PQ-Suggested Answer (Source Study Hub): HEYWOOD
PART (a) (9marks)
Recognition
An asset is recognised as intangible asset if:
It meets the definition of an intangible asset.
o The asset is identifiable and
o The asset is controlled by the entity
The future economic benefits attributable to the asset are probable; and
The cost of the asset can be measured reliably.
The recognition and initial measurement of intangible assets is considered in the following
circumstances:
As separate acquisitions
This is the most straightforward circumstance and there are no particular difficulties in measuring and
recognising the asset. Examples of this type of acquisition would be the purchase of the copyright to a
song or book or computer software.
There may be some complications in determining the purchase consideration for the intangible asset if it
is in the form of shares or other non-cash consideration.However, in most circumstances, it is usually
readily determinable and is often in cash.
As part of a business combination
This situation is more complex. The investor will usually obtain all the net assets of the acquired
company for an amount of purchase consideration. The basic principle in IFRS 3 Business Combinations
is that all identifiable assets, including intangibles, should be recognised at their fair values at the date of
acquisition.
It is often difficult to determine whether the fair value of an intangible asset can be measured with
sufficient reliability for the purpose of separate recognition. If there is a separate and active market in
the intangible asset, this could be used to determine fair value.
However, most intangibles do not have an active market as they are unique (e.g. brand names) and a
condition for an active market is that the assets are homogeneous.
Another possible method of estimating the cost of an intangible is to discount the net future cash flows
attributable to it. The problem with this approach is that it is rare for cash flows to be attributable to a
single asset; they are usually earned from assets in combination (tangible and intangible). Often an
entity will engage specialist valuers to determine the fair value of intangible assets such as brands.
Although it may be possible to identify separate intangibles in an acquisition, it may be difficult to
reliably attach a cost or fair value to them. In these circumstances such intangible assets cannot be
separately recognised and will be included in goodwill.
Internally Generated Goodwill
There is no doubt that internally generated goodwill and other intangibles exist (e.g. a brand name), but
in order for them to be recognised a value would have to be placed on them, this is difficult. In the past
costs such as advertising and even staff training have been suggested as components of the cost of
internal goodwill.
Alternatively the difference between the market value of a business as a whole, often based on a total
market capitalisation figure, and the carrying amount of its identifiable assets could be considered to be
a measure of the internal goodwill of the business.
However, this value could fluctuate greatly in a short space of time and cannot be considered as the
“cost” of the goodwill. IAS 38 does not consider that any of these methods can be used to reliably
measure internal goodwill and therefore concludes that it cannot be recognised.
Granted Intangible Assets
An intangible asset may be acquired from a government or other third party for a nominal fee or even
for free. An example of this may be aircraft landing rights. If an active market, as described above, exists
for such rights, this may be used to determine its fair value. This is likely to be rare.
In the absence of an active market the cost (which may be zero) together with any expenses that are
directly attributable to preparing the asset for use will be the carrying amount on initial recognition of
the asset.
PART (b) (8marks)
Fast Trak
IFRS 3 Business Combination requires identifiable intangible assets acquired as part of a business
combination to be recognised separately from goodwill.
An item is identifiable if it meets the separable or contractual-legal criterion. The fair value of an
intangible asset is recognised as a separate asset and not subsumed in the value of goodwill.
Kleenwash
A brand, almost by definition, is unique; however, a reliable fair value can usually be determined by
applying IFRS 13 and considering difference valuation methods and inputs to them.
Government licence
IFRS 3 requires an acquirer to recognise, separately from goodwill, the identifiable intangible assets
acquired in a business combination. An intangible asset is identifiable if it meets either the separability
criterion or the contractual-legal criterion.
In this situation the licence is not capable of separation but has arisen due to a legal contract.
IFRS 3 requires the intangible to be recognised at its fair value. In this example the only value is the $9
million arrived at by the directors. If this can be justified, maybe through future cash flows, the licence
can be recognised at this value.
However, it is highly likely that some form of external verification of the value should be sought before
accepting the director’s value.
Fishing quota
This appears to satisfy the definition of an active market, therefore the fair value is 10,000 × $1,600 =
$16 million. The quota may well be classified as an intangible asset with an indefinite life as the quota is
for an indefinite period of time. In this case the quota would be capitalised and tested annually for
impairment; it would not be amortised.
If Heywood followed the revaluation model for subsequent measurement and the price per tonne were
to increase above $1,600, the asset would be revalued and any increase in value recognised in other
comprehensive income.
If the government were to impose a finite life on the quota, it would have a finite life (from that point in
time) and would be amortised over that life.
Goodwill
This is the excess of the purchase consideration over the net tangible and separate intangible assets.
PART(c) (8marks)
Steamdays
IAS 36 Impairment of Assets says that an impairment loss for a cash-generating unit (CGU) should be
recognised if its recoverable amount is less than its carrying amount.
An impairment loss for a CGU should be allocated in the following order:
1. To the goodwill of the unit
2. To other asset on a pro rata basis, based on their carrying amounts
An impairment loss relating to any individual assets that form part of the CGU but that are individually
impaired should be recognised in the first instance.
In allocating an impairment loss as above, the carrying amount of an individual asset should not be
reduced to less than the highest of:
1. Its fair value less costs to sell
2. Its value in use (if separately determinable)
3. Zero
Notes:
The first impairment loss of $1 million:
$500,000 must be written off the engines as one of them no longer exists and is no longer part
of the CGU;
The goodwill of $200,000 must be eliminated; and
The balance of $300,000 is allocated pro rata to the remaining assets other than the remaining
engine which must not be reduced to less than its fair value less costs to sell of $500,000.
The second impairment loss of $200,000:
This should be allocated to the licence, property and rail track and coaches in the ratio 4:1:1 in
proportion to their carrying amounts. However, as this would result in allocating a $133,333 loss
to the licence 1, the first $100,000 is applied to write down the licence to its fair value less costs
to sell
The balance is applied pro rata to assets carried at other than their fair value less costs to sells
(i.e. $50,000 to both the property and the rail track and coaches)
