Accounting Guideline GAP 31 Intangible Assets All rights reserved. No part of this publication may be reproduced, stored in retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of the National Treasury of South Africa. Permission to reproduce limited extracts from the publication will not usually be withheld. Though National Treasury (NT) believes reasonable efforts have been made to ensure the accuracy of the information contained in the guideline, it may include inaccuracies or typographical errors and may be changed or updated without notice. NT may amend these guidelines at any time by posting the amended terms on NT's Web site. Note that this document is not part of the GAP standard. The GAP takes precedence while this guideline is used mainly to provide further explanations on the concepts already in the GAP.
Contents 1 INTODUCTION... 4 2 SCOPE... 5 3 BIG PICTUE... 6 4 IDENTIFICATION... 7 4.1 General... 7 4.2 Classification of software cost... 9 5 INITIAL ECOGNITION... 10 5.1 General... 10 5.2 Treatment of licence fees... 11 5.3 Internally generated intangible assets... 13 5.4 Website cost... 15 5.5 ecognition of an expense... 16 6 INITIAL MEASUEMENT... 17 6.1 General... 17 6.2 Elements of cost... 17 6.3 Measurement of cost... 18 7 SUBSEQUENT MEASUEMENT... 20 7.1 General... 20 7.2 Useful life and residual value... 21 7.3 Amortisation... 23 7.4 Fully depreciated assets still in use... 27 7.5 evaluation model... 28 7.6 Software upgrades... 29 8 IMPAIMENT... 31 8.1 General... 31 8.2 Compensation received from third parties... 31 9 DEECOGNITION... 33 10 ILLUSTATIVE EXAMPLES... 36 11 DISCLOSUE... 40 12 ENTITY-SPECIFIC GUIDANCE... 44 January 2014 Page 2
12.1 Municipalities... 44 13 SUMMAY OF KEY PINCIPLES... 46 13.1 Identification... 46 13.2 ecognition... 46 13.3 Measurement... 46 13.4 Derecognition... 46 January 2014 Page 3
1 INTODUCTION This document provides guidance on the accounting treatment of intangible assets. The content should be read in conjunction with GAP 31 (GAP Standard on Intangible Assets issued December 2006) and includes any changes made by the board in terms of the Improvements to Standards of GAP. For purposes of this guide, entities refer to the following bodies to which the standards of GAP relate to, unless specifically stated otherwise: Public entities Constitutional institutions Municipalities and all other entities under their control Parliament and the provincial legislatures Explanation of images used in the manual: Definition Take note Management process and decision making Example January 2014 Page 4
2 SCOPE GAP 31 is applicable to all entities preparing their financial statements on the accrual basis of accounting in the recognition, measurement and disclosure of intangible assets. The following are excluded from GAP 31: Instance where another standard of GAP is adopted, e.g. GAP 17, GAP 103, etc.; Financial assets within scope of GAP 104 on Financial Instruments; ecognition and measurement of exploration and evaluation assets; and Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resource. January 2014 Page 5
3 BIG PICTUE Intangible Assets Identification ecognition Measurement Initial Measurement Subsequent Measurement Amortisation and Impairment Derecognition Disclosure Cost Cost Model Fair Value evaluation Model Figure 1 January 2014 Page 6
4 IDENTIFICATION An intangible asset is an identifiable non-monetary asset without physical substance. 4.1 General An intangible asset is therefore identified based on all of the following: Intangible asset Identifiable Non-monetary asset Without physical substance O Is separable, i.e. is capable of being separated or divided from the entity and then sold, transferred or used on its own or together with other assets. Arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. This criterion creates the expectation that you normally cannot touch the asset. However, some intangible assets may be contained in or on a physical substance (e.g. documents & CD s), but with intangible assets the physical substance is a secondary element of the asset. As such, it is still regarded that the asset is without physical substance. Figure 2 identification criteria Take note of the following with regards to the identifiable criterion: Contractual rights include those rights arising from a binding arrangement; and Other legal rights granted by statute are specifically excluded from the identifiable criterion. ights granted by statute to an entity allows it to execute regulatory rights over certain activities, for example, telecommunications and energy or a municipality s right to levy January 2014 Page 7
tax. These rights will not be recognised as intangible assets as the definition of an intangible asset is not met, i.e.: An entity will not be able to sell, transfer or use the rights at their own discretion; and Legal rights granted by statute are specifically excluded from the identifiable criterion. However, rights to use natural resources administrated by the government will be recognised as intangible assets when the definition and recognition criteria are met. The following are examples of items that generally have a physical substance of some sort, but where the physical substance is secondary (incidental) to the intangible asset. Physical substance is deemed to be incidental when it is not the driver of the value of the asset. Item Licences (software licences, etc.) Application software Patents Physical substance Licence document / agreement CD Patent registration document Why is it still seen as without physical substance? The entity pays for the right of use of, e.g. software. Thus an entity does not pay for the tangible item being the piece of paper on which the licence agreement is printed, but rather for information contained on the document (you can t touch a right of use). The value of application software is not driven by the CD that it is loaded on, but rather by the knowledge that it embodies. Thus the physical substance is deemed to be incidental. The value of a patent is not driven by the piece of paper that it is printed on, but rather by the knowledge that it embodies. Thus the physical substance is deemed to be incidental. Entities could frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licences, and intellectual property. Common examples of items encompassed by these broad headings are computer software, patents, fishing licences or import quotas. These costs should be assessed against the definition and recognition criteria to determine whether or not it should be recognised as intangible assets. January 2014 Page 8
4.2 Classification of software cost Computer software can be classified as either a tangible asset, i.e. property, plant and equipment or an intangible asset, depending on the level of integration with the related hardware. Where software is an integral part of the related hardware, i.e. the hardware cannot operate without the software, the software will be treated as property, plant and equipment together with the related hardware already recognised, which will normally be computer equipment. Where the software is not an integral part of the related hardware, i.e. the hardware can operate without the software, an entity determines whether the cost meets the definition and recognition criteria of an intangible asset and if met, capitalise the cost as an intangible asset. For example, the operating system of a computer (e.g. Microsoft Windows, Linux), without which the computer cannot operate, is an integral part of the related hardware and is therefore treated as property, plant and equipment. When the software is not an integral part of the related hardware, computer software is treated as an intangible asset. Examples of software that may be capitalised as intangible assets are Microsoft Office, Excel or Word or various accounting software packages, such as E-Venus, Pastel or SAP. In these cases the computer can operate without the software. Example 1: Capitalising software as property, plant and equipment A public entity in the health sector purchased a computer-operated machine that will automate the sample testing performed in the entity s laboratory. After a verification process has been followed, the results obtained from the machine will be more reliable and will be available in a fraction of the time than with hand-testing. The invoice obtained from the supplier split the cost as follows: Laboratory equipment Software Total payable 21,000,000 2,500,000 23,500,000 The entity subsequently has to decide whether to capitalise the software cost as a separate intangible asset, or along with the cost of the machine. To make this decision the entity should consider the level of integration with the machinery. The machinery cannot operate without that specific software and without that software the machine will be rendered completely useless. The software is therefore an integral part of the machine and should consequently be treated as property, plant and equipment. January 2014 Page 9
