IFRS 2 - Summary
Index
Week 1
Lecture 1
Why accounting standards?
● Economic activities generate economic value
○ Activities are regulated to increases social welfare
● Accounting provides information to facilitate capital allocation
○ Capital allocation deals with selecting projects with NPV>0
○ Accounting consists of:
■ Internal controls
■ Incentives
■ Auditing
■ Standards
○ Higher quality accounting = higher economic value
■ High quality when information provided reduces friction in market
■ Healy & Palepu (2001): disclosure critical for functioning of capital
market (information asymmetry and agency problem)
Attributes of financial accounting information:
● Decision usefulness
○ Evaluate return potential of investment opportunities
○ Ex-ante
● Stewardship
○ Evaluate capital providers to monitor use of their capital once committed
○ Ex-post
○ Corporate governance & CSR
Why IFRS?
● To eliminate barriers/reduce friction
● Need for reliable, transparent, and comparable information
● Increase market efficiency and reduce cost of capital
● Improving competitiveness and boost growth
IFRS 3 (2004) changes are shown in grey
Intangible assets and impairment of goodwill
IAS 38 Intangible Assets
1
,● Definition asset: resource controlled by entity as result of past event from which
future economic benefits are expected.
● Definition intangible asset:
○ Identifiable
■ Separability: separated from entity and sold/rented or
■ Contractual / legal rights
● Useful life of intangible asset should not exceed period of the
contract/legal rights but can be shorter
● Useful life should include renewal periods (when no significant
costs for renewal)
○ Non-monetary
○ No physical substance
● Initial recognition
○ Recognize/capitalize when:
■ Probable future benefits
● Always probable when intangible assets are acquired
separately or in business combination
■ Reliably measurable
● Fair value measured reliable and recognized separately from
goodwill when intangible assets are acquired in business
combination and has finite useful life
● Indefinite useful life when there is no foreseeable limit to the
period over which the asset is expected to generate net cash
inflows.
○ Disclose carrying amount and reason for indefinite
useful life
○ If not expense
● Acquire intangible asset
○ Acquire
○ Internally generated (goodwill)
■ Not: brands, publishing titles, customer lists etc.
■ Expense: research expenditure
■ Capitalize: development expenditure (R&D) when:
● Technical feasibility
● Intention to complete
● Ability to use/sell
● Probable future economic benefits
● Available resources
2
,● Ability to measure
3
, IAS 36 Impairment (of goodwill)
● No yearly amortization for intangible assets
● Review useful life each reporting period
● Objective: assets carried at no more than recoverable amount
● Impairment when:
○ Carrying amount of cash generating unit (CGU) > recoverable amount CGU
○ Impair until the highest of
■ Fair value - costs of disposal
■ Value in use (discounted cash-flow model max. 5 years)
● Impairment loss recognized through profit and loss
● First impairment of goodwill, second of asset
● Reversal of impairment
○ Assess at balance sheet date
○ Through profit and loss
○ Increase carrying value not exceed original carrying value
○ No reversal for goodwill
4
Index
Week 1
Lecture 1
Why accounting standards?
● Economic activities generate economic value
○ Activities are regulated to increases social welfare
● Accounting provides information to facilitate capital allocation
○ Capital allocation deals with selecting projects with NPV>0
○ Accounting consists of:
■ Internal controls
■ Incentives
■ Auditing
■ Standards
○ Higher quality accounting = higher economic value
■ High quality when information provided reduces friction in market
■ Healy & Palepu (2001): disclosure critical for functioning of capital
market (information asymmetry and agency problem)
Attributes of financial accounting information:
● Decision usefulness
○ Evaluate return potential of investment opportunities
○ Ex-ante
● Stewardship
○ Evaluate capital providers to monitor use of their capital once committed
○ Ex-post
○ Corporate governance & CSR
Why IFRS?
● To eliminate barriers/reduce friction
● Need for reliable, transparent, and comparable information
● Increase market efficiency and reduce cost of capital
● Improving competitiveness and boost growth
IFRS 3 (2004) changes are shown in grey
Intangible assets and impairment of goodwill
IAS 38 Intangible Assets
1
,● Definition asset: resource controlled by entity as result of past event from which
future economic benefits are expected.
● Definition intangible asset:
○ Identifiable
■ Separability: separated from entity and sold/rented or
■ Contractual / legal rights
● Useful life of intangible asset should not exceed period of the
contract/legal rights but can be shorter
● Useful life should include renewal periods (when no significant
costs for renewal)
○ Non-monetary
○ No physical substance
● Initial recognition
○ Recognize/capitalize when:
■ Probable future benefits
● Always probable when intangible assets are acquired
separately or in business combination
■ Reliably measurable
● Fair value measured reliable and recognized separately from
goodwill when intangible assets are acquired in business
combination and has finite useful life
● Indefinite useful life when there is no foreseeable limit to the
period over which the asset is expected to generate net cash
inflows.
○ Disclose carrying amount and reason for indefinite
useful life
○ If not expense
● Acquire intangible asset
○ Acquire
○ Internally generated (goodwill)
■ Not: brands, publishing titles, customer lists etc.
■ Expense: research expenditure
■ Capitalize: development expenditure (R&D) when:
● Technical feasibility
● Intention to complete
● Ability to use/sell
● Probable future economic benefits
● Available resources
2
,● Ability to measure
3
, IAS 36 Impairment (of goodwill)
● No yearly amortization for intangible assets
● Review useful life each reporting period
● Objective: assets carried at no more than recoverable amount
● Impairment when:
○ Carrying amount of cash generating unit (CGU) > recoverable amount CGU
○ Impair until the highest of
■ Fair value - costs of disposal
■ Value in use (discounted cash-flow model max. 5 years)
● Impairment loss recognized through profit and loss
● First impairment of goodwill, second of asset
● Reversal of impairment
○ Assess at balance sheet date
○ Through profit and loss
○ Increase carrying value not exceed original carrying value
○ No reversal for goodwill
4
