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Antonella Risi: Welcome, everyone, to today’s webinar on the Public Sector Accounting Boards Exposure Draft on Intangible Assets, Proposed Section PS 3155.
The objective of this webinar is to explore the proposed guidance and how it aligns with International Public Sector Accounting Standard, IPSAS 31, the International Public Sector Accounting Boards and Tangible Asset Standard.
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I’m Antonella Risi, and I’m excited to be joined by Iman Sheikh and Sophia Kasozi to present today’s webinar. I’m an Associate Director with the Public Sector Accounting Board. Iman and Sophia are Principals and work together on the Intangible Assets project supporting PSAB’s mission to serve the public interest by developing accounting standards and other related reporting guidance for the Canadian public sector that support accountability, informed decision-making and stewardship.
Now, before we went any further, we did want to make a land acknowledgment.
PSAB has a commitment to diversity, equity and inclusion. In keeping with Indigenous Protocol and building respectful relationships between Indigenous and non-Indigenous peoples in Canada, it is customary to acknowledge the Traditional Territories or Ancestral Lands of Indigenous peoples. We’re meeting virtually, so we’d like to acknowledge that the Indigenous peoples are the traditional stewards of the lands and waters where each of us attends the webinar today.
We are grateful for the opportunity to live and work on this land, and we acknowledge the ongoing history, spirituality, and culture of the Indigenous peoples, who continue to care for this land.
We also recognize the injustices of the past and present and commit to working towards reconciliation and building respectful relationships with Indigenous communities.
Today’s session will cover several key areas, including a project background, an introduction to the main proposals in the Exposure Draft and how you can respond to the Exposure Draft itself.
So let’s begin with the project background.
The Exposure Draft proposes introducing a new standard, Section PS 3155, which will replace Public Sector Guideline, or PSG-8.
PSG-8 has been incorporated within proposed section PS 3155.
Essentially, proposed section PS 3155 aims to provide comprehensive guidance for both acquired and internally generated intangible assets, filling a significant gap in the Public Sector Accounting Handbook.
PSAB’s Intangible Asset project provided an opportunity for PSAB to apply its international strategy fully. This means that PSAB’s Intangible Asset Standard was developed by leveraging principles from the International Public Sector Accounting Standard, IPSAS 31.
PSAB’s Technical Advisory Group was engaged in applying PSAB’s International Strategy to develop the proposed guidance that we will talk about today. And we wanted to take a moment to acknowledge their efforts and thank them for their comments and expertise.
As part of the Intangible Asset project, PSAB is also developing a cloud computing guideline. PSAB agreed to take this additional work on, based on feedback it received on its 2022 Work Plan Consultation. There is currently no accounting guidance for Canadian public sector entities on cloud computing arrangements in the Public Sector Accounting Handbook. This guideline will assist Canadian public sector entities to consistently account for these arrangements.
At the current stage, we seek your feedback on two areas: the first, the Intangible Asset Exposure Draft, and the second, the cloud computing surveys.
Your feedback on the Exposure Draft will be crucial in moving us closer to finalizing an Intangible Asset Standard for inclusion in the Public Sector Accounting Handbook.
And your thoughts on the cloud computing surveys will give us insights into cloud computing arrangements that exist in the public sector in Canada.
And there are two different surveys: One survey was developed for financial statement preparers, and another survey was developed for auditors, consultants and other practitioners. But I’m getting ahead of myself. More on this towards the end of the webinar.
Let’s now look at PSAB’s international strategy as I’ve referred to it a few times in the past few slides.
In 2020, PSAB approved its international strategy, which is to leverage existing standards from the International Public Sector Accounting Standard Board, which we will refer to as the IPSASB, when an International Public Sector Accounting Standard exists on the topic being explored.
In order to apply its international strategy, PSAB created criteria for modifying and reviewing an International Public Sector Accounting Standard.
These criteria state that PSAB will make amendments to a principle in an International Public Sector Accounting Standard if it is contrary to PSAB’s Conceptual Framework or if PSAB finds the principle is not appropriate for application in Canada, based on the Canadian public interests.
Accordingly, since the IPSASB has a standard on Intangible Assets, known as IPSAS 31, this Exposure Draft uses the principles from IPSAS 31 that were modified in accordance with the criteria I mentioned a few moments ago.