5 INITIAL ECOGNITION 5.1 General An intangible asset is recognised when: ecognise as an intangible asset when: Definition is met Future economic benefits or service potential associated with the item exists Entity has control over the resources The cost or fair value of the item can be measured reliably Figure 3 recognition criteria An entity needs to ensure that an item meets the definition of an intangible asset and the recognition criteria in order to apply GAP 31. If an item within the scope of GAP 31 does not meet the definition, it will be recognised as an expense when it is incurred. Expensing assets below a capitalisation threshold In practice it is often found that entities expense intangible assets with a cost price below a capitalisation threshold on the basis of materiality as determined in accordance with their policy on assets. It is important to note that assets should be capitalised in accordance with GAP 31 when it meets the definition of an intangible asset, regardless of the value of an asset. Therefore, if it is expected that future economic benefits related to the asset will flow to the entity beyond the current reporting period, it should be capitalised. If an entity does have a policy with a capitalisation threshold below which assets are expensed, this policy should be an internal policy of the entity and should not appear in the accounting policies to the financial statements. With reference to the preceding paragraph, it is important to note that it would not be appropriate to assume that the non-disclosure of the internal policy in the accounting policy alone would be acceptable. GAP 1 Presentation of Financial Statements states explicitly that if an entity states that it prepares its financial statements in accordance with GAP it must comply in full with the standards of GAP. Therefore, for financial reporting purposes full compliance with GAP is required regardless of the entity s internal reporting requirements. January 2014 Page 10
5.2 Treatment of licence fees Entities should keep adequate records of all the intangible assets expensed, as the effect on the cost and amortisation as reflected in the financial statements may become material over time. Materiality must be considered by not only taking into account the materiality of the individual item, but also considering: the cumulative effect of all the individually immaterial items of intangible assets that were expensed during a specific financial year; and the cumulative year-on-year effect of all expensed items of intangible assets. Generally licence fees are intangible assets because they are: Identifiable as they arise from a contractual or legal right; Non-monetary assets because they are not money nor are they assets that are receivable in fixed or determinable amounts of money; and Not physical in substance. Although the entity might receive an invoice or certificate to indicate that it has the right to use something the actual right has no physical substance. When licence fees comply with the recognition criteria of intangible assets then they should be recognised as intangible assets. For practical purposes, at management s discretion, licence fees can be expensed when the following conditions are met: the licence fee is for a period of one year or less; and the one year or less period falls exactly within the financial reporting period of the entity. Example 2: Licence fees Entity A uses two accounting systems for which they have to pay annual licence fees. Licence 1 amounts to 20, 000 and it covers the period of use from 1 January to 31 December 2010 (the entity paid this fee in January 2010). Licence 2 is for an amount of 500, 000 and it covers the period of use from 1 April 2010 to 31 March 2011. The entity paid this fee in March 2010. The reporting period ends 31 March. The journal entries will be as follows for the period ending 31 March 2010: 1 January 2010 Debit Credit Intangible assets 20,000 Bank 20,000 ecognise intangible asset for licence fee 1 January 2014 Page 11
31 March 2010 Debit Credit Pre-paid expenses 500,000 Bank 500,000 ecognise a pre-paid expense for licence fee 2 The payment for the licence fee will be recognised as a pre-payment in the statement of financial position as the licence is for the following period, i.e. 2010/2011. 31 March 2010 Debit Credit Amortisation (20,000 / 12 months x 3 months) 5,000 Accumulated amortisation 5,000 Amortisation of licence fee 1 In the next period, licence fee 2 can be written off as an expense because the licence period and the reporting period are exactly the same. Alternatively, the licence fee can be capitalised and fully amortised in the same period. This example shows the effect of exercising the second option. The journal entries will be as follows for the period ending 31 March 2011: 1 April 2010 Debit Credit Intangible assets 500,000 Pre-paid expenses 500,000 Capitalising licence fee 2 costs 31 December 2010 Debit Credit Amortisation (20,000 / 12 months x 9 months) 15,000 Accumulated amortisation 15,000 Amortise licence fee 1 over the remainder of the licence period 31 March 2011 Debit Credit Amortisation (500,000 / 12 months x 12 months) 500,000 Accumulated amortisation 500,000 Amortisation of licence fee 2 January 2014 Page 12
5.3 Internally generated intangible assets Internally generated intangible assets Internally generated goodwill, -customer lists, -brands etc: recognise as an expense esearch phase: recognise as an expense Development phase: recognise as an intangible asset only if specified criteria are met Figure 4 internally generated intangible assets Sometimes it is difficult to assess whether an internally generated intangible asset qualifies for recognition due to problems such as identifying whether and when there is an identifiable asset that will generate expected future economic benefits or service potential and determining the cost reliably. An entity should classify the internal generation of assets into a research phase and a development phase. Where an entity cannot distinguish the research phase from the development phase, the expenditure incurred will be treated as if it was incurred in the research phase only. The cost of an internally generated intangible asset will be recognised from the day it meets the specific recognition criteria. Any expenditure previously expensed cannot be capitalised subsequently. esearch is an original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Expenditure on research will be recognised as an expense when it is incurred as an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits or service potential. esearch activities include for example: Activities with the objective to obtain new knowledge; Search for applications, materials, devices, products, systems; and Evaluation and selection of applications, materials, devices, products, systems. January 2014 Page 13
Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of production or use. Within the development phase an entity can, under certain circumstances, identify an intangible asset and demonstrate that the asset will generate probable future economic benefits or service potential due to the development phase being further advanced than the research phase. An entity needs to demonstrate all of the following criteria before an intangible asset arising from development phase can be recognised: Technical feasibility of completing the intangible asset to be used or sold Intention to complete the intangible asset for use or sale Ability to use or sell the intangible asset How the intangible asset will generate probable future economic benefits or service potential Availability of resources to complete the development of intangible asset Ability to measure the development expenditure attributable to the intangible asset Figure 5 recognition criteria of development costs as an intangible asset Development activities include for example: The design, construction and testing of pre-production or pre-use prototypes and models; The design of tools, jigs, moulds and dies involving new technology; The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and The design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services. An entity can use the principles in GAP 21 on Impairment of Non-cash-generating Assets or GAP 26 on Impairment of Cash-generating Assets to assess whether it is probable that an intangible asset will generate future economic benefits or service potential. efer to the accounting guidelines GAP 21 and GAP 26 for more detail. January 2014 Page 14
Internally generated brands, mastheads, publishing titles, customer lists and items of similar substance, as well as internally generated goodwill, are not recognised as intangible assets, as it cannot be distinguished from the cost of developing the operation as a whole. 5.4 Website cost Website costs arising from the development phase can be recognised if they satisfy the recognition criteria and the requirements of the development phase as indicated under Figure 2 and Figure 5 respectively. Some websites are developed to comply with a statute or to be used mainly to provide information to the public at large. The costs incurred for the development of these websites should be expensed. Determining whether a website can be capitalised as an intangible asset It is important to note that an entity will need to demonstrate how the website will generate probable future economic benefits or service potential, in order to capitalise the website as an intangible asset. If the entity cannot demonstrate this, all expenditure on such a website should be recognised as an expense when it is incurred. It is difficult to demonstrate that probable future economic benefits or service potential will be generated from a website developed solely or primarily to promote and advertise its own products or services; consequently all costs on developing such a website will be recognised as an expense. Example 3: Capitalisation of intangible assets An educational institution, providing distance learning courses to students, reproduces all the study material and relevant textbooks necessary for the completion of the course on a specific website. Participating students pay a fee which grants them access to the website contents necessary for their studies. This website qualifies for recognition as an intangible asset as the future economic benefits can be demonstrated by the fees generated. The same institution has another website providing information to prospective students regarding the study programme and fees. It is difficult to demonstrate that future economic benefits or service potential are probable, as the website is solely intended to promote the products and services of the institution. The costs related to this website should therefore be expensed An entity should evaluate the nature of expenditure incurred at each stage, to determine the accounting treatment thereof until the website is complete. The following are examples of the stages and types of cost incurred: January 2014 Page 15
Figure 6 identifying the stages in development of a website 5.5 ecognition of an expense Where expenditure incurred on an intangible asset does not meet the recognition criteria, it will be expensed when it is incurred. Such expenditure cannot be recognised as part of the intangible asset at a later stage. January 2014 Page 16
6 INITIAL MEASUEMENT 6.1 General An intangible asset is initially measured at cost. Where an intangible asset is obtained at no cost or nominal cost, its cost is the fair value on the date of acquisition. Intangible assets may be gifted or contributed to an entity and therefore obtained at no cost. GAP 23 - evenue from Non-exchange Transactions deals with the recognition and measurement of assets under these situations as well as grants received for the acquisition of assets. Intangible assets may also be acquired at no cost or for a nominal cost (below market value) through the process of sequestration. In both these circumstances, the cost of the intangible asset should be measured at its fair value, i.e. the amount for which an asset could be exchanged, or a liability settled between knowledgeable, willing parties in an arm s length transaction, at the date of acquisition. Subsequent to the recognition of such an asset, an entity can choose to adopt either the revaluation model or the cost model in accordance with GAP 31. 6.2 Elements of cost Measuring intangible assets at initial recognition at fair value vs. measuring intangible assets using the revaluation value model for subsequent measurement emember that the initial measurement of an asset acquired at no cost at fair value does not call for the use of nor does it imply the use of the revaluation model for subsequent measurement. If intangible assets are subsequently measured at cost, the fair value at initial recognition will be the deemed cost of the asset, which will also subsequently be subject to amortisation. However, if the revaluation model is used for the subsequent measurement of intangible assets, the revalued amount is usually determined by reference to an active market. The movements in the revalued amount will be recognised in a revaluation surplus in net assets. For more detail on the revaluation model (and cost model), refer to the section on Subsequent measurement. The cost of an intangible asset would generally include: purchase price, including import duties, non-refundable purchase tax; and any directly attributable cost necessary to get the asset ready for its intended use. Examples of other directly attributable costs are: January 2014 Page 17
employee costs as defined in GAP 25 on Employee Benefits, those costs that arise as a result of direct involvement in the construction or acquisition of the item of property, plant and equipment; costs of testing the asset; and professional fees. Capitalisation of costs will cease as soon as the asset is in the condition necessary for it to be capable of operating in the manner intended by management. 6.3 Measurement of cost Deferred settlement There may be situations where an entity is allowed to settle payment for the asset beyond normal credit terms. In such cases, the difference between the cash price equivalent and the total payments is recognised as interest over the period, unless it is capitalised in accordance with GAP 5 on Borrowing Costs. efer to the accounting guideline on GAP 5 for more detail. Assets acquired in an exchange transaction The cost of an asset acquired in an exchange transaction for a non-monetary asset can be measured in the following way: Exchange of assets (exchange transaction) Y Fair value of asset received available? N Y Account for in accordance with GAP 23 (nonexchange transaction) Fair value of asset received = cost of asset N Fair value of asset given up available? Y Fair value of asset given up = cot of asset N Measure at carrying amount of asset given up January 2014 Page 18
Figure 7 - decision tree for determining the cost of an asset in an exchange transaction Example 4: Exchange of non-monetary assets Entity A acquired licence which meets the definition and recognition criteria of an intangible asset. Entity A acquired this licence in exchange for a computer. At transaction date the fair value of the licence was 10, 000, the fair value of the computer was 9, 800 and the carrying amount of the computer in the records of Entity A was 8, 000. Entity A should initially recognise the licence acquired at its fair value of 10, 000. The journal entries would be as follows: Transaction date Debit Credit Licence 10,000 Computer equipment 8,000 Gain on sale of assets 2,000 Had Entity A not been able to reliably measure the fair value of the licence, then the licence would be initially recognised at the fair value of the computer exchanged. The journal entries would be as follows: Transaction date Debit Credit License 9,800 Computer equipment 8,000 Gain on sale of assets 1,800 Had Entity A not been able to reliably measure the fair value of either of the license or the computer, then the license would have been initially recognised at the carrying amount of the computer exchanged. The journal entries would be as follows: Transaction date Debit Credit License 8,000 Computer equipment 8,000 January 2014 Page 19
