Valuation of Valuation of Intangible AssetsIntangible Assets

DefinitionDefinition

Intangible Assets

Identifiable

Non-monetary assets

Without physical substance

Held for use in the production or supply of goods of service

Problems in the accountingProblems in the accounting

Some are self-developed cost can’t measure easily and Some are self-developed cost can’t measure easily and objectively objectively

Some have definite lives So for those haven’t definiteSome have definite lives So for those haven’t definite lives not capable oflives not capable of being amortizedbeing amortized

Difficult to identify revenues SubjectiveDifficult to identify revenues Subjective Not easy to determineNot easy to determine expired cost and match expired cost and match the revenues earned inthe revenues earned in that periodthat period

Criteria to recognizeCriteria to recognize

Probable future economic benefits that are Probable future economic benefits that are attributable to the assets will flow to the attributable to the assets will flow to the enterpriseenterprise

++ cost measured reliably cost measured reliably

Expenditure on intangible Expenditure on intangible assetsassets

Initially recognized as an expenses in Initially recognized as an expenses in previous annual Financial statementprevious annual Financial statement

Should not be recognized as part of the costShould not be recognized as part of the cost

Should recognize as expensesShould recognize as expenses

Step to recognize the in Step to recognize the in tangible assetstangible assets

Initial recognitionInitial recognition

Benchmark AllowedBenchmark Allowed

Treatment alternativeTreatment alternative

TreatmentTreatment

Benchmark treatmentBenchmark treatment

After initial recognition( initially at cost)After initial recognition( initially at cost)

Cost – accumulated amortization- any Cost – accumulated amortization- any accumulated impairment lossaccumulated impairment loss

Allowed alternative Allowed alternative treatmenttreatment

Carried at a revalued amountCarried at a revalued amount

Fair value(x cost)-accumulated amortization-Fair value(x cost)-accumulated amortization-accumulated impairment lossaccumulated impairment loss

Problem:Problem:

Active market should existActive market should exist

Revaluation should be made regularlyRevaluation should be made regularly

Intangible AssetsIntangible Assets

GoodwillGoodwillResearch and DevelopmentResearch and DevelopmentPatents Patents CopyrightCopyrightFranchises Franchises TrademarksTrademarks

GoodwillGoodwill

Value of business as a wholeValue of business as a whole––aggregate aggregate of the fair value of its separable net assetsof the fair value of its separable net assets

Inherent GoodwillInherent GoodwillTypes Purchased Goodwill Types Purchased Goodwill Can’t carried at revalued amountCan’t carried at revalued amountNegative Goodwill can exist and recognize Negative Goodwill can exist and recognize

it by three stepsit by three steps

Accounting for Research Accounting for Research and Developmentand Development

Research: original and planned Research: original and planned investigation undertaken with the prospect investigation undertaken with the prospect of gaining new scientific or technical of gaining new scientific or technical knowledge and understandingknowledge and understanding

Can’t recognized prudence concept Can’t recognized prudence concept

DevelopmentDevelopment

The application of research The application of research findings to a plan or design for findings to a plan or design for the production of new and the production of new and substantially improvementsubstantially improvement

Should be recognized if fulfill the Should be recognized if fulfill the six development phasesix development phase

If we unsure the future revenueIf we unsure the future revenue write off to write off to P&LP&L

InvestmentInvestment

Long term investmentLong term investment

long term purpose depend on long term purpose depend on management intensionmanagement intension

Cost –provision for any diminution in Cost –provision for any diminution in valuevalue

Short Term InvestmentShort Term Investment

Measure at fair valueMeasure at fair value

Past Paper analysisPast Paper analysis02-02-Ⅱ-6Ⅱ-6Item(2)Item(2)In the past two years ,MSE ltd conducted considerable research In the past two years ,MSE ltd conducted considerable research

on new technology as follows:on new technology as follows: Year Research Cost Amortization Year Research Cost Amortization

periodperiod $$ 2000 14 400 000 3 years2000 14 400 000 3 years 2001 34 400 000 2 years2001 34 400 000 2 years

The production Manager suggested the from this years The production Manager suggested the from this years onwards , the research costs should be written off onwards , the research costs should be written off immediately. The Accounting Manager disagreed because immediately. The Accounting Manager disagreed because the current year’s profit would then be seriously reducedthe current year’s profit would then be seriously reduced

AnswerAnswer

Should be write off immediately against Should be write off immediately against the respective year P&Lthe respective year P&L

But the research cost in 2000 had been But the research cost in 2000 had been treated as an intangible asset-----prior year treated as an intangible asset-----prior year adjustment---so written off the remaining adjustment---so written off the remaining amount14400000*2/3against retained amount14400000*2/3against retained profitprofit

