CLASS 4 Intangible non-current assets (IAS 38) & Impairment of assets (IAS 36)

Part 1 Intangible assets (IAS 38)

1. Which of the following is one of the criteria for the recognition of development costs as an intangible
asset?
A. The asset has been completed and is available for sale or use
B. It is possible that the asset can be sold or used
C. The proceeds from sale or use of the asset can be reliably measured
D. The asset will generate probable future economic benefits

2. Geek is developing a new product and expects to be able to capitalise the costs.
Which one of the following would disallow the capitalisation of the costs?

A. Development of the product is not yet complete.

B. No patent has yet been registered in respect of the product.
C. No sales contracts have yet been signed in relation to the product.
D. It has not been possible to reliably allocate costs to development of the product.

3. Assoria Co had $20 million of capitalised development expenditure at cost brought forward at 1 October
20X7 in respect of products currently in production and a new project began on the same date.
The research stage of the new project lasted until 31 December 20X7 and incurred $1.4 million of costs.
From that date the project incurred development costs of $800,000 per month. On 1 April 20X8 the
directors of Assoria Co became confident that the project would be successful and yield a profit well in
excess of costs. The project was still in development at 30 September 20X8. Capitalised development
expenditure is amortised at 20% per annum using the straight line method.
What amount will be charged to profit or loss for the year ended 30 September 20X8 in respect of
research and development costs?

A. $8,280,000
B. $6,880,000
C. $7,800,000
D. $3,800,000

Solution:

Charge to Profit or Loss Calculations, $ $

Research costs
Expensed development
Depreciation on capitalisation amount
Total
 4. Dempsey’s year end is 30 September 20X5. Dempsey commenced the development stage of a project to
produce a new pharmaceutical drug on 1 January 20X5. Expenditure of $40,000 per month was incurred
until the project was completed on 30 June 20X5 when the drug went into immediate production. The
directors became confident of the project’s success on 1 March 20X5. The drug is expected to generate
benefits for five years.
What is carrying amount of any intangible asset recognised in respect of the project and what is the total
amount Dempsey Co will charge to profit or loss for the year ended 30 September 20X5?
Carrying amount of intangible assets Amount charged to profit or loss for
at 30 September 20X5 period ending 30 September 20X5

A. $228,000 $240,000
B. $152,000 $141,333
C. $98,667 $88,000
D. $0 $0

Solution

1 Jan 20X5 1 Mar 20X5 30 Jun 20X5 30 Sept 20X5

Costs are …… Costs are ……

5. Identify whether the following internally generated items are eligible for capitalisation as intangible
assets in accordance with IAS 38 Intangible Assets? (Ignore business combinations.)

True False
1. A customer list built up over the last ten years of trading updated for
the customer`s current preferences
2. Specialised tooling for a new product developed by the business
3. A working version of a new machine that uses new technology
used for testing of the prototype apparatus
4. The title heading, font and design of the front page of a major
broadsheet newspaper
 6. Kirk is an incorporated entity. On 31 December, it was successful in a bid to acquire the exclusive rights to a
patent which had been developed by another entity. The amount payable for the rights was $600,000
immediately and $400,000 in one year's time. Kirk has incurred legal fees of $87,000 in respect of the bid.
Kirk operates in a jurisdiction where the government charges a flat rate fee (a "stamp duty") of $1,000 for
the registration of patent rights. Kirk's cost of capital is 10%.
Calculate the cost of the patent rights on initial recognition.

