CAF-07 IAS-38

Lecture # 1
Class work
1. Discussed Page 1 of book to revise cost components as per IAS 16.
2. Discussed page 190 of book (except discussion on Amortisation/impairment on that page)
3. Discussed page 191 of book (except acquired intangibles)
4. Practice Q.17 (Pg. 196) was solved from book.

Lecture # 2
Class work
1. IAS 36 was revised with the help of following class question.
Question
A company purchased a bus costing Rs. 500 on 1 January 2013. Its useful life is 5 years.
Following further information is available:
1. On 31 December 2015 a competitor came in market so we decided to check our
bus for impairment test.
2. On 31 December 2015 future cash flows are estimated as follows:
Rs.
Annual inflows ( Fare from Passenger) 70
Annual outflows (Petrol Etc.) 15
3. At the end of life bus can be sold at Rs. 25. Cost to sell will be Rs. 2.
4. If we sell bus today i.e. at 31 December 2015.
Rs.
Fair value 130
Cost to sell 14
5. Discount rate is 12%.

Required:
Calculate impairment loss on 31 December 2015?

2. Handwritten Page no.1 of IAS-38 was discussed

3. Para 54, 56, 57 and 59 of IAS 38 on page 184 and 185 of book was discussed.
4. On page 188 of book exchange of assets was discussed.

Adnan Rauf, FCA Page 1

CAF-07 IAS-38

Lecture # 3
Class work
1. Handwritten Page no. 2 and 3 of IAS-38 was discussed
2. It was explained how to solve the theory based questions as below:
Solving Theory Based Questions
1 Initial Recognition

IAS-38 allows the recognition of an identifiable non-monetary assets without

physical substance as intangible assets, if they fulfill following conditions:
 It is probable that expected future economic benefits that are
attributable to the asset will flow to the entity.
 The cost of the assets can be measured reliably.
Since ______ acquired/internally generated by organisation meet the above
conditions, it should recognized as an intangible asset in the statement of financial
position (SOFP) of the company.
2 Initial measurement

(i) It should initially be measured at cost. Entity should capitalize the development
Costs to be work, trial run cost, testing cost, cost to register, depreciation of another asset used
capitalised in its production i.e. Rs. ___ million as intangible asset.
(ii) IAS-38 does not allow capitalization of cost relating to the research work, staff
Costs to be training and advertisement. So these costs should be charged to statement of
expensed comprehensive income in the period in which they incurred.
3 Subsequent to initial recognition

(i) Finite life

Amortisation/ Since the product has a finite life of ___ years, therefore amortization expense
Impairment amounting to Rs. ____ should be recorded in the statement of comprehensive
income (SOCI) based on useful life. Residual value of intangible asset shall be
assumed to be zero (if no active market and no commitment by third party).

Note: If legal life (contractual life) and useful life are different the amortisation
should be charged at shorter of its legal life (i.e. __ years) and its useful life (i.e. ___
years).

Also discuss about impairment loss if there is any external or internal indicator
given in question.

Indefinite life
Since there is an indefinite useful life of the intangible asset, it should not be
amortized. Instead, organization should test the intangible asset for impairment by
comparing its recoverable amount with its carrying amount.
(ii) (a) IAS-38 permits an entity to adopt the cost or revaluation model as its
Measurement accounting policy.
model (b) The revaluation model can only be adopted if intangible assets are traded in
an active market.
(c) The cost model requires intangible assets to be carried at cost less
accumulated amortization and accumulated impairment losses. Revaluation
model requires intangible assets to be carried at revalued amount less
accumulated amortization and accumulated impairment losses.

Adnan Rauf, FCA Page 2

CAF-07 IAS-38

Home work
01. Power Limited has spent Rs. 200,000 researching new cleaning chemicals in the year ended 31
December 2020. They have also spent Rs. 400,000 developing a new cleaning product which will not
go into commercial production until next year. The development project meets the criteria laid down
in IAS 38 Intangible Assets.
How should these costs be treated in the financial statements of Power Limited for the year ended 31
December 2020?
(a) Rs. 600,000 should be capitalised as an intangible asset on the statement of financial position.
(b) Rs. 400,000 should be capitalised as an intangible asset and should be amortised; Rs.200,000
should be written off to the statement of profit or loss.
(c) Rs. 400,000 should be capitalised as an intangible asset and should not be amortised; Rs.
200,000 should be written off to the statement of profit or loss.
(d) Rs. 600,000 should be written off to the statement of profit or loss
02. Which TWO of the following items below could potentially be classified as intangible assets?
(a) purchased brand name
(b) training of staff
(c) internally generated brand
(d) licences and quotas
03. Which of the following should be included in a company’s statement of financial position as an
intangible asset under IAS 38 Intangible Assets?
(a) Internally developed brands
(b) Internally generated goodwill
(c) Expenditure on completed research
(d) Payments made on the successful registration of a patent.
04. At 30 September 2019 Shakir Limited (SL)'s trial balance showed a brand at cost of
Rs. 30 million, less accumulated amortisation brought forward at 1 October 2018 of
Rs. 9 million. Amortisation is based on a ten-year useful life.
An impairment review on 1 April 2019 concluded that the brand had a value in use
of Rs. 12 million and a remaining useful life of three years. However, on the same
date SL received an offer to purchase the brand for Rs. 15 million.
What should be the carrying amount of the brand in the statement of financial
position of SL as at 30 September 2019?

Answer-1 (c) Answer-2 (a) and (d) Answer-3 (d)

Answer-4 [Rs. 12,500,000]
Firstly we will calculate book value on 1.4.19 i.e. at the mid of year
Cost 30
Less: Accumulated Amortization ( 9+ ) (10.5)
Book value on 1.4.19 19.5
Now we will calculate Impairment loss on 1.4.19
Book value on 1.4.19 19.5
Recoverable amount (1.4.19) (Higher of:)
 Value in use = 12 (15)
 Fair value = 15
Impairment loss 4.5
So book value after impairment is Rs. 15 which will now be amortised over its remaining life
Now we will calculate book value on 30.9.19
Book value after impairment (1.4.19) 15
Less: Amortization ( ) (2.5)
12.5

Adnan Rauf, FCA Page 3