7 SUBSEQUENT MEASUEMENT 7.1 General After recognition of an intangible asset, an entity can choose either the cost model or revaluation model. Cost model Cost/fair value Accumulated amortisation and impairment losses Carrying amount Under the cost model, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses subsequent to initial recognition. This model is in essence the same as the cost model under GAP 17 Property, Plant and Equipment. evaluation model evalued amount Accumulated amortisation and impairment losses Carrying amount Subsequent to recognition, those assets whose fair value can be measured reliably (i.e. for which an active market exists), can be carried at revalued amount less any accumulated amortisation and any accumulated impairment losses. The revalued amount is the fair value at the date of the revaluation. This model is in essence the same as the revaluation model under GAP 17 on Property, Plant and Equipment. efer to the revaluation model section for more detail on the accounting treatment of intangible assets under the revaluation model. An active market is a market in which all of the following conditions exist: The items traded in the market are homogeneous; Willing buyers and sellers can normally be found at any time; and Prices are available to the public. The following sections deals with useful lives, residual values and amortisation. January 2014 Page 20
7.2 Useful life and residual value Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Useful life is: the period over which an asset is expected to be available for use by an entity; or the number of production or similar units expected to be obtained from the asset by an entity. An entity assesses the useful life or service potential of an intangible asset as either finite or indefinite. When an entity assessed all the relevant factors and determined that there is no foreseeable limit to the period over which an asset is expected to generate net cash inflows or service potential for the entity, the asset s useful life will be indefinite. Where an intangible asset arises from contractual rights or legal rights, the useful life of the intangible asset should not exceed the period of the contractual or legal rights, but may be shorter. If there is a specified term that the contract or legal right can be renewed without incurring significant cost, then the useful life should include the renewal period. Example 5: Useful life of an intangible asset Entity G acquired a construction permit from a local municipality in the northern region under a binding arrangement for a period of 30 years. The government has awarded the permit to the local municipality for a period of 55 years. The useful life of the construction permit in the records of entity G should be a period not exceeding 30 years as per the binding arrangement as that is the expected use that the entity will derive from the permit. Evidence that indicates an entity would be able to renew the contractual rights or legal rights without significant cost include: Past experience has proved it is possible for an entity to renew a contractual right or legal right; Evidence clearly indicates that the conditions necessary to obtain a renewal have been met; and The cost of renewal is not significant when compared with the future economic benefits or service potential expected to flow to the entity. January 2014 Page 21
The residual value of an intangible asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life. The residual value of an intangible asset with a finite useful life will normally be zero, except where: A third party has committed to purchase the asset at the end of its useful life; or An active market for the asset exists; and o o the residual value can be determined by reference to that market; and it is probable that such a market will still exist at the end of the asset s useful life. A residual value other than zero implies that an entity expects to dispose of the intangible asset before the end of its economic life. Economic life is either: the period over which an asset is expected to be economically usable by one or more users; or the number of production or similar units expected to be obtained from the asset by one or more users. Useful life is either: the period over which an asset is expected to be available for use by an entity; or the number of production or similar units expected to be obtained from the asset by an entity. The difference between useful life and economic life can therefore be summarised as follows: Useful life is the term that the entity expects to use an asset while the economic life is the actual life span of the asset. For example, it might be the policy of an entity to purchase accounting software every two years and therefore the useful life of the software is 2 years. The software can, however, still be used for at least another 3 years after which is has to be upgraded otherwise it will become unusable. The economic life of the software will therefore be 5 years. If the residual value of an asset increases to an amount equal to or greater than the asset s carrying amount, no amortisation is recognised until the residual value subsequently decreases to an amount below an asset s carrying amount. January 2014 Page 22
7.3 Amortisation Intangible assets with indefinite useful lives are not amortised, but are assessed for impairment annually, or whenever there is an indication that the intangible asset may be impaired. The diagram below summarises the difference in the accounting treatment (under subsequent measurement) of intangible assets with finite useful lives versus intangible assets with indefinite useful lives: Intangible assets Finite useful lives Indefinite useful lives Measured at cost (revalued amount) less accumulated amortisation and accumulated impairment losses Measured at cost less any accumulated impairment losses Amortised over its useful life Never amortised, but assessed for impairment at least annually Figure 8 subsequent measurement of intangible assets Amortisation of an intangible asset commences when the asset is available for use. Amortisation of an asset continues even though the asset is idle, unless it is classified as held for sale or derecognised. Thus, the asset should be amortised when it can be used even if it is not used. January 2014 Page 23
An asset is available for use when the asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. Amortisation methods The amortisation method used should allocate the depreciable amount on a systematic basis over its useful life, that is reflective of the pattern in which the future economic benefits or service potential are expected to be consumed by the entity (i.e. over its useful life). If a pattern cannot be determined reliably, the straight-line method is used. The more commonly applied amortisation methods in accordance with GAP 31 are the straight-line method, the diminishing balance method and units of production method. The following examples illustrate the difference between the three methods. Example 6: Straight-line method Entity B purchased an intangible asset for 120, 000 and the asset is expected to be used for 10 years with a no residual value. The entity chooses to allocate the asset s depreciable amount using the straight-line method over its expected useful life. Calculations: The cost of the asset 120,000 The annual amortisation charge will therefore be 12,000 (120,000 / 10) Example 7: Diminishing balance method Assume the same information as in Example 6 above, but the diminishing balance method is used. As a result, the carrying amount of the asset is amortised by multiplying it with the amortisation rate (10%). Calculations: The cost of the asset 120,000 The amortisation charge for year 1 will therefore be 12,000 (120,000 x 10% ) The amortisation charge for year 2 will 10,800 January 2014 Page 24
