Deck 10: Accounting for Intangible Assets

Question 1

Under AASB 138,the cost of identifiable intangible assets that are purchased separately is:

A) the purchase price plus all cost directly attributable to preparing the asset for its intended use
B) fair value at the date of acquisition
C) the sum of expenditure incurred from the date the intangible assets first meet the recognition criteria
D) none of the above

Answer 1

A

Question 2

Discuss the accounting treatment for trademarks and brand names in accordance with AASB 138.

Answer 2

Trademarks and brand names,which include such well-known names as Coca-Cola,Pepsi-Cola,Nike and Reebok,are used to differentiate products and brands in the eyes of consumers.These trademarks and brand names can be protected by registering them with the Commonwealth Government.Currently,the initial period of registration is 10 years,with a right of renewal in perpetuity.Consequently,the potential legal life of trademarks and brand names is unlimited,provided they continue to be registered.If a trademark or brand name is purchased,it should be recognised as an asset in accordance with AASB 138 and measured initially at cost.AASB 138 expressly forbids recognition of 'internally generated brands,mastheads,publishing titles,customer lists and items similar in substance' (para.63).It is arguable that trademarks are 'similar in substance' to brand names and,therefore,cannot be recognised if internally generated.Subsequent measurement of trademarks or brand names would be on the cost basis as they have no active market.As trademarks and brand names have an unlimited legal life,it may be argued that they have an indefinite life and,under AASB 138,amortisation would not be charged.However,the asset's useful life,which largely depends on the tastes of consumers,is likely to be much shorter than its legal life.Consequently,if the costs of trademarks and brand names are recognised as assets,they ought to be amortised systematically over their estimated useful lives.Under AASB 138,trademarks or brand names recognised as assets would be subject to an impairment test.

Question 3

Explain and discuss the application of AASB 138 in its proposals to account for research and development expenditure.

Answer 3

Paragraph 126 of AASB 138 requires disclosure of the aggregate amount of research and development expenditure recognised as an expense during the period.In relation to intangible development assets,AASB 138 requires extensive disclosures but fails to mention research and development as one of the possible classes of intangibles for which disclosure is required (para.119).Assuming research and development assets are a separate class of intangible assets,the disclosures required are extensive,including requirements to: • disclose whether useful lives are indefinite or finite and,if finite,the useful lives or amortisation rates used; • disclose the amortisation methods used for intangible assets with finite lives; and • reconcile the opening and closing asset balances showing additions,revaluations,impairment losses and amortisation.

Question 4

AASB 138 permits two bases for measuring intangible assets,subsequent to initial recognition,the cost model and the revaluation model:

A) in practice the revaluation model is the one that is most commonly applied
B) the conditions for the use of the revaluation model will only be met on rare occasions
C) in practice the two models are applied about 50/50
D) none of the above

Question 5

Purchased computer software should be:

A) recognised as an asset and recorded at cost
B) amortised over its useful life
C) subject to an impairment test
D) all of the above

Question 6

The recommended treatment under AASB 138 and Interpretation 132 of i.planning costs and ii.graphics and content costs,incurred internally by a company to develop its website is:

A) write-off both as expenses
B) i. expense: ii. recognise as an intangible asset if all the requirements of AASB 138 are met
C) recognise both as intangible assets if all the requirements of AASB 138 are met for both
D) it depends on the reasons the website was developed, e.g., was it primarily to promote and advertise the company's products?

Question 7

In AASB 138,an 'identifiable non-monetary asset without physical substance',is the definition of:

A) an intangible asset
B) cash at bank
C) goodwill
D) none of the above

Question 8

The initial patent period granted by the Australian Government and the potential legal life of trademarks and brand names,are respectively:

A) 10 years; unlimited, provided they continue to be registered
B) 16 years; unlimited, provided they continue to be registered
C) 20 years; 16 years
D) 7 years; 7 years

Question 9

What criteria must be demonstrated by an entity for the recognition of an item as an intangible asset?

A) The item must meet the definition of an intangible asset
B) The recognition criteria
C) Both A and B
D) Neither A nor B

Question 10

AASB 138 prohibits recognising as intangible assets all internally generated:

A) costs of patents
B) brand names costs
C) trademark costs
D) all of the above

Question 11

The initial recognition of the costs associated with intangible assets as an asset rather than an expense:

A) is consistent with the treatment of these costs for income tax purposes
B) is allowable provided that a future economic benefit exists
C) is allowable provided that the cost is material
D) all of the above

Question 12

Prior to the first Australian accounting standard on research and development,costs associated with research and development were usually:

A) capitalised
B) expensed and reinstated
C) expensed in the period incurred
D) none of the above

Question 13

How is the accounting treatment different for purchased intangible assets as opposed to internally-generated intangible assets?

A) Internally-generated assets are amortised over a shorter useful life
B) Cost is recorded gradually for internally-generated intangible assets but at acquisition for purchased assets
C) Act of registering patents is more detailed for an internally-generated intangible asset
D) There are no differences in the accounting treatment for purchased or internally generated intangible assets

Question 14

Which of the following is a necessary factor relating to the existence of an intangible asset?

