Intangible Assets

1) According to IAS 38 Intangible Assets, which of the following statements about research
and development expenditure are correct?

1. If certain conditions are met, an entity may decide to capitalise development

expenditure.

2. Research expenditure, other than capital expenditure on research facilities, must be

written off as incurred.

3. Capitalised development expenditure must be amortised over a period not exceeding 5

years.

4. Capitalised development expenditure must be disclosed in the statement of financial

position under intangible non-current assets.

A. 1, 2 and 4 only
B. 1 and 3 only
C. 2 and 4 only
D. 3 and 4 only

2) According to IAS 38 Intangible Assets, which of the following statements concerning the
accounting treatment of research and development expenditure are TRUE?

1. Development costs recognised as an asset must be amortised over a period not

exceeding five years.
2. Research expenditure, other than capital expenditure on research facilities, should be
recognized as an expense as incurred.
3. In deciding whether development expenditure qualifies to be recognised as an asset, it
is necessary to consider whether there will be adequate finance available to complete the
project.
4. Development projects must be reviewed at each reporting date, and expenditure on
any project no longer qualifying for capitalisation must be amortised through the
statement of profit or loss and other comprehensive income over a period not exceeding
five years.

A. 1 and 4
B. 2 and 4
C. 2 and 3
D. 1 and 3
3) Which of the following CANNOT be recognised as an intangible non-current asset in
NMB's statement of financial position at 30 September 20X1?

A. NMB spent $12,000 researching a new type of product. The research is expected to lead
to a new product line in 3 years' time

B. NMB purchased another entity, BN on 1 October 20X0. Goodwill arising on the

acquisition was $15,000

C. NMB purchased a brand name from a competitor on 1 November 20X0, for $65,000

D. NMB spent $21,000 during the year on the development of a new product. The product
is being launched on the market on 1 December 20X1 and is expected to be profitable

4) According to IAS 38 Intangible Assets, which of the following are intangible non-current
assets in the financial statements of Iota Co?

1. A patent for a new glue purchased for $20,000 by Iota Co

2. Development costs capitalised in accordance with IAS 38
3. A licence to broadcast a television series, purchased by Iota Co for $150,000
4. A state of the art factory purchased by Iota Co for $1.5million

A. 1 and 3 only
B. 1, 2 and 3 only
C. 2 and 4 only
D. 2, 3 and 4 only

5) In its first year of trading to 31 July 20X6, Rigo Co incurred the following expenditure on
research and development, none of which related to the cost of non-current assets:
$10,000 on successfully devising processes for converting seaweed into chemicals X, Y and Z
and $90,000 on developing a headache pill based on chemical Z. No commercial uses have
yet been discovered for chemicals X and Y. Commercial production and sales of the
headache pill commenced on 1 April 20X6 and are expected to produce steady profitable
income during a 5-year period before being replaced. Adequate resources exist to achieve
this.

What is the maximum amount of development costs that must be carried forward at 31
July 20X6 under IAS 38 Intangible Assets?

A. $90,000
B. $84,000
C. $93,333
D. $72,000
6) A manufacturer incurs the following costs: $40,000 developing new techniques that will be
put in place shortly to cut production costs; $30,000 researching a new process to improve
the quality of the standard product and $5,500 on market research into the commercial
viability of a new type of product. It is company policy to capitalise costs whenever
permitted by IAS 38 Intangible Assets.

How much should be charged as research and development expenditure in profit or loss?
(ignore amortisation)

A. $75,500
B. $35,500
C. $70,000
D. $40,000

A/FA FINANCIAL ACCOUNTING

7) Which TWO of the following conditions would preclude any part of the development
expenditure to which it relates from being capitalised?

1. The development is incomplete

2. The benefits flowing from the completed development are expected to be less than
its cost
3. Funds are unlikely to be available to complete the development
4. The development is expected to give rise to more than one product

A. 1 and 2
B. 2 and 3
C. 3 and 4
D. 1 and 4

8) Dora Co purchased a patent on 31 December 20X3 for $300,000. Dora Co expects to use the
patent for ten years, after which it will be valueless.

According to IAS 38 Intangible Assets, what amount will be amortised in Alpha Co's
statement of profit or loss and other comprehensive income for the year ended 31
December 20X4?

$
9) QR purchased a quota for carbon dioxide emissions for $9,000 on 30 April 20X6 and
capitalised it as an intangible asset in its statement of financial position. QR estimates that
the quota will have a useful life of three years.

What is the journal entry required to record the amortisation of the quota in the
accounts for the year ended 30 April 20X9?

A. DEBIT Expenses $9,000

CREDIT Accumulated amortisation $9,000

B. DEBIT Expenses $3,000

CREDIT Accumulated amortisation $3,000

C. DEBIT Intangible assets $3,000

CREDIT Accumulated amortisation $3,000

D. DEBIT Accumulated amortisation $9,000

CREDIT Intangible assets $9,000

10) What is the purpose of amortisation?

A. To allocate the cost of an intangible non-current asset over its useful life
B. To ensure that funds are available for the eventual purchase of a replacement non-
current asset
C. To reduce the cost of an intangible non-current asset in the statement of financial
position to its estimated market value
D. To account for the risk associated with intangible assets

11) Which of the following items (that all generate future economic benefits, and whose costs
can be measured reliably), is an intangible non-current asset?