As we began working through IPSAS 31 by applying the criteria presented, we identified that other changes needed to be made to IPSAS 31 to be able to integrate it into the Public Sector Accounting Handbook.
These amendments were done in order to ensure the new standard would be consistent with the other standards in the Handbook. And we refer to these changes as integration changes, and in the next slide show the example of what we mean.
Firstly, this slide shows two key amendments that were made as a result of applying the criteria for modifications, and then we will get into the integration changes.
So, PSAB decided to not include the Revaluation Model as a subsequent measurement model and its Intangible Asset Standard because it is contrary to its Conceptual Framework, the first criteria for modification.
The Revaluation Model allows entities that apply international standards to subsequently value assets at their current value, and an example of current value is fair value.
This is contrary to PSAB’s Conceptual Framework, which primarily requires historical cost as a measurement attribute for initial and subsequent measurement.
PSAB also decided to not include guidance on public sector combinations in its Intangible Asset Standard because it was found not to be appropriate for application in Canada, based on the public interest, the second criteria for modification.
As noted in the Public Sector Accounting Handbook, acquisitions are expected to be rare in the public sector.
Also, the public sector combinations guidance in IPSAS 31 is based on an acquisition accounting model that does not align with guidance in the Public Sector Accounting Handbook.
Lastly, as noted in the previous slide, integration amendments were made to IPSAS 31. And two key examples of these integration changes included aligning the recognition criteria to the wording and PSAB’s Conceptual Framework, and terminology changes such as replacing the term “reliable” in IPSAS 31 with the concept of “faithful representation”.
And with that, I will now turn it over to Sophia to take us through some of the proposals in the Exposure Draft.
Oh, Sophia, I believe you might be on mute.
Bear with us, everyone. We are … There’s always some technical issues. Actually, before we started the webinar, there … one of us went offline … and so teaching us … a teaching moment for us on the importance of bearing with technology. And with that, I will now pass it over to Sophia.
Sophia Kasozi: Thank you. Excuse me one second. Okay. So thank you for that, everyone. Next, we will look at some of the key proposals related to PSAB’s Exposure Draft Proposed Section, Intangible Assets PS 3155.
Among the key proposals is a definition. An intangible asset is an identifiable non-mandatory economic resource without physical substance.
The definition of an intangible asset requires an intangible resource to have the following characteristics: It should be separate and identifiable from goodwill. And second, it requires that the entity has control over the intangible resource and any future economic benefits that fall from the intentional resource. In addition, it should be the result of a past transaction and/or other events.
Common examples include computer software that is not integral to the related computer hardware, patents, copyrights, acquired fishing licences, and acquired important quotas.
It’s important to note that not all intangible resources will meet the definition of an intangible asset.
If we zoom in and spend a little bit more time on the concept of identifiability, this is very important because identifiability for an intangible asset is achieved when the asset is separate from goodwill and/or is the result of a binding arrangement.
A binding arrangement is an arrangement that confers enforceable rights and obligations, like a contract. While the concepts of identifiability and binding arrangement are not found in the PSA Handbook, for the Proposed Intangible Asset Standard, PSAB did decide to retain the concepts of identifiability and binding arrangement, as they were critical in assessing the criterion of whether an intangible asset existed.
In substance, binding arrangements are discussed in the Handbook, but within the context of contractual rights and obligations found throughout the Handbook.
Entities frequently expend resources or incur liabilities on the acquisition, development, maintenance, or enhancement of intangible resources such as scientific and technical knowledge, design and implementation of new processes or systems, licenses, intellectual property, and trademarks, including publishing titles.
Common examples of these—as discussed earlier, include broad headings—are computer software, patents, copyrights, motion picture films, lists of users for a service, and acquired fishing licences, and acquired import quotas as mentioned earlier.
It should be noted that not all the items described in the paragraph will meet the definition of intangible asset when you review that standard. When the defining characteristics such as identifiability do not exist, or control over the resource, or the existence of future benefits cannot be established, and it’s not the result of a past transaction, then it would not meet the scope of the definition, and in this case it would be expensed as will be discussed later.