therefore be [(120,000 12,000) x 10%] This process will continue in a similar way each year. Example 8: Units of production A copyright is acquired that allows reproduction of 1,600,000 units of music records over its useful life. The cost of the intangible asset is 120, 000 (VAT incl.). The expected residual value is 15, 000. In the first year 500,000 units were produced. Calculations: The cost of the asset 120,000 ecognising the amortisation charge The depreciable amount 105,000 (120,000 15,000) The amortisation charge for year 1 will therefore be The amortisation expense is recognised in surplus or deficit, except where it is capitalised against another asset. The amortisation charge will continue to be recognised even though the fair value of the asset exceeds the carrying amount. Only when the residual value exceeds the carrying amount of the asset, should the amortisation charge cease. eassessment of amortisation methods, useful lives and residual values 32,813 (500,000 / 1,600,000 x 105,000 ) The amortisation charge continues even though the asset is idle or retired from active use and held for disposal, unless the asset is fully depreciated or the asset is classified as held for sale. However, where the unit of production method is adopted, the amortisation charge will be zero while the asset is idle. The amortisation method applied to an intangible asset should be reviewed at least at each reporting date. Any changes in the amortisation method or period should be accounted for January 2014 Page 25
as a change in accounting estimates and applied prospectively in accordance with GAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors. Similarly, the estimate of the useful life and residual value of an asset with a finite useful life should also be reviewed at least at each reporting date. Any changes in the estimated residual value of an asset should be accounted as changes in accounting estimate and applied prospectively in accordance with GAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors. Example 9: Assessing the useful life of an asset Entity Z acquired a software program to assist in the proper record keeping of its noncurrent assets, such as property, plant and equipment, heritage assets and intangible assets, on 1 July 2010 for 225,000. The entity originally assessed the useful life of the software to be 5 years. Assume that the software has no residual value. At 30 June 2012 upon reassessing the useful lives and residual values of its assets, Entity Z now decides, as it is very impressed with the software, that it will use it for a total of 10 years from purchase date. The following information is available for the period ending 30 June 2011: Carrying amount at 30 June 2011 Old amortisation at 30 June 2011 180,000 (225,000 x 4/5) 45,000 (225,000 / 5) Calculating the change in estimate: A change in accounting estimate in accordance with GAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors is accounted for prospectively; therefore the entity needs to recalculate amortisation from the beginning of the current reporting period, i.e. 1 July 2011. It is important to note that when calculating the amortisation for the 2011/2012 period, the entity will use the estimated remaining useful life at the beginning of the period. Therefore, for the period ended 30 June 2012, the entity will have to determine the remaining useful life at 30 June 2011. The remaining useful life at 30 June 2011 is 9 years. The 9 years is calculated is follows: remaining useful life based on original assessment of useful life at 30 June 2011 is 4 years, add the additional years added based on reassessment, which is 5 years. As from 1 July 2011, the vehicle will therefore be amortised over 9 years. The calculation is as follows: New amortisation for next 9 years 20,000 (180,000 / 9) Change in accounting estimate 16,667 (45,000 20,000 ) January 2014 Page 26
Take note that when calculating the new amortisation as a result of a change in estimate, one will always calculate it by dividing the carrying amount by the remaining useful life. The change in accounting estimate results in a decrease in amortisation in the current period ending 30 June 2012. 7.4 Fully depreciated assets still in use If an entity made an appropriate estimate of the useful lives, residual values and amortisation method of an intangible asset based on the information available at the previous reporting dates, it continues to measure the intangible assets at zero value. GAP 31 encourages an entity to disclose the fact that fully depreciated intangible assets are still in use. This would be for instance where an entity has a policy to replace intangible assets at specified intervals and at the end of a reporting period, an entity fully depreciates certain intangible assets knowing that in the following year, it is scheduled to replace these assets. However, in the following year, due to cash flow problems, the budget has been reduced, and the entity was not able to replace the assets. Where an entity did not appropriately review the useful life, residual values and amortisation method in accordance with GAP 31 and the intangible asset is fully depreciated, but still being used, this constitutes a prior period error. This error should be corrected and disclosed in accordance with the requirements of GAP 3. Decision tree to assist whether fully depreciated assets still in use, constitutes an error or not: Fully depreciated asset still in use Appropriate estimate of the useful lives made? Y N No adjustment is required Account as an error Disclose in accordance with GAP 102 Disclose the error and correct retrospectively in accordance with GAP 3 January 2014 Page 27
Figure 9 fully depreciated assets still in use 7.5 evaluation model Subsequent to recognition, those assets whose fair value can be measured reliably (i.e. for which an active market exist) are carried at revalued amount less any accumulated amortisation and any accumulated impairment losses. The revalued amount is the fair value at the date of the revaluation. Important to note when applying the revaluation model: evaluations should be made with sufficient regularity to ensure that the carrying amount of the intangible asset does not differ materially from the fair value at the reporting date. When an entity chooses the revaluation model, all intangible assets within the same class must be measured using the same model, except where there is no active market for a specific asset. In such a case the asset can be measured under the cost model until such time as an active market becomes available. Also note that the movement in the revalued amount is recognised in net assets - under the revaluation surplus, and not in surplus and deficit. evaluation model For the purpose of revaluations of intangible assets, fair value should be determined by reference to an active market. It will therefore be very difficult and possibly not prudent to measure intangible assets under the revaluation model, as an active market for intangible assets is rare and consequently a price paid for one asset may not be sufficient evidence of the fair value of another and furthermore, prices are often not accessible to the public. An active market can also not exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique. Given the history of rapid changes in technology, intangible assets, such as computer software, are susceptible to technological obsolescence and therefore are likely to have a relatively short useful life and no resale value. Management should therefore assess the reasonableness and appropriateness of choosing the revaluation model for a class (or classes) of intangible assets. Under the revaluation model, an entity cannot revalue intangible assets that have not previously been recognised as assets or that have been recognised initially at amounts other than cost (i.e. where recognised at fair value because it was received/acquired for no cost or nominal consideration). Where only a part of the cost of an intangible asset is recognised, because the asset did not meet the criteria for recognition until part of the way through the development process, the revaluation model may be applied to the whole asset. January 2014 Page 28
