Question

Norfolk Ltd has decided to replace the computer software currently used for the company's payroll and general ledger functions. Norfolk Ltd is considering the following four options to obtain the new computer software:

1. Purchase or licence the computer software from another company. The purchased or licenced computer software would require only minimal changes before it could be used by Norfolk Ltd.

2. Contract independent programmers or a software company to develop specific software for Norfolk Ltd. Norfolk Ltd would pay the independent contractors or company and own the computer software outright.

3. Purchase generic computer software to be incorporated into a project to develop the computer software that meets the needs of Norfolk Ltd. The project would be undertaken by Norfolk Ltd's own computer specialists and involve significant work and cost.

4. Employ its own computer specialists to write AND develop the computer software.

Required

(a) For each of the four options, explain whether the computer software satisfies the definition of an intangible asset in accordance with AASB 138 Intangible Assets.

(b) For each option that satisfies the definition of an intangible asset, explain the recognition criteria that would be applied by Norfolk Ltd.

(c) Explain how any computer software recognised as an intangible asset by Norfolk Ltd would be measured on initial recognition and subsequent to initial recognition and whether the useful life of the computer software would be assessed as finite or indefinite.

Answer 1

A) As per AASB 138 An intangible asset is an identifiable non-monetary asset without physical substance.Entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources for example computer software. When an item meet the definition of an intangible asset, that is, identifiability, control over a resource and existence of future economic benefits. The future economic benefits flowing from an intangible asset may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the entity. For example, the use of intellectual property in a production process may reduce future production costs rather than increase future revenues.If an item within the scope of this Standard does not meet the definition of an intangible asset, expenditure to acquire it or generate it internally is recognised as an expense when it is incurred.

B) An intangible asset shall be recognised if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

(b) the cost of the asset can be measured reliably.

An intangible asset shall be measured initially at cost.

If an intangible asset is generated internally then its cost can be distinguished between Research phase and Development phase.

No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred.

An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following:

(a) the technical feasibility of completing the intangible asset so that it will be available for use or sale.

(b) its intention to complete the intangible asset and use or sell it.

(c) its ability to use or sell the intangible asset.

(d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

(e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

(f) its ability to measure reliably the expenditure attributable to the intangible asset during its development.

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Examples of directly attributable costs are:

(a) costs of materials and services used or consumed in generating the intangible asset;

(b) costs of employee benefits (as defined in AASB 119) arising from the generation of the intangible asset;

(c) fees to register a legal right; and

(d) amortisation of patents and licences that are used to generate the intangible asset.

C) Subsequent recognition of Intangible Asset i.e. Computer software may be done on Cost Model or Revaluation Model

Cost Model : After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortisation and any accumulated impairment losses.

Revaluation model : After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be measured by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value.

Given the history of rapid changes in technology, computer software and many other intangible assets are susceptible to technological obsolescence. Therefore, it will often be the case that their useful life is short. So the useful life of the computer software would be assessed as finite.