02-Ⅱ-402-Ⅱ-4(3) The company acquired a trademark at a cost of 7.000.000 on 1 (3) The company acquired a trademark at a cost of 7.000.000 on 1

January 2001.Legal fees of $130,000 were incurred for registering January 2001.Legal fees of $130,000 were incurred for registering the trademark .During the year, two additional expenses were the trademark .During the year, two additional expenses were incurred:(1)550,000 spent on extending the use of the trademark to incurred:(1)550,000 spent on extending the use of the trademark to Singapore ,and(2) 1,000,000 spent on advertising the products Singapore ,and(2) 1,000,000 spent on advertising the products under the trademark .The trademark has a legal life of 15 years under the trademark .The trademark has a legal life of 15 years and is expected to contribute to the company’s revenue for 12 and is expected to contribute to the company’s revenue for 12 years years

RequirementRequirement

(a) In accordance with the generally accepted accounting principles, (a) In accordance with the generally accepted accounting principles, prepare a list showing the revised values for the items as at 31 prepare a list showing the revised values for the items as at 31 December 2001 December 2001

(b) Briefly explain the treatment with reason(b) Briefly explain the treatment with reason

AnswerAnswer The correct value of the trademarkThe correct value of the trademark

(7000+130+550)*11/12=7040(7000+130+550)*11/12=7040 Capitalize the cost of acquisition, legal fees and the Capitalize the cost of acquisition, legal fees and the

extension of the use of trademarkextension of the use of trademark

------because those cost are needed for bringing the ------because those cost are needed for bringing the assets into present location and positionassets into present location and position

And the trademark should be written off over 12 And the trademark should be written off over 12 years (economical useful life )instead of 15 years years (economical useful life )instead of 15 years (legal life)(legal life)

Advertising expenses P&LAdvertising expenses P&L

2002-2002-Ⅱ-4 Ⅱ-4

(4) The company established two shops in a foreign (4) The company established two shops in a foreign country on 1 January 1999.The net asset value of each country on 1 January 1999.The net asset value of each shop was HK$2,000,000 as at 31 December 2001 . In shop was HK$2,000,000 as at 31 December 2001 . In December 2001, the foreign government informed December 2001, the foreign government informed Adolph Ltd that one of the branches would be Adolph Ltd that one of the branches would be nationalized in June 2002 and agreed to pay 500,000 as nationalized in June 2002 and agreed to pay 500,000 as compensationcompensation

RequirementRequirement

(a) In accordance with the generally accepted accounting (a) In accordance with the generally accepted accounting principles, prepare a list showing the revised values for principles, prepare a list showing the revised values for the items as at 31 December 2001 the items as at 31 December 2001

(b) Briefly explain the treatment with reason(b) Briefly explain the treatment with reason

AnswerAnswer

The value of the investmentThe value of the investment

2000,000+500,000=2500,0002000,000+500,000=2500,000 Nationalized shop---recognize as net realizable valueNationalized shop---recognize as net realizable value

$500,000---Purdence concept$500,000---Purdence concept The remaining shop---recognize as $2,000,000The remaining shop---recognize as $2,000,000

because the Going concernbecause the Going concern

98-Ⅱ-498-Ⅱ-4 ((2) ABC Co concluded marketing research in early 2) ABC Co concluded marketing research in early

1997 .Based on the findings the company developed 1997 .Based on the findings the company developed a new marketing strategy which included an a new marketing strategy which included an advertising campaign cater for the needs of the advertising campaign cater for the needs of the customers . The cost of the marketing research and customers . The cost of the marketing research and advertising campaign amounted to $1,000,000 and advertising campaign amounted to $1,000,000 and $2,000,000 respectively. The company director, Mr. $2,000,000 respectively. The company director, Mr. Peter Lee ,believed that the marketing research and Peter Lee ,believed that the marketing research and advertising campaign were so successful that they advertising campaign were so successful that they would increase both the company’s sales and profits would increase both the company’s sales and profits for coming two years . Mr. Peter Lee decided to for coming two years . Mr. Peter Lee decided to recognize the research and advertising expenditure recognize the research and advertising expenditure as an asset and amortize it over its useful life.as an asset and amortize it over its useful life.

Comment on Mr. Peter Lee’s decisionComment on Mr. Peter Lee’s decision..

AnswerAnswer

Is revenue expenditureIs revenue expenditureBecause of the prudence conceptBecause of the prudence conceptOnly when the assets is sure the Only when the assets is sure the

economic benefit will attributable to the economic benefit will attributable to the assetasset

QuestionQuestion

1 Can we recognize the inherent goodwill?1 Can we recognize the inherent goodwill?2 The short term investment is recognize 2 The short term investment is recognize

at market value or at cost?at market value or at cost?3 why we can’t capitalized the research 3 why we can’t capitalized the research

cost?cost?