Category Archives: Financials

Recognizing an intangible asset

Although the company may have identified an intangible asset, recognizing it on the balance sheet is another matter. Before the company may record the asset in its books, the company must be able to demonstrate that the asset meets the definition of an intangible asset and also the recognition criteria for such assets.

According to IAS 38 an intangible asset shall be recognized if, and only if it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably. As you may have understood, both those conditions have to be met obviously.
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Understanding the meaning of an intangible asset

Plainly speaking, an intangible asset is an identifiable non-monetary asset without physical substance. This should be fairly obvious from the name ‘intangible’. What this means really is the fact that you cannot touch or physically grasp the asset. What however is required prior you can talk of an asset is the requirement of identifiability – the company must be able to separate it from physical substance for an example and it must be ‘usable’ all on its own.
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Internally generated intangible asset – development phase

Now that we know what to treat as and how to treat the expenses incurred in research phase, we can move onto the development phase. If the company has decided the path to pursue with the generation of the asset, it starts to develop it, meaning that it can now identify the asset and perhaps more reliably measure and state future economic benefits arising from use of the asset.

However, it’s not that clear with the recognition as it was with research phase, where everything was expensed. An intangible asset arising from development shall be recognized if, and only if, the company can demonstrate all of the following:
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Internally generated intangible asset – research phase

We have already discussed the two main considerations a management needs to take into account when thinking about recognizing an internally generated asset. First one relates to identifying the asset itself and strictly speaking this shouldn’t be a difficulty. However, the second consideration is far trickier and with this post we’ll start opening the issue of why this is considered more difficult.

To begin with the assessment, the management needs to classify the generation of the asset into two phases – research and development phase. With this post we’ll go into more detail with the first one – research phase. As this distinction is trivial for identifying and measuring the cost, those two terms need to be clearly understandable and hopefully we’ll be able to bring more sense into this dilemma.
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Internally generated intangible asset

There are times when a company generates an intangible asset that it may feel to be separately valued. This asset may very well be a website, software or anything similar that the company uses in its business to either increase revenue or to achieve cost-efficiency. In assessing whether the asset falls into the recognition criteria as an asset and not current period expense, there are two considerations that have to be taken into account.

First off the management needs to identify the asset itself – is it software perhaps or is it a website? Alongside with this identification the management needs to be able to assess and identify the benefits the company will gain from using this asset. They need to be clearly stated and understandable.
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Interest on finance lease liabilities

Finance leases are in other words also called capital leases. Shortly of the meaning of finance lease – it’s an arrangement where the borrower chooses an asset, the finance company will purchase the asset and the borrower will use the selected asset during the period of lease. During this very same period the borrower pays to the finance company series of installments for the use of the asset. Usually the borrower will also have an option to acquire the asset, but that’s not relevant at the moment to the interest calculation methods.
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Simple interest calculation

Regardless of the fact that in Medieval Ages charging for interest was not well looked upon to say the least, in nowadays interest is something we all agree that makes sense. Moreover, it makes sense in the form that you are giving or you are given the ability to use someone else’s asset (whether its money, car or something else). From such activities interest is considered to be as compensation to the lender as he or she could have done something else with the asset, but instead it was given for you to use. As it is reasonable to believe that assets should always earn income or give value, giving it to someone else for use is just another means of an asset generating income really.
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