Accounting for Impairment of Intangible Assets

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Questions and Answers

What is the journal entry to recognise amortization of an intangible asset?

Dr Amortization, Cr Intangible assets

Dr Amortization, Cr Accumulated amortization (correct)

Dr Intangible assets, Cr Accumulated amortization

Dr Accumulated amortization, Cr Intangible assets

What is the purpose of an impairment test for an intangible asset?

To determine the amortization method for the asset

To determine the residual value of the asset

To determine the useful life of the asset

To determine if the asset's carrying value exceeds its recoverable amount (correct)

How is the useful life of an intangible asset determined?

Based on the residual value of the asset

Based on the amortization method chosen

Based on the estimated period of time the asset will generate economic benefits (correct)

Based on the cost of the asset

What is the criteria for capitalising costs incurred in the development phase of an intangible asset?

When the date criteria is met Signup and view all the answers

How is the recoverable amount of an intangible asset calculated?

The higher of the asset's net selling price and its value in use Signup and view all the answers

What is the purpose of a deferred tax asset or liability?

To recognise the future tax consequences of a transaction Signup and view all the answers

How are research expenses accounted for?

Expensed as incurred Signup and view all the answers

When is an intangible asset considered impaired?

When its carrying value exceeds its recoverable amount Signup and view all the answers

What is the primary purpose of running an impairment indicator on the reporting date for an intangible asset with a finite lifespan?

To identify a possible impairment that cannot be resolved through extra amortization Signup and view all the answers

Under what circumstances can a previous calculation of the recoverable amount be used instead of calculating it annually for an intangible asset with an indefinite lifespan?

If three specific criteria are met Signup and view all the answers

What is the consequence of an intangible asset's carrying amount being higher than its recoverable amount in an impairment test?

The asset is no longer recognized as an intangible asset Signup and view all the answers

How often must the recoverable amount of an intangible asset that is not yet available for use be calculated?

At least annually, but at any time Signup and view all the answers

What is the first step in reversing an impairment loss for an intangible asset?

Determine if the amortization period should be decreased Signup and view all the answers

What is the limit on increasing the carrying amount of an intangible asset when reversing an impairment loss?

The original carrying amount Signup and view all the answers

What is the purpose of the accumulated amortization and impairment losses account?

To record the decrease in value of an intangible asset over time Signup and view all the answers

How would the revaluation of an intangible asset be presented in the financial statements?

As an increase or decrease in the net carrying amount of the intangible asset Signup and view all the answers

What is the purpose of the impairment test for an intangible asset?

To determine the recoverable amount of an intangible asset Signup and view all the answers

How would the amortization of an intangible asset be presented in the financial statements?

As a decrease in the net carrying amount of the intangible asset Signup and view all the answers

What is the purpose of the useful life determination for an intangible asset?

To determine the amortization method for an intangible asset Signup and view all the answers

How would the reversal of a previous impairment loss be presented in the financial statements?

As an increase in the net carrying amount of the intangible asset Signup and view all the answers

What is the purpose of the recoverable amount calculation for an intangible asset?

To determine the impairment loss of an intangible asset Signup and view all the answers

How would the addition of an intangible asset through internal development be presented in the financial statements?

As an increase in the net carrying amount of the intangible asset Signup and view all the answers

What is the purpose of the amortization method for an intangible asset?

To allocate the cost of the intangible asset over its useful life Signup and view all the answers

What is the purpose of the gross carrying amount of an intangible asset?

To record the original cost of an intangible asset Signup and view all the answers

Study Notes

Impairment Tests

Finite lifespan: Run an impairment indicator on the reporting date, and calculate the recoverable amount if there is a possible material impairment that cannot be determined by processing extra amortization.
If the carrying amount (CA) is greater than the recoverable amount, the intangible asset no longer applies.
Indefinite lifespan: Calculate the recoverable amount at least annually, at any time, but at the same time each year.
Not yet available for use: Calculate the recoverable amount annually, at any time, but at the same time each year, and this annual calculation must not be avoided.

Impairment Reversal

First, check if the amortization should not just decrease (change in estimate).
If the carrying amount is still too low, convert an impairment loss.
Ensure the carrying amount is not increased as it would have been if the original impairment had never been processed.

Journal Entries

Dr. Intangible assets – Website cost (SFP) = development/installation fees + fees paid to developer + salaries/wages for assisting with development.
Dr. Research expenses (P/L) = expenses in research phase.
Dr. Advertising expenses (P/L) = advertising costs.
Dr. Amortization (P/L) = cost price recognized / useful life × depreciated period.
Dr. Income tax expenses (P/L) = amortization × 28%.
Dr. Impairment loss (P/L) = recognition of impairment on website.

Important Reminders

No active market = no residual value.
Everything (costs) before date criteria is met → part of research phase = expenses; everything after date criteria is met = development phase = capitalize.

Financial Statements Disclosure

Intangible assets disclosure includes gross carrying amount, accumulated amortization and impairment losses, net carrying amount, additions, retirements and sales, impairment losses, and revaluation increases/decreases.

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Description

This quiz covers the procedures for testing impairment of intangible assets, including finite and indefinite lifespan, and calculating recoverable amount. Understand the steps to determine if an intangible asset is impaired and how to record it.