A) Disclosure in financial statements
B) Classification
C) Liquidity
D) Existence of future economic benefits

Question 15

AASB 138 requires disclosure of:

A) the aggregate amount of research and development costs recognised as an expense during the period
B) the amortisation methods used for intangible assets with finite lives
C) a reconciliation of the opening and closing asset balances showing additions, revaluations, impairment losses and amortisation
D) all of the above

Question 16

When the value of an intangible asset is impaired,the change in the value of the asset is:

A) recognised as a charge in the statement of comprehensive income
B) recognised as a charge to equity
C) amortised over a period not exceeding 20 years
D) all of the above

Question 17

Which of these is not correct under AASB 138 concerning the measurement of intangible assets subsequent to acquisition?

A) If the revaluation model is used, amortisation is not required even if the useful life of the asset is finite
B) With both the cost and the revaluation models, all assets should be regularly tested for impairment
C) If the cost model is used, amortisation is required if the useful life of the asset is finite
D) The revaluation model is only permitted to be used if there is an active market for the asset

Question 18

Compare the costs likely to be recorded for internally developed patents with those associated with a patent purchased in an arm's length transaction.

Question 19

What two models are permitted by AASB for measuring intangible assets subsequent to initial recognition.

A) Basis and fair value
B) Cost and revaluation
C) Cost and fair value
D) Revaluation and expected use

Question 20

The main reason why accounting for intangible assets is more difficult than accounting for other assets is:

A) intangible assets are inherently inert and their value can grow or dissipate quickly
B) intangible assets may be developed internally
C) intangible assets do not have physical substance
D) all of the above are equally important reasons why accounting for intangible assets is more difficult than accounting for other assets

Question 21

When is goodwill recognised?

A) When an asset is sold above its book value
B) As part of an arms'-length purchase of one entity by another
C) By the company that is being purchased in an arms'-length purchase
D) When the market price of a company's stock rises

Question 22

The statement concerning the requirements of AASB 138 in relation to goodwill that is incorrect is:

A) it prohibits the recognition of internally generated goodwill
B) it distinguished between identifiable intangible assets and goodwill
C) it requires goodwill to be tested for impairment at least every 5 years
D) none of the requirements is incorrect

Question 23

Discuss the arguments for and against each of the following:
i.Writing off goodwill immediately as an expense in the income statement
compared to recognising it as an asset in the balancesheet.
ii. Systematically amortising goodwill that has been recognisedas an asset compared to not amortising it.

Question 24

AASB 138 requires that entities classify their intangible assets into those with finite lives and those with indefinite lives.Which of these is a factor that tends to limit the useful life of intangible assets?

A) Technological obsolescence
B) Contractual and legal rights
C) Uncertainty
D) All are factors

Question 25

What is a popular method of recording the gain on bargain purchase?

A) As a deferred credit that is shown in the statement of financial position
B) To allocate the identifiable non-monetary net assets
C) Both A and B are popular methods
D) Neither A nor B are a method of recording the gain

Question 26

In negotiations leading up to a sale agreement,which of these is a method that can be used to estimate the amount of goodwill that exists in a business?

A) Calculate the present value of the profit stream the purchasing company would acquire and deduct from it the fair value of the net assets gained
B) Calculate the discounted value of 'super-profits' which are the difference between the expected annual operating profit and normal profit
C) Calculate the difference between the price paid for the business and the fair value of the identifiable net assets acquired
D) None of the above, i.e., all are methods of estimating the amount of goodwill that exists in a business in negotiations leading up to its sale

Question 27

After 1 January 2005,the position that applies in Australia to the amortisation of goodwill is:

A) goodwill must be amortised systematically over the period during which the future economic benefits are expected to be consumed
B) goodwill is not required to be systematically amortised and is not subject to an impairment test
C) goodwill is not required to be systematically amortised but is subject to an impairment test
D) goodwill is to be amortised over a period not exceeding 20 years

Question 28

When the sum of the fair values of the identifiable net assets acquired exceeds the cost of acquisition,the difference is known as:

A) negative goodwill
B) excess on acquisition
C) goodwill
D) both A and B

Question 29

Which of the following is recommended as the preferred accounting treatment for excess on acquisition?

A) Reduce proportionately the fair values of the non-monetary assets acquired until the excess is eliminated
B) Reduce proportionately the fair values of the monetary assets acquired until the excess is eliminated
C) Treat it as a deferred credit in the balance sheet and periodically allocate it as income
D) Immediately recognise the excess on acquisition as income in the income statement

Question 30

Which of these provisions of AASB 138 is inconsistent with the asset recognition criteria of the Framework?

A) Reviewing the unamortised balance of goodwill annually and, to the extent it is no longer supported by probable future economic benefits, writing it down
B) Recognising purchased goodwill as an asset
C) Not recognising internally generated goodwill as an asset when the market value of an entity can be measured reliably
D) Amortising goodwill

Question 31

Which of these accounting standards applies to goodwill?

A) AASB 3
B) AASB 136
C) AASB 138
D) All of the above

Question 32

Which accounting standard distinguishes between intangible assets and goodwill?

A) AASB 136
B) AASB 3
C) AASB 138
D) AASB 9