The scope of the proposed standard applies to intangible assets that are acquired or purchased, including those acquired through other means such as non-exchange transactions.
The standard also applies to internally generated or developed intangible assets. This means that interested and affected parties will now be able to start recognizing internally generated or developed intangible assets that were previously prohibited from being recognized.
The standard does not apply to intangible assets that are within the scope of another section in the Handbook, specifically in section PS 3160, or public private arrangements, where guidance for the initial measurement and recognition of intangible assets from such arrangements is provided. However, this standard would apply to the subsequent measurement and disclosure of P3 intangible assets.
The standard does not apply to sovereign or equivalent powers and/or rights provided for in the Constitution or devolved or delegated through legislation or bylaws, or provided for in accordance with Indigenous laws or rights.
The standard does not apply to financial instruments, nor does it apply to expenditure or costs incurred for the development and extraction of minerals, oil, natural gas and similar non-renewable resources.
It does not apply to the recognition and measurement of exploration and evaluation assets related to mineral resources.
It does not apply to deferred acquisition costs and intangible assets that may arise from an insurer’s contractual rights under insurance contracts.
And finally, it does not apply to intangible assets that are held by an entity for sale in the course of its operations. That intangible assets held would be considered inventory.
The proposed standard applies to intangible assets that meet the definition, with some exceptions.
Number one: Software that is integral to hardware will continue to be accounted for as a tangible capital asset under section PS 3150.
For example, the standard provides the example of a navigation software system that was specifically developed for firefighter aircraft. In this case, this software within the firefighter aircraft will be accounted for in accordance with PS 3150, while software that is not entitled to related hardware will be for accounted for under the new proposed section of PS 3155, Intangible Assets.
It’s important to state that professional judgment is required in determining if an asset with both tangible and intangible components should be treated as a tangible capital asset or as an intangible asset. In making this assessment, consideration should be given to the significance of the value of the tangible and intangible components relative to one another and how integral the components are relative to another based on the purpose and use of the intangible asset.
Secondly, intangible works of art, historical treasures and collections are not recognized in the proposed standard. However, they must be disclosed in the financial statements.
An example of an intangible work of art or a historical treasure or collections may include recordings of significant historical events or the rights to use the likeliness of a significant public person. An item such as postage stamps are collectible. Please.
Antonella Risi: Hi Sophia. If I can just pause here for just a second. I wanted to give everybody a heads-up. I will interrupt as Sophia and Iman will speak to ask them a few questions that we’ve received in our journey, in PSAB’s journey in developing this proposed Exposure Draft. So, you’ll find me popping in and out at various times to ask various questions. And the very first question—well, actually the very first two questions for Sophia before you go to the next slide—is why did PSAB not adapt guidance related to heritage assets found in IPSAS 31, and why did PSAB take a disclosure-only approach to works of art, historical treasures and collections?
Sophia Kasozi: Yes, those are great questions. PSAB noted that the term “heritage asset” appeared to have a broader meaning than the more commonly understood term in the Canadian public sector, which is works of art and historical treasure. Furthermore, PSAB acknowledged that it is often difficult to reasonably estimate the future economic benefits associated with works of art and historical treasures and that such a requirement could result in an increased writing and costs for public sector entities.
So, this approach is also consistent with the approach PSAB took with respect to tangible works of art and historical treasures and collections. The disclosure-only approach was also reaffirmed during the recent government not-for-profit capital asset project.
When we look at the recognition criteria, an intangible resource is recognized as an intangible asset when it meets the definition of an intangible asset discussed previously and when the cost of the asset can be measured in a faithfully representative way. As discussed earlier, in adopting the principles of IPSAS 31, certain integration changes were made to integrate the IPSAS into the PSA Handbook and ensure that there was consistency with the other PSAB standards. For recognition, the paragraphs in IPSAS 31 were changed to structurally align with PSAB’s Conceptual Framework.
Specifically, PSAB replaced the first point in IPSASB’s recognition principle, which was “it is probable that the expected future economic benefits or service potential that are attributable to the asset will flow to the entity”. This was replaced with that “the intangible asset meets the definition of an asset”.
PSAB did this because in order to meet the definition of an asset in the PSA Handbook, it is already expected that the future economic benefits related to the assets will be obtained.