Solution:

Calculations, $ $
Cash paid
Deferred consideration
Legal fees
Stamp duty
Cost on initial recognition

7. Picard is an incorporated entity. On 31 December it paid $10,000,000 for a 100% interest in Borg. At the
date of acquisition the net assets of Borg as shown on its statement of financial position had a fair value of
$6,000,000. In addition, Borg also held the following rights:
1. The brand name "Assimilation", a middle-of-the-range fragrance. Borg had been considering the sale of
this brand just prior to its acquisition by Picard. The brand had been valued at $300,000 by Brand
International, a reputable firm of valuation specialists, which had used a discounted cash flow technique.
2. Sole distribution rights to a product called "Lacutus". It is estimated that the future cash flows generated
by this right will be $250,000 per annum for the next 6 years. Picard has determined that the appropriate
discount rate for this right is 10%. The 6-year, 10% annuity factor is 4.36. Ignore taxation.
Calculate goodwill arising on acquisition.
$

Solution:

$`000
Consideration paid
Less
Net assets recognised in Borg's statement of financial position
Brand acquired
Distribution rights
Goodwill on acquisition
Part 2 Impairment of assets (IAS 36)

1. Complete the statements using the options provided.

The recoverable amount of an asset is the higher of
and under IAS 36.

Fair value Market value

Fair value less cost of disposal cost Value in use

2. The following measures relate to a non-current asset:

(1) Carrying amount $20,000
(2) Net realisable value $18,000
(3) Value in use $22,000
(4) Replacement cost $50,000
What is the recoverable amount of the asset?

A. $18,000
B. $20,000
C. $22,000
D. $50,000

3. A cash-generating unit comprises the following assets:

$`000
Building 700
Plant and equipment 200
Goodwill 90
Current assets 20
1,010

One of the machines, carried at $40,000, is damaged and will have to be scrapped. The recoverable
amount of the cash generating unit is estimated at $750,000.
What will be the carrying amount of the building after the impairment loss has been recognised?
(to the nearest $`000).

A. $597,000
B. $577,000
C. $594,000
D. $548,000

Solution:
$`000
Total impairment

Balance to allocate
 Balance to allocate

Building Plant

4. A business which comprises a single cash-generating unit has the following assets:
$m
Goodwill 3
Patent 5
Property 10
Plant and equipment 15
Net current assets 2
35
Following an impairment review it is estimated that the value of the patent is $2 million and the
recoverable amount of the business is $24 million.
At what amount should the property be measured following the impairment review?

A. $8 million
B. $10 million
C. $7 million
D. $5 million

Solution:
$m $m $m
Goodwill
Patent
Property
Plant and equipment
Current assets

5. In 20X3 Angry revalued at $360,000 a plot of land which had been purchased in 20X1 for $300,000 and
recognised a revaluation gain of $60,000. In 20X4 Angry revalued to $130,000 a second plot of land which
had been purchased for $100,000 in 20X2 and recognised a further revaluation gain of $30,000. In 20X5
Angry wishes to write down the value of the first plot of land from $360,000 to $260,000 because of an
impairment in its value due to changes in market prices. There have been no other movements on the
revaluation surplus.
What amounts should be recognised in the financial statements for 20X5 for the impairment loss?

Profit or loss Other Comprehensive Income

A. $100,000 Nil
B. $40,000 $60,000
C. $10,000 $90,000
D. Nil $100,000
 6. IAS 36 Impairment of Assets suggests how indications of impairment might be recognised.
Which TWO of the following would be EXTERNAL indicators that one or more of an entity`s assets may
be impaired?
(i) An unusually significant fall in the market value of one or more assets
(ii) Evidence of obsolescence of one or more assets
(iii) A decline in the economic performance of one or more assets
(iv) An increase in market interest rates used to calculate value in use of the assets

A. (i) and (iv)

B. (ii) and (iii)
C. (i) and (iii)
D. (ii) and (iv)

7. Select whether the following statements are indicators of impairment or are not indicators of impairment
under IAS 36 Impairment Assets?
Indicator of Not an indicator
impairment of impairment
1. Advances in the technological environment in which an asset
is employed has an adverse impact on its future use
2. An increase in interest rates which increases the discount rate
an entity uses
3. The carrying amount of an entity`s net assets is lower than
the entity`s number of shares in issue multiplied by its share
price
4. The estimated net realizable value of inventory has been
reduced due to fire damage although this value is greater than
its carrying amount

8. Lichen Co owns a machine that has a carrying amount of $85,000 at the year end of 31 March 20X9. Its
market value is $78,000 and costs of disposal are estimated at $2,500. A new machine would cost
$150,000. Lichen Co expects it to produce net cash flows of $30,000 per annum for the next three
years. The cost of capital of Lichen Co is 8%.
What is the impairment loss on the machine to be recognised in the financial statements at 31 March
20X9?

