An Identifiable Non Monetary Asset Without Physical Substance Accounting Essay


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In this question firstly the directors have a debate in the treatment of the film library, distribution rights and agreements. There are five types of intangible assets. They are market related, customer related, artistic related, contract based and technology-based intangible asset. Motion pictures, films, music videos and television programs falls under artistic -related intangible assets. Under the IAS 38 an intangible asset must satisfy the criteria which are the key characteristics. They can be summarized as

The resource controlled by an entity from where its derives future economic benefits,

Lack of physical substance,


Intangible assets are developed internally and are also acquired in a business combination. They are recorded at their fair value in the case of acquisition in a business combination, while some assets are recognized at the cost incurred in the phase of development in the case when they are internally generated. The internally generated intangible assets are of two phases called the research phase and the development phase. Research phase includes all activities and costs incurred before the asset is commercially feasible, while the development phase is incurred after the asset is established to be feasible commercially. All costs in development phase are capitalized while costs incurred in research phase are expensed.

In this question, the distribution right is the stem which controls the future economic benefit of the film library. A film library lacks in physical substance. Therefore the debate in the treatment of the film library has been identified as intangible assets. In this question, the directors say that the distribution rights, film library and agreements are all self replenishing assets without any depreciable amount. But their statement is wrong. The view of the directors is wrong. Because these assets are not self-replenishing assets as they can be amortized and found to be having finite useful life.

Cost model:

IAS 38 permits the use of either the cost model or the revaluation model for each class of intangible asset. The company must choose either one as their accounting policy.

Cost model: after initial recognition the intangible assets must be carried at cost less accumulated amortization and impairment losses.

Revaluation model: after initial recognition, the intangible asset should be carried at a revalued amount which is its fair value at the date of revaluation less subsequent accumulated amortization and subsequent accumulated impairment losses.

Here the intangible assets of the company should be measured by the cost model. Because the carrying amount of the cost model is cost minus accumulated amortization minus the impairment losses. This method is suitable because the cost is a historical figure and does not change. On the other hand, the entity needs to compute amortization on the intangible asset. The choice of a suitable depreciation method such as the straight-line method is a matter of professional judgment and entity policy. In addition, the entity needs to perform an impairment test and compute impairment losses (if any). So the directors are advised to use the cost model for measurement of the intangible assets in their company.


One of the issues in the question is that whether the asset can be amortized or not. Allocating the cost of intangible assets is called amortization. The accounting terms used by companies to spread the cost of the assets throughout its useful life are depreciation and amortization. These both provide a more accurate picture of the financial health of the companies. Although they are often used interchangeably, they refer to different types of assets. Amortization is used for intangible assets such as goodwill, patent, license, trademark or a motion picture films and depreciation is used for tangible assets like vehicle, machinery or warehouse. The accounting for intangible assets depends mainly on its useful life which is of two types. Useful life can be defined as the shorter of legal life and economic life. There are finite and indefinite. If the useful life is finite then the asset can be amortized and if it is indefinite it cannot be amortized.

Finite useful life: The period during which the required asset or property is expected to be usable. It is amortized.

Indefinite useful life: The carrying value of the assets may not be recoverable and they are not amortized.

For an intangible asset with a finite useful life, the capitalized cost is allocated less any estimated residual value in which the asset is expected to contribute to the company's revenue-generating activities. This requires that we determine the asset's useful life, its amortization base (cost less estimated residual value), and it is the appropriate allocation method as like the depreciation in the intangible assets. The intangible assets in the company such as the motion picture film is seem to be finite and as an advice, the directors should amortize the assets as their useful life is finite in nature.

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