This modification by PSAB combines the first two recognition criteria and PSAB’s Conceptual Framework for assets and ensures that the Intangible Asset Standard will be properly integrated into the Handbook.
Now, to assess whether internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into two phases: the research phase and the development phase.
I will now pass it on to Iman to discuss the specific recognition criteria for internally generated intangible assets.
Iman Sheikh: Great! Thank you so much, Sophia, for that overview. And you’re right. We’re going to now zoom in a little bit into internally generated assets.
So, this is new guidance. For internally generated intangibles, as Sophia mentioned, the costs are allocated into one of two phases: It could be the research phase or the development phase.
No intangible assets arise from research, and they should not be recognized during the research phase.
Expenditures on research must be recognized as an expense when they are incurred, as an entity usually at this stage cannot demonstrate that an intangible asset exists that will generate future economic benefits during this particular phase.
The research activities that may contribute to expenditures in the research phase for an internal project may include things like expenditures aimed at obtaining new knowledge or there being a search or evaluation and final selection of applications of research findings or knowledge; search for alternative materials, devices, products, processes, systems or services; or the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.
In the development phase, certain expenditures may be capitalized if they meet certain criteria. But we’ll review that criteria in the next slide.
In the meantime, we will try and cover some typical types of development activities that may be conducted in the development phase of an internal project. And these activities could include the design, construction, and testing of pre-production or pre-use prototypes or models; the design of tools, jigs, molds, dyes, involving new technologies; the design, construction, or operation of a pilot plant or operation that is not of scale economically feasible for commercial production yet or use in providing commercial services; the design, construction and testing of a chosen alternative of new or improved materials, devices, products, processes, systems or services; and website costs and software development costs.
Now, on this slide, we’re coming back to some of that criteria we talked about in the last slide, related to internally generated assets. So, Sophia spoke about some of the general recognition criteria, but for internally generated assets, there’s specific criteria that must be met in order to recognize or capitalize expenditures in the development phases of internally generated projects, internally generated asset projects.
So, for example, an intangible asset arising from development is or should only be recognized if an entity can demonstrate all of the following criteria you see on your screen:
It must be technically feasible to complete the project or asset.
There must be an intention to complete the asset.
There must be the ability to use or sell the asset.
There must be a demonstration of generation of future economic benefits generated by the asset.
There must be adequate availability of resources to complete the development of the asset, and the ability to measure the expenditure attributable to the asset in a faithfully representative way.
I will note, however, there are certain prohibitions related to internally generated items. So, internally generated brands, goodwill mastheads and publishing titles should not be recognized as intangible assets.
Now, just to take a deeper dive into some of these criteria and why they would be important, we’re going to look at an example—an example where an entity is developing a new system to schedule court cases more efficiently and will result in increased service delivery.
For this entity on March 1, it determines that the newly developed system can meet the criteria for recognition because at this date the system is technically feasible and the expenditure attributable to it can be identified and measured in a faithfully representative way.
However, this entity incurred $900 on the system prior to March 1 that this expenditure would be expensed because it incurred prior to meeting the recognition criteria that we just discussed.
Another $100 was incurred after March 1, which can be recognized as an internally generated intangible asset or the system because it occurred after the date the recognition criteria was met.
And with that, we’ve kind of completed our discussion on some of the recognition criteria. So, we’re going to move on to measurement.
Measurement guidance in the proposed standard comes for both separately acquired assets and internally generated assets. So we’re going to review those next.
For separately acquired assets, intangible assets acquired separately should be measured initially at cost. The initial cost of a separately acquired intangible asset may be determined as a purchase price and any directly attributable expenditures for preparing an asset for intended use.
In some cases, an intangible asset may be acquired through non-exchange transactions. Under these circumstances, the cost of the item is its fair value at the date it is acquired unless measurement guidance for the non-exchange transaction is specified in another standard.
Now, for internally generated assets, costs that are related to these assets may comprise of directly attributable expenditures necessary to create, produce and prepare the asset to be capable of operating in the manner it was intended.
Antonella Risi: Iman, if we can pause here for a moment. You talked about directly attributable costs. Can you walk us through some examples of what these costs are that may be capitalized?