Solution:
Calculations, $ $
Fair value less cost of disposal
Value in use 1st year
2nd year
3rd year
Recoverable amount
Impairment loss ()
Carrying amout
 9. The following information relates to an item of plant owned by Bazzar Co:
- Its carrying amount in the statement of the financial position is $3 million.
- The company has received an offer of $2.7 million from a company in Japan interested in buying the
plant.
- The present value of the estimated cash flows from continued use of the plant is $2.6 million.
- The estimated cost of shipping the plant to Japan is $50,000.
What is the amount of the impairment loss that should be recognized on the plant?

Solution:
$`000
Fair value less cost of disposal
Value in use
Recoverable amount
Impairment loss ()
Carrying amount

Assessment progress test (Class 4)  15 min

https://edu.hse.ru/mod/quiz/view.php?id=252235
 SELF-STUDY (Intangible assets)

Biogenics is a publicity listed pharmaceutical company. During the year to 31 December 20X9 the following
transactions took place:
(i) $6m was spent on developing a new obesity drug with received clinical approval on 1 July 20X9 and is proving
commercially successful. The directors expect the project to be in profit within 12 months of the approval date.
The patent was registered on 1 July 20X9. It cost $1.5m and remains in force for three years.
(ii) A research project was set up on 1 October 20X9 which is expected to result in a new cancer drug. $200,000 was
spent on computer equipment and $400,000 on staff salaries. The equipment has an expected life of four years.
(iii) On 1 September 20X9 Biogenics acquired an up-to-date list of GPs at cost of $500,000 and has been visiting
them to explain the new obesity drug. The list is expected to generate sales throughout the life-cycle of the
drug.

Required
Prepare extracts from the statement of financial position of Biogenics at 31 December 20X9 relating to the
above items and summarize the costs to be included in the statement of profit or loss for the year.

SELF-STUDY (Impairment of assets)

(i) Telepath acquired an item of plant at a cost of $800,000 on 1 April 2oXo that is used to produce and package
pharmaceutical pills. The plant had an estimated residual value of $50,000 and an estimated life of five years, neither
of which has changed. Telepath uses straight-line depreciation. On 31 March 20X2, Telepath was informed by a major
customer (who buys products produced by the plant) that it would no longer be placing orders with Telepath. Even
before this information was known, Telepath had been having difficulty finding work for this plant. It now estimates
that net cash inflows earned from the plant for the next three years will be:
$’000
Year ended: 31 March 20X3 220
31 March 20X4 180
31 March 20X5 170
On 31 March 20X5, the plant is still expected to be sold for its estimated realisable value. Telepath has confirmed that
there is no market in which to sell the plant at 31 March 20X2. Telepath‘s cost of capital is 10% and the following values
should be used:
Value of $1 at: $
End of year 1 0.91
End of year 2 0.83
End of year 3 0.75
(ii)Telepath owned a 100% subsidiary, Tilda, that is treated as a cash generating unit. On 31 March 20X2, there was an
industrial accident (a gas explosion) that caused damage to some of Tilda‘s plant. The assets of Tilda immediately before
the accident were:
$’000
Goodwill 1,800
Patent 1,200
Factory building 4,000
Plant 3,500
Receivables and cash 1,500
12,000
As a result of the accident, the recoverable amount of Tilda is $6.7 million.
The explosion destroyed (to the point of no further use) an item of plant that had a carrying amount of $500,000.
Tilda has an open offer from a competitor of $1 million for its patent. The receivables and cash are already stated at
their fair values less costs to sell (net realisable values).
Required
Calculate the carrying amounts of the assets in (i) and (ii) above at 31 March 20X2 after applying any impairment losses.
Calculations should be to the nearest $1,000.