1 Computer hardware owned by a business

2 Operating software that operates the computer hardware in (1)
3 A patent bought by a business
4 An extension to an office building owned by a business

A. All four items

B. 1, 2 and 4 only
C. 1 and 2 only
D. 3 only
12) Sheran incurred the following expenditure on research and development in the year to 30
November 20X6:

Project 175 $2.5 million

Project 254 $1.6 million
Project 393 $4.8 million

Project 175 is investigating the link between vitamin deficiency and emotional well-being. If
a link is proven the company may produce a food additive to improve well-being.

Project 254 was completed during the year after a period of 15 months. It has achieved its
aim of reducing the material cost of a new product. Production of the product commenced
on 1 September 20X6. The first sales are expected in February 20X7 and the expected life of
the product is four years. The project meets the capitalisation criteria of IAS 38 Intangible
Assets.

Project 393 is a joint research project with a leading University.

What amount of research and development expenditure should appear in Sheran’s

statement of profit or loss for the year to 30 November 20X6?

A. $2.5 million
B. $7.3 million
C. $7.4 million
D. $8.9 million

13) Which of the following statements about intangible assets is/are true?

(1) All intangible assets should be reported in the statement of financial position
(2) Only purchased intangible assets can be reported in the statement of financial position
(3) Goodwill can only be carried in the statement of financial position at cost

A. None of the statements

B. 2 only
C. 1 and 3
D. 2 and 3
14) Which TWO of the following items would be classed as an intangible asset in a statement of
financial position?

A. Research
B. Franchise agreements
C. Internally generated goodwill
D. Staff expertise
E. Computer software

15) Which TWO of the following costs would be capitalised as intangible non-current assets?

A. Goodwill arising from the purchase of a business

B. Specialist computer software purchased for a six-month project
C. 10-year licence to manufacture a patented product
D. 25-year lease of property

Answers

1. C (1) Development expenditure must be capitalised if the criteria are met.

(3) There is no time scale given by IAS 38 for amortisation.

2. C. Development costs are amortised over the useful life of the project. This is not confined
to five
years.

3. A. ABC spent $12,000 researching a new type of product. The research is expected to lead
to a
new product line in 3 years' time.

Research expenditure can never be capitalised and must be recognised as an expense in the
statement of profit or loss in accordance with IAS 38.

4. B. A factory is a tangible asset as it has physical form. The others are intangible assets.
5. B. $84,000

The $10,000 spent on converting seaweed does not meet the recognition criteria for an
intangible asset and so must be recognised as an expense in profit or loss.

The $90,000 relating to the headache pill must be capitalised. Amortisation must start once
commercial production begins and amortisation is $1,500 per month ($90,000 / 5 years).

The value at the year end represents $90,000 less four months' amortisation.

6. B. $35,500

The $30,000 research costs are not directed towards a confirmed outcome and so should be
recognised as an expense. The $5,500 market research costs suggest that the commercial
viability of the product has not yet been determined and so the capitalisation criteria have not
yet
been satisfied.

7. B. 2 and 3

The benefits flowing from the completed development are expected to be less than its cost
Funds are unlikely to be available to complete the development

A project that is not commercially viable would not be capitalised.

The company must have adequate resources to fund the project for it to be capitalised.

FFA/FA FINANCIAL ACCOUNTING

8. $30,000

The patent should be amortised over its useful life of 10 years. (300,000 / 10) = $30,000

9. B. The amortisation charge is $9,000/3 years = $3,000 per annum. The double entry to
record
the amortisation is DEBIT expenses, CREDIT accumulated amortisation.

10. A. Amortisation is an application of the matching concept and allocates the cost of the
intangible
asset over its useful life (over the accounting periods expected to benefit from its use).

11. D. A patent has no physical substance and provides future economic benefits; it is
therefore an
intangible non-current asset.

Computer hardware is a tangible non-current asset as it is physical in substance and provides

future economic benefits.

Operating software that operates the computer hardware on first glance may appear to be an
intangible non-current asset. However, since it is an integral part of the computer hardware

(which could not function without it), it is classed as part of the computer hardware.

A building extension has physical substance and provides future economic benefits and is
therefore a tangible non-current asset.

12. C. Expenditure on both Projects 175 and 393 is research expenditure which must be
expensed as incurred.

Expenditure on Project 254 is development expenditure that must be capitalised.

Amortisation commences with production, not sale. Therefore the amount to be
amortised is $1.6m ÷ 4 years × 3/12 = $100,000.

Therefore expensed to profit or loss is:

Project 175 $2.5m

Project 254 $0.1m
Project 393 $4.8m
Total $7.4m

13. A. (1) Is incorrect as many internally-generated intangibles are not recognised

(e.g. development costs that do not meet all the asset recognition criteria).

(2) Is incorrect as some internally-generated assets (e.g. development costs

that meet the asset recognition criteria) may be recognised.

(3) Is incorrect. Goodwill (like any other asset) must be carried at an amount
that is less than cost if its realisable amount is less than cost.
14. B and E
Research is specifically disallowed by IAS 38 because an asset should be capable of bringing
economic benefit and be reliably measured. Uncertainty exists as to whether the research will
bring future economic benefit.
Only purchased goodwill can be recognised. Therefore the answer internally generated
goodwill is incorrect.
A company cannot control staff nor can a value be reliably measured. Therefore the answer 'staff
expertise' is incorrect.

15. A and C
Option (A) and option (C) are both intangible because neither have a physical form and both have an
economic value to the business.
Option (B) is an expense because it will be used within six months, whereas assets are used in the
business for over a year
Option (D) relates to a tangible asset, property, not an intangible asset.