Iman Sheikh: Absolutely, and that’s a great question! So, for internally generated assets and their measurement, some examples of these directly attributable costs that could be capitalized may include things like the cost of materials or services that are consumed in generating the asset, the cost of employee benefits arising from the generation of the asset, fees to register a legal right associated with the asset or even amortization of patents or licences used in the generation of the asset.
And with that, we’ll move into the subsequent measurements proposals in the standard.
Sophia, could you advance the slide to the Subsequent Measurement slide?
Perfect. Thank you so much!
So first, Subsequent measurement.
After initial recognition, both acquired and internally generated intangible assets are measured and carried at historical cost less accumulated amortization and accumulated impairment losses.
Now, you’ll note that IPSASB permits entities to subsequently measure assets, including intangible assets at its current value, using the current market rates or what is commonly referred to as a current value model.
As discussed earlier in Antonella’s discussion, in leveraging IPSAS 31, PSAB removed guidance related to the current value model, as it was deemed inconsistent with PSAB’s Conceptual Framework.
Accordingly, references to the current value model were excluded from PSAB’s Intangible Asset Standard. And this is in line with the first criteria for modification under PSAB’s international strategy, which is that PSAB will amend a principle if it is deemed inconsistent with its Conceptual Framework.
Now, we’re going to zoom in a little bit on an element of subsequent measurement, which is impairment.
So, you’ll notice one of the key differences in PSAB’s Intangible Asset Standard is we’ve included guidance related to impairment. So, we’ve provided guidance on the recognition of impairment. And if conditions exist that indicate that the value of the future economic benefits associated with the intangible assets has decreased, for example, due to technological changes, removal from service, or a decline in demand, the curing amount of the asset should be reduced to reflect this decline.
Specific indicators of impairment may include changes in the extent or manner of use of the assets, evidence of significant technological developments indicating obsolescence, and changes in laws or environment affecting the assets use.
If impairment indicators such as these exist, impairment testing is required.
An intangible asset is considered to be impaired when its carrying amount exceeds its recoverable service amounts. So, there’s some new terminology that’s being introduced. We’ll talk about that next. So, the “recoverable service amount” is defined as a higher of the asset sphere value, less cost to sell and its value in use. “Value in use” is another new terminology within the PSA Handbook. And the value in use is defined as a present value of the assets remaining service potential.
The value in use of an asset is determined using the depreciated replacement cost approach.
Under this approach, the present value of the remaining service potential of an asset is calculated as the depreciated replacement cost.
This cost reflects the current expense required to replace the assets growth service potential, but it is adjusted for any depreciation to account for the asset’s used condition.
The proposed guidance specifies that impairment losses should not be reversed in future periods. This approach aligns with the treatment of write-downs provided in Section PS 3150.
And you might be wondering, and we wanted to expand a little bit on why PSAB decided to provide impairment guidance for intangible assets and why this is different from what IPSAS 31 does.
So, IPSAS 31 refers to two stand-alone impairment standards—IPSAS 21 and IPSAS 26—instead of providing guidance within the standard itself, which is IPSAS 31.
However, the PSA Handbook lacks equivalent guidance and only contains limited guidance on write-downs. Therefore, PSAB decided to provide interim impairment guidance for intangible assets within the new standard itself.
There are a couple of reasons for this. So PSAB recognized that there's a gap in the existing PSA Handbook concerning impairment guidance, and PSAB noted that the guidance was important particularly for intangible assets because such assets may involve more judgment in concerning impairment due to their non-physical nature.
The lack of guidance may also lead to inconsistent practices among public sector entities.
Furthermore, PSAB also noted that interim guidance for impairment of intangible assets was an important first step to ensuring the guidance in the new standard is complete until a future project to develop a comprehensive impairment guidance could be undertaken by PSAB.
Now, we notice that this is potentially a new concept for a lot of the listeners, and we’ve introduced some new terminology. So, we thought the best way to dive a little bit deeper into this impairment guidance was through the use of an example.
So, in this example, we’ll look at the depreciated replacement cost approach, which estimates the current value of the asset by determining the cost to replace it and then depreciating the cost to reflect the asset’s current condition and remaining service potential.
The city—in this example, the City of Kermann—acquires a mainframe software application for $350,000 in 1999. That’s the initial acquisition cost.
