Intangible Assets: Goodwill, Research and Development – ACCA Financial Accounting (FA) lectures

Intangible Assets: Goodwill, Research and Development – ACCA Financial Accounting (FA) lectures

This is a lecture from open tuition to benefit from the lecture you should download the free lecture notes from open tuition calm all right this is an accounting standard number thirty-eight intangible assets and i mentioned the difference between tangible and intangible assets when we went through the chapter on depreciation and that tangible assets are ones we can

Touch so the normal ones machines buildings motor vehicles or so on and we deal with all of that those non current assets appear on the stand to financial position and we depreciate intentional assets and ones that we can’t touch i’ll give you example six line patents and the two types you need to be aware of ah goodwill and more importantly for the exam what we

Call research and development and our first of all goodwill again i did mention this before goodwill suppose i was buying another company and i’m buying all their machines and whatever else and i say oh i think their machines are worth 20,000 i think they’re building was a worth a hundred thousand they’ve also got up their assets to list everything let’s say they i

Think they’re worth ten so i think that tangible assets are worth a hundred and thirty thousand that’s what i think they’re worth and i’ll try and see if i can buy hundred thirty but if it’s a successful business if the business has already got loads of customers and it’s making profits then of course by up by up their business by their machines built lisa and i’ll

Immediately start making profits because all the customers are there and so i’m sure almost certainly going to have to pay more mainly after negotiating i end up paying two hundred thousand and why am i paying more because it’s already a successful business and i’ll make profit straight away the extra am paying we call good will and it’s an extra nurses just like

Our board machines i’ve been prepared to pay twenty for them have an asset well good well i’ve paid seventy for it it is an asset and so we are allowed when we’ve actually paid for goodwill in this way we are allowed to show it as a non current assets we can come advise cabin life means show it as an armed current asset so you know the turnigy paid credit cash we

Debit machines with twenty thousand we debit buildings with a hundred we debit goodwill with seventeen so you can capitalize it and now as a limit what you can be asked in your exam it’s later exams it does get messier because in later years you have to check you know is it still worth $70 going to reduce it amortize it amortize is another word for depreciation but

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I’m concerned about is the fact that we can capitalize it however only when its goodwill we’ve bought here i’m bought another company i actually paid an extra 70 for the goodwill forget buying another company though i could save my company my company the assets are only worth hundred the 30 but i know it’s worth a lot more because of goodwill well i cannot stick

In my statements goodwill how do i know the true value we can’t you can all my show goodwill if you’ve actually paid for it like buying another company you can’t show it when you don’t paid when you just grown it to yourself you know i’m sure my business is worth more than the tangible assets i’m sure it is but i’ll never know until i try and sell it we can’t show

It so just to make sure you’re with me purchased goodwill we can capitalize it appears as a non-current asset in this type of financial position nonde purchased goodwill we cannot non purchased the fact i think my business is worth more that there is goodwill well i haven’t paid for it we can’t show it okay that’s enough they’re more important your exam research

And development let me say what we’re talking about suppose sir we’re a company making drugs medicine drinks and now they’ve got a team of scientists working on trying to find a cure or for part problems they’re doing research it’s costing me a lot of money you know i’ve paid all their wages and everything so i’ve spent on all the wages have spent half a million

This year and these scientists are trying to find a new medicine it’s a lot of money and if they do find a new medicine we start earning a lot and the companies say oh well can we show it as an acid you know i spent all this money but just as other companies buy machines in order to produce products and make half a million in wages to find a new product they want

To show it as an asset well the rule is with pure research you can’t what research is is where you’re looking for new product but of course you know looking to find a cure for some heart problems although you’re looking for a new product you don’t know what it is what will result and of course you don’t even know if you find one might not result in anything and

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So amazement half a million on them wages we cannot show it as an asset we must show it as an expense in the statement of profit or loss ok what we spent must show it as an expense however that’s research when you’re looking for new product but you don’t know what it is you’ll end up with the other thing though is something called development expenditure and what

This is suppose we have found a new drug we know there’s this new drug which will help the heart problem we still need to do some a bit more work on it just sorting out some for what size of tablets and that sort of thing but we know we’ve got this new product and we know we’re going to be able to sell it or carmakers we’ve decided on a new car we’re gonna make i

Can’t we hate doors or something it’s not finished yet because you know we need to carry on with the design and sort of view things out but we know what the products gonna be it’s gonna be an egg door car we know we’ll be able to make it and sell it well that is development development is where we know what the product will be and this is expenditure getting it

Ready for sale so again i may be paying half a million in wages and things to these people or getting this car ready for sale the development well the rule is we must capitalize i remember categorize means show it as a non-current asset on the statement of financial position provided and there’s a list of things now i’m not gonna write it all down because there

On the second page of the note look at it with me development expenditures should be capitalized and show us an asset on the statement of financial position if and only if the following conditions apply there must be an identifiable product so we know what the products going to be but it’s not all we might find a new drug that we might not we know there’s going

To be this new car we must have the resources to be able to complete the development we must know we are going to be able to finish and start producing this car this should be an identified market so we have to be sure we are going to be able to sell it so we’ve done our research we know what this cars going to be we know people are going to be prepared to buy it

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We know we’re going to be able to make it and of course we must be able to measure how much we spent well provided those conditions apply we capitalize it we show it as an asset on the statement of financial position and we amortize i mention before amortize is another word for depreciation but when his tangible assets would appreciate when it’s intangible we call

It amortization we amortize in line with the pattern of income sounds messiness not again really your problem but you know if i think this car is going to be and we’ll just be able to sell it for five years let us start selling it we’d amortize over five years whatever if the commission’s aren’t fulfilled so if any one of those doesn’t apply if we’re not certainly

We’re going to be able to sell it if we’re not certainly gonna be able to make it then we must show it in the statement of profit and loss as an expense so now our research always is an expense instead of profit or loss development must be shown as an asset i was tempted by ultra position provided those four conditions apply now finally just one trick to look for

In the exam suppose we are doing research you know we’ve got this team of scientists looking for a new drug and the salaries are paid half a million and they also needed obviously a room to work in a laboratory so the cost of their building cost me a hundred thousand well watch this is a trick we’re only here talking about intangible assets their salaries are

Intangible and so it’s that which we’re looking at and are here because it’s research we do not capitalize it’s simply an expense however the building is a tangible asset and so whether you’ve bought the building in order to do research or whether you’ve bought it in order to do development irrelevant if it’s a tangible asset at the bill any machines or equipment

We needed to buy then that you do capitalize and you depreciate be careful whatever the reason if you bought an a tangible asset it’s a non-current asset you depreciated we’re only talking about here about the intelligible bits things like the wages of the people doing the research or doing the developing disclosure requirements you never read of that yourself

But what’s important the exam is what i spoke through

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Intangible Assets: Goodwill, Research and Development – ACCA Financial Accounting (FA) lectures By OpenTuition