• 15 Marks

FR – May 2015 – L2 – SC – Q5 – Impairment of Assets (IAS 36)

Discuss intangible assets, characteristics and recognition of goodwill, development cost conditions, and calculate goodwill on consolidation.

IAS 38 – Intangible Assets, specifies the criteria that must be met before an intangible asset can be recognised by an entity in its Financial Statements. Intangible assets are identifiable non-monetary assets without physical substance and include goodwill, brands, copyright and research and development expenditure. They could be
purchased and/or internally generated.
Required:

(a) Identify any TWO characteristics of goodwill which distinguish it from other intangible assets. (2 Marks)

(b) Explain THREE differences between purchased goodwill and non-purchased goodwill. (3 Marks)

(c) Identify any THREE conditions that must be met under IAS 38 for development expenditure to be recognised as an intangible asset. (3 Marks)

(d) State any FOUR factors to be considered when determining the useful life of an intangible asset. (4 Marks)

(e) Calculate the goodwill on consolidation from the information below:
Parent has 80% interests in subsidiary.

Item Amount (N’000)
Parent’s cost of investment in subsidiary 299,700
Fair value of non-controlling interest at acquisition date 169,500
Net asset at acquisition date (subsidiary) 345,800
Impairment of goodwill 62,200

Required: Compute the goodwill on consolidation. (3 Marks)

(a) Characteristics of Goodwill

  1. Non-Identifiable Nature: Goodwill cannot be specifically identified or separated from the business as it encompasses a company’s reputation, customer relationships, and brand value.
  2. Indeterminate Useful Life: Goodwill does not have a finite useful life and is retained on the balance sheet until impaired.

(b) Differences between Purchased Goodwill and Non-Purchased Goodwill

Purchased Goodwill Non-Purchased Goodwill
1. Arises from the acquisition of another business as a going concern. 1. Inherent in the business and developed over time without specific acquisition.
2. Has a quantifiable cost and is recorded on the balance sheet. 2. Not recognized on the balance sheet as it lacks a quantifiable purchase cost.
3. Recognized upon acquisition and consolidated in financial statements. 3. Exists within the business and not accounted for separately.

(c) Conditions for Recognizing Development Expenditure as an Intangible Asset
Under IAS 38, development expenditure can be recognized as an intangible asset if the entity demonstrates:

  1. Technical Feasibility: Ability to complete the asset so it will be available for use or sale.
  2. Intention to Complete: Commitment to finishing and using or selling the intangible asset.
  3. Probable Future Economic Benefits: Evidence of a market for the output of the intangible asset or its usefulness for internal purposes.

(d) Factors in Determining the Useful Life of an Intangible Asset

  1. Expected Usage: The extent and frequency with which the asset will be used.
  2. Obsolescence: Potential for technical or commercial obsolescence.
  3. Legal and Regulatory Limitations: Duration of legal rights or similar restrictions.
  4. Dependence on Other Assets: Whether the asset’s useful life is linked to the useful life of other assets owned by the entity.

(e) Goodwill Calculation

Calculation Step Amount (N’000)
Cost of investment in subsidiary 299,700
Fair value of non-controlling interest 169,500
Total Consideration 469,200
Less: Net assets at acquisition (subsidiary) (345,800)
Goodwill on Consolidation 123,400
Less: Impairment of goodwill (62,200)
Net Goodwill on Consolidation 61,200
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