For more detail on the revaluation model and how to apply it, refer to the accounting guideline on GAP 17. 7.6 Software upgrades Software upgrades Many software packages are upgraded on a regular basis. Management should determine whether the subsequent expenditure on an upgrade is likely to maintain the expected future economic benefits or service potential embodied in the existing software, or whether it meets the definition of an intangible asset and the recognition criteria in GAP 31. If the nature of an upgrade is such that it effectively means that the current software is replaced, the replaced asset (or part of the asset) should be derecognised and the cost of the replacement asset (or part of the asset) should be recognised. This is only true if the replacement meets the definition and recognition criteria of an intangible asset. If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or internally generated. Therefore, when an entity has capitalised software costs, it should derecognise the carrying amount of the software replaced and recognise the cost of the new (upgrade) software on the acquisition date. Updates and minor upgrades to software that are included with a maintenance subscription should be expensed. Major upgrades that meet the definition and recognition criteria of intangible asset and which increase the capacity or efficiency or extend the application s useful life should be capitalised. Example 10: Software upgrades Scenario 1 Currently Entity A is using MS Office 2007 which was purchased 16 months ago. During the current financial year Microsoft introduced MS Office XX+, which provides additional features. This is not a compulsory upgrade and entities and individuals have to purchase the software separately. Entity A decided to upgrade to MS Office XX+ and bought the new software in March. This will replace MS Office 2007. Entity A recognised MS Office 2007 as an intangible asset when it was purchased and then amortised the software over its useful life. When MS Office XX+ is purchased the carrying amount of MS Office 2007 should be de-recognised and the cost of MS Office XX+ should be capitalised and then amortised over its useful life. Scenario 2 Currently Entity A s accounting software is version 5 which was purchased 16 months ago. Part of the service agreement signed when the software was purchased, which includes a fixed monthly maintenance fee, includes minor upgrades at no additional cost. January 2014 Page 29
Entity A recognises version 5 as an intangible asset when it is purchased and then amortises the software over its useful life. Any minor upgrades provided by the developers at no cost will not be capitalised and all maintenance fees paid as per the service agreement are expensed when incurred. January 2014 Page 30
8 IMPAIMENT 8.1 General At each reporting date, the entity needs to assess (in accordance with GAP 26 on Impairment of Cash-generating Assets and GAP 21 on Impairment of Non-cash-generating Assets) whether or not there is an indication that an intangible asset might be impaired. If there is an indication of impairment, then the recoverable amount or recoverable service amount should be determined respectively. An impairment loss is the amount by which the carrying amount of the asset exceeds its recoverable amount or recoverable service amount. An intangible asset with an indefinite useful life must be assessed for impairment annually and whenever there is an indication that the asset may be impaired. When assets are carried at cost under the cost model, any impairment loss or reversal of impairment loss is recognised in surplus or deficit When assets are carried at revalued amounts, an impairment loss is treated as a revaluation decrease i.e. the impairment is recognised in the revaluation reserve to the extent of a revaluation surplus available beyond which the amount is recognised in surplus or deficit. In addition, the reversal of an impairment loss previously recognised, should be treated as a revaluation increase i.e. is recognised in the revaluation reserve (unless it is first recognised in surplus or deficit to reverse a previous impairment loss recognised in surplus or deficit, in which case, only the excess will be recognised in the revaluation reserve). efer to the accounting guideline on GAP 21 for guidance on the impairment of noncash-generating assets and refer to the accounting guideline on GAP 26 for guidance on the impairment of cash-generating assets. These guidelines will provide indicators of impairment that an entity should consider guidance on how to determine the recoverable amount and recoverable service amount of impaired assets and how to recognise impairment losses and reversals of impairment losses. 8.2 Compensation received from third parties When compensation is expected from third parties for intangible assets that were impaired, lost or given up, it is included in surplus or deficit when the compensation amount becomes receivable. January 2014 Page 31
The loss or impairment of an asset and the compensation received from third parties (i.e. insurance payments) are separate economic events and hence the transactions have to be accounted for and disclosed separately. The transactions should not be netted off. The loss on disposal/impairment of asset will therefore be shown separately from the insurance payments received as compensation in the statement of financial position. For example: Extract out of the statement of financial performance evenue Compensation received insurance claim paid out Notes 20x1 20x0 x 200,000 Other revenue XX XX Expenses Loss on disposal of assets x (50,000) Impairment loss on assets x (60,000) Other expenses (XX) (XX) January 2014 Page 32
9 DEECOGNITION An intangible asset is derecognised: On disposal; or A disposal can be, for example, when an asset is: sold; donated; scrapped; transferred, etc. When no future economic benefits or service potential are expected from its use or disposal. The gain or loss arising from the derecognition of an intangible asset is determined as follows: Net disposal proceeds (if any) Carrying value Gain / (loss) The gain or loss is recognised in surplus or deficit when the asset is derecognised. If the intangible asset was carried at revalued amount then the revaluation surplus of the intangible asset disposed is recognised in accumulated surplus or deficit. The net proceeds received or receivable on disposal is initially recognised at fair value. Thus when payment is deferred, the proceeds received is recognised as the cash price equivalent. The difference between the cash price equivalent and the nominal amount is recognised as interest revenue. efer to accounting guideline on GAP 9 for the recognition and measurement of revenue from the sale of assets and interest (when cash inflow is deferred). Example 11: Derecognition of intangible assets Entity PAT has a patent which is classified as an intangible asset in its financial records. After careful consideration Entity PAT made a decision to sell this patent. A potential buyer was found on the 25 th of November 20x0 and after several meetings a sale agreement was signed on the 28 th of January 20x1. The following information pertains to the example: Carrying amount on 25 November 20x0 650,000 Carrying amount on 28 January 20x1 625,000 January 2014 Page 33
Carrying amount on 15 February 20x1 620,000 Selling price The entity s reporting date is 31 March. 1,500,000 The agreed selling price is a cash price of 1,500,000, however the buyer does not have the full amount in cash and it was therefore agreed that the buyer pay Entity PAT 500, 000 cash, which was paid on 15 February 20x1 and the remaining balance will be paid over 12 months in equal instalments of 88, 615, with first payment due on 31 March 20x1. The agreement stipulates that the buyer will take control of the patent once the cash amount of 500,000 is paid. Based on above: The transaction date for disposal of the patent is the 15 th of February 20x1, as this is the date that the significant risks and rewards of ownership were transferred to the buyer. The payment is deferred and therefore the proceeds recognised should be the cash price, which is 1,500,000. The effective interest rate is calculated as 11, 5% (using the formula - PV = 1,000,000, n = 12, PMT = -88, 615 on a financial calculator). For the deferred portion, the difference between the cash equivalent (1,000,000) and the nominal amount (1,063,380 = 12 months x 88, 615) should be recognised as interest revenue over the period of the credit. Journal entries: The journal entries for the disposal will be as follows: 15 February 20x1 Debit Credit Bank 500,000 eceivables 1,000,000 Intangible assets 620,000 Gain on disposal of intangible asset 880,000 31 March 20x1 Debit Credit Bank 88,615 eceivables 88,615 ecognise the first instalment received 31 March 20x1 Debit Credit eceivables 9,583 Interest revenue January 2014 Page 34
