Intangible Assets recognition criteria

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Other internally generated intangibles Assessment of whether an internally generated intangible asset meets the criteria for recognition requires a company to classify the generation of the asset into:

 a research phase; and

 a development phase.

Definitions: Research Research:

Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development:

The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use.

Accounting treatment of development costs

Development costs must be recognised as an intangible asset, but only if all the following conditions can be demonstrated.

 It is technically feasible to complete the development project.

 The company intends to complete the development of the asset and then use or sell it.

 The asset that is being developed is capable of being used or sold.  Future economic benefits can be generated. This might be proved by the existence of a market for the asset’s output or the usefulness of the asset within the company itself.  Resources are available to complete the development project.

 The development expenditure can be measured reliably (for example, via costing records). Only expenditure incurred after all the conditions have been met can be capitalised. Once such expenditure has been written off as an expense, it cannot subsequently be reinstated as an intangible asset.

 

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 If the provision is more than the amount needed to settle the liability the balance is released as a credit back through the income statement.  If the provision is insufficient to settle the liability an extra expense is recognised.

An onerous contract is a contract where the unavoidable costs of fulfilling/completing the contract now exceed the benefits to be received (the contract revenue)

A provision should be made for the additional unavoidable costs of an onerous contract. (The ‘additional unavoidable costs’ are the amount by which costs that cannot be avoided are expected to exceed the benefits).

Future operating losses Provisions cannot be made for future operating losses. This is because they arise from future events, not past events.

 

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Restructuring A provision is recognised for the future restructuring costs only if a present obligation exists.

A constructive obligation to restructure arises only when a company:

 has a detailed formal plan for the restructuring (IAS 37 specifies certain minimum content); and

 has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

Future repairs and major overhauls

A provision cannot be recognised for the cost of future repairs or replacement parts unless the company has an obligation to incur the expenditure. A company should capitalise expenditure incurred on replacement of an asset and depreciate this cost over its useful life.

Normal repair costs are expenses that should be included in profit or loss as incurred.