At this time, it is estimated that its useful life will be seven years.
Then in 2003, which is four years into its use, impairment indicators creep up, so the usage declines to 15% of the anticipated demand of this software application.
The software application is now underutilized due to declining demand.
So, because there’s an impairment indicator here, we want to start to do a few calculations to calculate the impairment loss.
So, we’ll look at, at first, some preliminary calculations, at that one me do, and we do realize this is a simplified example. But because this is new territory, simplified examples probably work best.
So, we’re going to assume that the annual depreciation for the asset needs to be calculated. So, that would be the acquisition cost divided by the useful life. That would be the $350,000 / 7.
That would yield $50,000 of annual depreciation on the current asset.
But we also need to calculate the accumulated depreciation on this asset.
So, we’re going to take the 50,000 annual depreciation on the current asset and multiply it by 4, which will give you $200,000. That’s accumulated depreciation on the existing asset.
Now, under the depreciation replacement cost method, we want to calculate a replacement cost for a similar asset, and we determine that a similar asset would probably cost around $70,000, and this would be just to replace the remaining service potential.
Right. Sorry.
The annual depreciation on the replacement asset would then be calculated as the replacement cost, which is a $70,000 divided by the useful life of seven years. That yields $10,000.
Now, to compare apples to apples, we’ll also need to calculate or assume accumulated depreciation on the replacement asset as if it was in use for the four years, similar to the current asset. So, we would take the $10,000 of annual depreciation on the replacement asset, multiply it by four years, and that gives us the $40,000 of accumulated depreciation on the replacement asset.
Now, once we’ve done these preliminary calculations, it makes the impairment assessment a little bit easier.
And for the impairment assessment, we will compare the carrying amounts of the existing asset to the recoverable service amount to determine if the carrying amount exceeds the recoverable service amount.
So, in this example, the carrying amount will be the acquisition cost of the existing asset minus the accumulated depreciation to date. So, you’ll remember that acquisition cost was $350,000. We calculated an accumulated depreciation on the existing asset for $200,000. So, if we take the 350 minus the 200, that leaves us with a carrying amount of $150,000 for the existing asset.
Next, we’re going to calculate the recoverable service amount, which we are defining as a replacement cost minus the accumulated depreciation related to the replaced asset.
And that would be the 70,000 that we noted earlier minus the 40,000 accumulated depreciation that we calculated, which leaves us with $30,000 as a recoverable service amount.
So, in this case, it’s pretty apparent the carrying amount clearly exceeds the recoverable service amount, and it indicates that there is an impairment loss. The impairment loss would then be calculated as a carrying amount minus the recoverable service amount. So that would be the $150,000 minus the $30,000 to give you an impairment loss of $120,000.
Antonella Risi: Please continue.
Iman Sheikh: Absolutely. Okay, perfect.
So that’s great. We’ll continue on to the next topic, which is Useful Life and Amortization.
So, for useful life, the key proposals in the standard sort of cover a breadth of important guidance. And it’s basically that an entity must assess whether the useful life of the intangible asset is finite or it’s indefinite.
If it is finite, the entity should determine the length of that useful life an intangible asset is considered to have. If an intangible asset is considered to have an indefinite useful life, basically, there is no foreseeable limit to the period over which it is expected to generate future economic benefits, and that’s how you would derive that it has an indefinite useful life.
Factors that influence the determination of a useful life of a finite asset may include their expected usage, technological obsolescence, the stability of the industry, and any legal or contractual limits on the use of the asset.
So, that’s a little bit of background on useful life guidance. Next, we’ll take a look at amortization.
So, intangible assets with a finite useful life should be amortized systematically over their useful life.
An amortization begins when the asset is available for use.
Antonella Risi: Iman, can you walk us through some of the possible amortization methods that may be applied for intangible assets with finite useful lives?
Iman Sheikh: Absolutely. The amortization methods may be familiar to our audience already. But just to list them, they include the straight-line method, the diminishing-balance method or the units-of-production method.
And I do want to mention: The amortization method should reflect the pattern in which the asset’s future economic benefits are expected to be consumed.
If that pattern cannot be determined reliably, the straight-line method should be used.