(1,000,000 x 11.5% / 12 months) 9,583 ecognise the interest earned for the month of March 20x1 January 2014 Page 35
10 ILLUSTATIVE EXAMPLES Illustrative example A identification, recognition, measurement and derecognition of software costs and licence fees Entity P uses accounting software to process daily transactions, perform monthly reconciliations and perform year-end procedures in order to compile management reports, other relevant reports and the annual financial statements. Entity P paid 15, 000 for the accounting software, named version 1.1.2010, which allows a free trial period of 60 days, thereafter, Entity P needs to register the software to be able to use it. Entity P registered the software on the date of purchase, which was 1 January 2010. Entity P needs 8 licences as the accounting department consists of 8 people that will work on the system on a daily basis. One licence costs 2, 000, and therefore an amount of 16, 000 was paid on 1 January 2010 for these 8 licences. Licence fees renewed are subject to a 10% annual increase. Furthermore Entity P also has to renew the licences each year (if they are not renewed, the users will no longer be able to use the software). The reporting date is 30 June 2010. Assume a useful life of 5 years and no residual value. The accounting treatment of the software cost and licence fees will be as follows: The accounting software will be recognised as an intangible asset on acquisition date as the hardware can operate independently of the software. The licence fees paid would be capitalised and amortised over a one year period starting 1 January 2010. At the end of each year, i.e. 31 December, the carrying amount of the licence fees will be derecognised and upon the purchase (renewal) the new cost of the licence fees will be recognised. The journal entries will be as follows for the first year (2009/2010): 1 January 2010 Debit Credit Software (intangible asset) 15,000 Licence fees (Intangible asset) (16,000 x 6/12) 16,000 Bank 31,000 ecognising the software acquired and licence fees paid January 2014 Page 36
30 June 2010 Debit Credit Amortisation (15,000 x 6/12 / 5) 1,500 Accumulated amortisation 1,500 ecognising amortisation for the first 6 months for the software 30 June 2010 Debit Credit Amortisation (16,000 x 6/12) 8,000 Accumulated amortisation 8,000 ecognising amortisation for the first 6 months for the licence fees The journal entries will be as follows for the second year (2010/2011): 31 December 2010 Debit Credit Amortisation (16,000 x 6/12) 8,000 Accumulated amortisation 8,000 ecognising amortisation for the last 6 months for the licence fees Assume that Entity P renewed the licence fees for 8 users on 1 January 2011. 1 January 2011 Debit Credit Accumulated amortisation 16,000 Licences fee (Intangible asset) 16,000 Licences fee (Intangible asset) (annual increase of 10%, thus 16,000 x 1,1) 17,600 Bank 17,600 Derecognise carrying amount of licence fees and recognise cost of renewal of license fees 30 June 2011 Debit Credit Amortisation (17,600 x 6/12) 8,800 Accumulated amortisation 8,800 ecognising amortisation for the first 6 months for the licence fees January 2014 Page 37
30 June 2011 Debit Credit Amortisation (15,000 / 5) 3,000 Accumulated amortisation 3,000 ecognising amortisation for the second year on the software On 31 December 2011, i.e. year three (2011/2012), the software distributor made an announcement that an upgrade was available for the accounting software version 1.1.2010. The new software (upgrade) is named version 1.1.2012. Entity P decides to purchase the new software (upgrade) as it has additional features and the processing of transactions are easier on the newer version. The new software is purchased on 1 January 2012 at a cost of 21,000 and also registered on the same date. The treatment of the licence fees will remain the same; still assume 8 licences are purchased (i.e. the yearly renewal with a 10% annual increase). The accounting treatment of the software cost and licence fees will be as follows: As Entity P is effectively replacing the original accounting software purchased, the carrying amount, on acquisition date of the new software, should be derecognised and the cost of the new software capitalised. Based on the fact that the software has been upgraded so quickly, management decided to change the estimated useful life of this type of accounting software to 3 years as from 1 January 2012. The journal entries will be as follows for the third year (2011/2012): 31 December 2011 Debit Credit Amortisation (15,000 x 6/12 / 5) 1,500 Accumulated amortisation 1,500 ecognising amortisation for the first 6 months on the software (up to date of derecognition) 31 December 2011 Debit Credit Amortisation (17,600 x 6/12) 8,800 Accumulated amortisation 8,800 ecognise amortisation for the last 6 months on licence fees January 2014 Page 38
1 January 2012 Debit Credit Accumulated amortisation (1,500 + 3,000 + 1,500) 6,000 Software (intangible asset) 15,000 Loss on disposal of assets 9,000 Derecognising the carrying amount of the software (version 1.1.2010) 1 January 2012 Debit Credit Software (intangible asset) 21,000 Bank 21,000 ecognising the software acquired (version 1.1.2012) 1 January 2012 Debit Credit Accumulated amortisation 17,600 Licences fee (Intangible asset) 17,600 Licence fees (intangible assets) (annual increase of 10%, thus 17,600 x 1.1) 19,360 Bank 19,360 Derecognise carrying amount of licence fees and recognised cost of renewal of license fees 30 June 2012 Debit Credit Amortisation (21,000 x 6/12 / 3) 3,500 Amortisation (19,360 x 6/12) 9,680 Accumulated amortisation 13,180 ecognising amortisation for the first 6 months on software and licence fees January 2014 Page 39
11 DISCLOSUE An example illustrating the disclosures required for intangible assets (refer to the standard for detail): Extract from Statement Financial Position Non-current assets Note 20x1 20x0 Intangible assets 4 XX XX Net assets evaluation reserve 5 XX XX Extract from Statement Financial Performance Expenses Note 20x1 20x0 Depreciation and amortisation 6 XX XX Gain or loss on disposal of assets x XX XX Impairment loss / (reversal of impairment loss) on assets Accounting policies 1.4 Intangible assets Accounting policy should include as a minimum: x XX (XX) ecognition criteria; Measurement basis (initial and subsequent); Amortisation method; Whether asset s useful life is finite or indefinite; and The useful lives or amortisation rates of assets with finite useful lives. For example: An intangible asset is recognised when: January 2014 Page 40
it is probable that the expected future economic benefits or service potential that are attributable to the asset will flow to the entity; and the cost or fair value of the asset can be measured reliably. Intangible assets are initially recognised at cost. Where an intangible asset is acquired by the entity for no or nominal consideration (i.e. a non-exchange transaction), the cost is deemed to be equal to the fair value of that asset on the date acquired. Subsequent to initial recognition, intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. The cost (or depreciable amount) of intangible assets with finite useful lives are amortised over the estimated useful lives. Where the useful life is indefinite, the asset is not amortised but is subject to an annual impairment test. Amortisation is charged so as to write off the cost of intangible assets with finite useful lives over their estimated useful lives using the straight-line method. Amortisation commences when the asset is ready for its intended use. The annual amortisation charges are based on the following estimated average asset lives: Software Licences Patent x-x years x-x years x-x years The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at each reporting date and any changes are recognised as a change in accounting estimate in the Statement of Financial Performance. An intangible asset is derecognised when the asset is disposed of or when there are no further economic benefits or service potential expected from the use of the asset. The gain or loss arising on the disposal or retirement of an intangible asset is determined as the difference between the sales proceeds and the carrying amount and is included in surplus or deficit when the item is derecognised. Extract from Notes to the financial statements 20x1 4. Intangible assets [For each class of intangibles assets recognised] 20x0 Opening balance XXX XXX Cost / evalued amount XX XX Accumulated amortisation and impairments (XX) (XX) Additions XX XX Amortisation XX XX Carrying amount of disposals (XX) (XX) January 2014 Page 41
