Topic10 Solutions - AF3110 Intermediate Accounting 1...

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1 AF3110 Intermediate Accounting 1 2009/10 Semester 2 Topic 10 Suggested Solutions Question 1 (Chapter14 Q15) (a) HKAS 38 Intangible Assets says an intangible asset should only be recognised if: it is probable that future economic benefits specifically attributable to the asset will flow to the enterprise; and the cost of the asset can be measured reliably. The recognition and initial measurement of intangible assets is considered in the following circumstances: (1) As separate acquisitions This is where an intangible asset is purchased separate to any accompanying assets. This is the most straightforward circumstance and there are no particular difficulties in describing and recognising the asset. 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. Examples of this type of acquisition would be the purchase of the copyright to a song or book, or some computer software. (2) As part of a business combination Here the situation is more complex. In an acquisition, the acquiring company will usually obtain all of the net assets of the acquired company for an amount of purchase consideration. The basic principle in HKFRS 3 Businness Combinations is that all assets, including intangibles, should be recorded 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 its fair value. However for most intangibles there cannot be an active market as the intangible will be unique (e.g. a brand name) 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, because they are usually earned from assets in combination (tangible and intangible). Thus, while it may identify separate intangibles as part of an acquisition, it is often
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2 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 within goodwill. (3) 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 recognized a cost would have to be placed on them. This is difficult. In the past costs such as advertising and even staff training have
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Topic10 Solutions - AF3110 Intermediate Accounting 1...

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