There’s a little bit of a nuance here. The proposed standard provides a rebuttable presumption that using revenue generated by an activity as a basis for amortization is inappropriate in most cases. This is because revenue is influenced by various factors not directly linked to the consumption of economic benefits of the intangible asset.
The presumption can be overcome in limited circumstances, such as (a) if the intangible asset is expressed as a measure of revenue or (b) it can be demonstrated that the revenue and consumption of the economic benefits are highly correlated.
The amortization period and method should be reviewed at least at each reporting date, and any changes should be accounted for as changes in accounting estimates in a manner that is consistent with the guidance in PS 2120.
Before we end, we’ll talk about residual value and also indefinite access with indefinite useful life.
So, the residual value of an intangible asset with a finite useful life is assumed to be 0 unless there is a commitment by a third party to acquire the asset at the end of its useful life or there is an active market for the asset.
Intangible assets with indefinite useful life should not be amortized, but they should be tested for impairment at each reporting date.
And with that, I’m just going to close off with some disclosures—just to give you a highlight of what disclosures are included in the new standard.
So, the proposal, the proposed Exposure Draft, includes requirements for general disclosures for intangible assets, but it also includes some specific disclosures.
So, let’s look at the general disclosures first.
The entity should disclose information for each class of intangible assets, and it should distinguish between internally generated intangible assets and other intangible assets. And the disclosures should include whether the useful lives are indefinite or finite, and if they’re finite, their useful lives and the amortization rates used.
The amortization methods used for the intangible assets with finite lives should also be disclosed.
The gross carrying amount and any accumulated amortization aggregated with accumulated impairment losses at the beginning and end of the period should be disclosed. Furthermore, a reconciliation is required of the carrying amount at the beginning and end of the period, which shows additions indicating separately those from internal development and those acquired separately. It should include disposals, impairment losses recognized in surplus and deficit during the period, any amortization and other changes in the carrying amount during the period.
Now, we’ll switch over to looking at an overview of some of the specific asset information to be disclosed. This will include the carrying values of intangible assets not being amortized because they are under development or have been removed from service.
Next, the nature of the amount of contributed intangible assets received in the period and recognized in the financial statements; also, the nature and use of intangible assets that are recognized at a nominal value; and finally, the nature of intangible works of art and historical treasures held by the entity as we discussed earlier in in the webinar.
Disclosures related to internally generated intangibles are also required.
An entity should disclose the aggregate amount of research and development expenditures recognized as an expense during the period.
Disclosures are also required for intangible assets that are not recognized. These would include major categories of intangible assets that meet the definition of an asset but are not recognized due to not meeting the recognition criteria.
The entity should disclose the reasons why a reasonable estimate of the amount involved cannot be made.
And with this, I would like to pass the floor over to Sophia to walk us through the effective date and transitional provisions.
Sophia Kasozi: Thank you, Iman. As we go through the final two proposals, we’ll start off with the effective date.
The proposals are effective to fiscal years beginning on or after April 1, 2030. Earlier adoption is permitted. It should be noted here that the Board did contemplate an effective date of April 1, 2029, one year earlier. However, concerns about the potential reporting burden that an April 1, 2029, effective date could have on users were raised, given that the proposed Employee Benefits Standard, PS 3251 will also be effective on April 1, 2029. To reduce this impact, the Board agreed to changing the effective date to April 1, 2030, and determined that was the appropriate effective date for the Intangible Asset Standard. So, as a result of this, the effective date of the amendments to the Tangible Capital Assets Section PS 3150 have also changed to April 1, 2030, in order to retain overall alignment and consistency between the amendments in Section PS 3150 and recognition of intangible assets proposed in this standard.
The transitional provisions are that an entity may apply the proposed section to the new transactions and other events occurring on or after April 1, 2030, or through modified retroactive application, which is retroactive application with a statement in accordance with the Accounting Changes Standard. However, the useful life will be determined and any impairment may be measured using information and assumptions that are current at the beginning of the fiscal year in which this section is applied.
Similar to the Board’s consideration for the effective date, PSAB noted that full retroactive application with restatement would create a reporting burden for entities, since entities would be required to restate prior year amounts and assumptions through significant efforts of identifying past data from past transactions that may no longer be available, complete or relevant. Further, full retroactive application with restatement would require that the entity assess whether or not the useful life of an intangible asset was indefinite at the end of each prior period before the effective date of this section.