Cost (XX) (XX) Accumulated amortisation XX XX Impairment loss (recognised) / reversed (XX) (XX) Increase / (decrease) due to revaluation (XX) (XX) Closing balance XXX XXX Cost / evalued amount XX XX Accumulated amortisation and impairments (XX) (XX) Additional disclosure should be made, for example: The carrying amount of intangible assets which are held under a finance lease. [efer note]. The carrying amount of an asset assessed as having an indefinite useful life and the reasons supporting the assessment. The details should include a description of the factor(s) that played a significant role in determining that the asset has an indefinite useful life. The existence and carrying amounts of intangible assets whose title is restricted. The carrying amounts of intangible assets pledged as security for liabilities. The amount of contractual commitments for the acquisition of intangible assets. Compensation received from third parties [disclose in note if not disclosed separately on face of statement of financial performance]. The details should include the asset and the amount of compensation received. The class of intangible assets that were revalued, on which date, method and significant assumptions applied in estimating the fair values and what the carrying amounts would have been under the cost model. Note that the disclosure above is only for example purposes; it does not cover all the disclosure required by GAP 31. This disclosure also assumes that the entity applies both the cost and revaluation model for its classes of intangible assets. 5. evaluation reserve Opening balance XXX XXX Increase/ (decrease) in revaluation for the period XX XX Disposals XX XX Closing balance XXX XXX Disclosure of any restrictions on the distribution of this balance to owners of the net assets. 6. Depreciation and amortisation Intangible assets XX XX... January 2014 Page 42
Total XXX XXX January 2014 Page 43
12 ENTITY-SPECIFIC GUIDANCE Entity-specific guidance has been included where appropriate to provide specific guidance on a subject that only relates to those types of entities. 12.1 Municipalities Valuation roll In accordance with the Property ates Act, municipalities are required to prepare valuation rolls. These valuation rolls enable a municipality to legally levy property rates. The municipality has a legal right by statute to levy taxes, thus the legislation and not the valuation roll provides the municipality with the right to levy taxes. The valuation roll itself does not generate any economic benefit or service potential for the municipality. The cost incurred to prepare a valuation will be expensed and it should not be capitalised in accordance with GAP 31. Servitudes Servitudes are rights granted by a property owner to another person or entity to use the land for a certain purpose. Servitudes may be acquired through an agreement between parties, court order, statute or other means. 1) Creation of servitudes by way of legislation Municipalities receive certain rights regarding the creation of servitudes through legislation. For example a municipality may declare servitudes to be registered over certain parts of the land that falls within the boundaries of the proclaimed township so that the municipality can install infrastructure to provide basic services. No compensation is required to the landowner for servitudes granted to the municipality in terms of legislation. However costs may be incurred to register the servitudes with the Deeds Office. Servitudes granted under these conditions do not meet the identifiable criteria because: it cannot be sold, transferred, rented or exchanged freely and are not separable from the municipality they arise from rights granted in statute, as indicated earlier, are specifically excluded from the identifiable criteria (refer to the section on Identification for more detail). The cost incurred to register these servitudes (if any) will be expensed and it should not be capitalised in accordance with GAP 31. 2) Creation of servitudes by way of acquisition (including an agreement) A municipality may need a specific piece of land to install infrastructure, e.g. power cables. Where the landowner is compensated for the rights received associated with the land, the registered servitude may be accounted for as an intangible asset. January 2014 Page 44
Servitudes granted under these conditions meet the identifiable criteria as they arise from contractual or other legal rights that are acquired through a binding arrangement rather than by statute. The cost incurred to acquire the servitude (i.e. the compensation paid to the land owner) and any additional costs allowed by GAP 31 (i.e. costs to bring the asset to the condition and location as intended by management) will be capitalised at initial recognition in accordance with GAP 31. Management can decide whether a servitude arising from a binding agreement that do meet the definition of an identifiable intangible asset, should be recognised as a separate intangible asset or as part of the related tangible asset (e.g. infrastructure assets - electricity distribution network). For it to be recognised as part of the related tangible asset, it would normally be considered that the servitude is essential to the operation of the tangible asset. It should however be noted that if the decision is made to recognise the servitude as part of the related tangible asset, componentisation may be required as the values and nature are different and the useful life of the servitude may be different than that of the related tangible asset. efer to accounting guideline GAP 17 for more detail on componentisation. January 2014 Page 45
13 SUMMAY OF KEY PINCIPLES 13.1 Identification An intangible asset is an identifiable non-monetary asset without physical substance. An asset meets the identifiable criterion when it is separable, i.e. capable of being sold, transferred, etc. or arises from contractual rights (including binding arrangements) or other legal rights (excluding rights granted by statute), regardless of whether those rights are transferable or separable. Only software that is not an integral part of the related hardware can be classified as intangible assets. 13.2 ecognition Intangible assets are recognised when the assets meet the definition and recognition criteria of an intangible asset. Otherwise the expenditure incurred is recognised as an expense in surplus or deficit. Only costs incurred under the development stage can be capitalised if it meet the specific recognition criteria, over and above the general recognition criteria. Without ignoring the general recognition criteria, costs incurred to develop a website, can only be capitalised if an entity can demonstrate that future probable economic benefits or service potential will arise as a result from the website. 13.3 Measurement Intangible assets are initially recognised at cost (or at fair value if acquired for no cost or nominal consideration). Only cost incurred to bringing the asset to its location and condition as intended by management can be capitalised. Intangible assets are subsequently measured in accordance with the cost model or revaluation model. Cost model: Cost less accumulated amortisation and impairment evaluation model: evaluation value less accumulated amortisation and impairment losses; The revalued amount is taken to the revaluation surplus in net assets (except in the case of reversals). Subsequent costs incurred after the developed phase are expensed. Costs previously expensed cannot be capitalised subsequently. 13.4 Derecognition An asset is derecognised when it is disposed of or when no future economic benefits or service potential is expected. Any gain or loss is recognised in surplus or deficit. January 2014 Page 46