INTANGIBLE ASSETS

Question 4.1

Bolt plc is a company specialising in the production of pet products. The Financial Director is new to the industry and is preparing financial statements for the year ended 31 December 20X8. S/He would like some general guidance on the definition of an intangible asset and the criteria for the recognition of such assets.

S/He would also like you to provide some advice on how to deal with the following issues:

Research and development expenditure

During the year the company spent 1,000,000 on research and development. This comprised of three projects:

Project 1: Cost in the year 300,000 - funded research conducted at the local university. The research looked into the impact of different chemical compounds on rabbits.

Project 2: Cost in the year 200,000 - development of a new microchip cat flap expected to be a very profitable product line. The final development phase has just finished and production of the cat flap is expected from January 20X9 with the product expected to generate profits from January 20Y0.

Project 3: Cost in the year 500,000 development of a pet utility belt designed to hold all the equipment necessary to walk a dog. The development work on this product is complete but market testing of this product indicated that pet owners found the product ridiculous and were unlikely to buy it.

Trademark

During the year the company acquired the Wiggles, Wags and Whiskers trademark from a large listed company. The trademark is associated with a line of luxury products for cats and dogs including a high quality range of pet food, diamante collars and coats for dogs. The trademark cost the company 500,000 and the Financial Director believes that it will be of benefit to the company for the next 10 years after which it is difficult to predict market conditions.

The Financial Director believes that over the coming years the value of this trademark is likely to increase.

Brand

NoPull is a brand of dog lead used to stop dogs pulling on the lead. The company have built this brand themselves and have invested 800,000 in brand design, labelling, advertising and promotion costs during the year.

REQUIRED:

1. INTANGIBLE ASSETS

Set out the definition and recognition criteria for intangible assets as required under International Accounting Standards.

1. RESEARCH AND DEVELOPMENT EXPENDITURE

In the case of each of the research and development projects clearly outline and justify the required accounting treatment.

1. TRADEMARK

Advise the Financial Director of the correct accounting treatment of the trademark.

Outline clearly the guidance given in IAS38 regarding the revaluation of intangible assets.

Give an example of an intangible asset that can be re-valued and an example of one that cannot.

1. BRAND

Advise the Financial Director of the correct accounting treatment of the brand and explain this treatment in the context of the definition and recognition criteria for intangible assets.