This exercise requires the entity to make estimates of useful life that would have been made at a prior date, introducing the role and risk of hindsight in developing prior estimates under the full retroactive application with restatement approach.
These transitional provisions are intended to avoid these issues and provide transitional relief to entities.
Finally, when we look at the consequential amendments related to the proposed section PS 3155, Intangible Assets, they include withdrawal of PSG-8 as discussed earlier; terminology updates—for example, purchased intangibles will be replaced with intangibles to reflect the broader scope of the proposed standard, which allows for recognition beyond just purchased items.
Amendments to recognition exclusions include changes to the recognition exclusion outlined in paragraphs PS 1202, paragraph 17 and 80, which specifically removes references to developed intangibles, which are now referred to as internally generated intangibles in the proposed section. However, recognition exclusions for non-purchased intangibles such as the wireless spectrum rights, air rights and forestry rights and sea rights and for issuers were retained. This is because such non-purchased intangibles relate to powers and rights, which do not in and of themselves represent intangible assets until an action is taken to invoke those rights.
Another consequential amendment is removal of software references in PS 3150.
Footnotes and references to software within PS 3150 will be removed unless the software is integral to the assets discussed earlier. This was done because software is now included in the new Intangible Asset Standard.
Finally, incorporation of intangible assets in other sections were consequential amendments that were made specifically to PS 3410, Government Transfers, recognizing that now the public sector entities could receive intangible assets or funds similar to the way they may receive tangible capital assets from governments.
When we look at the key next steps, there are three:
The Intangible Asset Exposure Draft was issued at the end of February, and the CCA surveys were also issued at the same time. The comment period for both the Exposure Draft and the Intangible Asset Standard will be May 30, 2025.
It is anticipated that the final Intangible Asset Standard will be approved by the Board in December 2026.
Antonella Risi: Thank you, Sophia and Iman, for that. I realize that there’s only four minutes left. So, with that, we will try to end our formal part of the presentation with a very important message.
We want your feedback. Feel free to share your views on Exposure Draft proposals either by submitting a response letter or taking part in the Connect.FRASCanada.ca survey. Both links are on this slide, and the slides are available on the webinar landing page.
As Sophia noted, the comment deadline is May 30, and we value your feedback and look forward to it.
Now, before we get to the very quick Q&A, because we do see some questions have come in, you’ll see up on the screen a link and a QR code to the post-webinar quiz. By attending this webinar, successfully completing the quiz, you will receive a CPD certificate, which may help to work fulfilling your CPD requirements for the year. Deven will put the QR code and link to the quiz in the chat as we go to the next slide. But again, you have access to the slides.
So now, we will open the floor to questions. The very first question is in relation to the fact that, given that computer software is included in the definition of intangible assets, will there be amendments to remove footnote 2 to section PS 3150? And, as Sophia mentioned, we as part of the Exposure Draft, there are a series of consequential amendments. One of those consequential amendments is to do exactly that—to remove the footnote in section 3150.
The next question is with respect to the calculation of impairment, a loss, that Iman took us through. And the question says the calculation for the impairment loss indicates that the amortization amount for the remaining three years would be 10,000 a year instead of 50,000 a year. Is that correct? Iman, would you like to take this one?
Iman Sheikh: Absolutely, I can take it. So, Jennifer, you are absolutely right. So, based on my calculation, how I quickly got to that is you have the 150 carrying amount minus the impairment loss of 100 and [inaudible] money that will lead 30,000 appreciated over the remaining useful life of three years would be the 10,000 per year. So, I agree with your calculation.
Antonella Risi: Thank you, Iman, for taking care of that. I see that it is 11:59. Respecting everybody’s time, we will end the Q&A there. If you have any questions, please feel free to contact Sophia, Iman or myself. Our contact information is on the slides that are being made available to you. And lastly, but most importantly, I wanted to take, we all wanted to take, this time to thank you, all of you, for listening today. We appreciate your time and your interest in our work, and we wish you a great rest of the day. Thank you so much, everyone. Bye.