CAF-1 · Chapter 6

IAS 38 Intangible Assets MCQs with Answers

15 multiple-choice questions on IAS 38 Intangible Assets for CAF-1 Financial Accounting and Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   Which of the following best describes the defining characteristics of an intangible asset under IAS 38?

   • A) A monetary asset with physical substance used in production.
   • B) An identifiable non-monetary asset without physical substance.
   • C) Any asset acquired in a business combination.
   • D) An unidentifiable resource that generates future cash flows.
   Show answer & explanation

   Answer: B) An identifiable non-monetary asset without physical substance.

   IAS 38 defines an intangible asset strictly as an identifiable non-monetary asset without physical substance.

2. Question 2

   Which of the following items is explicitly EXCLUDED from the scope of IAS 38 Intangible Assets?

   • A) Computer software.
   • B) Fishing licences and import quotas.
   • C) Intangible assets held for sale in the ordinary course of business.
   • D) Patents and copyrights.
   Show answer & explanation

   Answer: C) Intangible assets held for sale in the ordinary course of business.

   Intangible assets held for sale in the ordinary course of business are excluded from IAS 38 and are instead accounted for under IAS 2 Inventories.

3. Question 3

   Omega Corp spent Rs. 800,000 during the year to evaluate possible alternative materials for a new product line. Under IAS 38, how should this expenditure be treated?

   • A) Capitalized as an intangible asset.
   • B) Deferred and amortized over 5 years.
   • C) Recognized as an expense in profit or loss when incurred.
   • D) Deducted directly from retained earnings.
   Show answer & explanation

   Answer: C) Recognized as an expense in profit or loss when incurred.

   Evaluating possible alternatives is considered a research activity, and under IAS 38, all research costs must be recognized as an expense when incurred.

4. Question 4

   Which of the following is NOT a required criterion for capitalizing development expenditure as an intangible asset?

   • A) The technical feasibility of completing the asset.
   • B) The intention to complete the asset and use or sell it.
   • C) The existence of a guaranteed government grant for the project.
   • D) The availability of adequate technical and financial resources to complete the development.
   Show answer & explanation

   Answer: C) The existence of a guaranteed government grant for the project.

   IAS 38 requires technical feasibility, intention, ability to complete/use/sell, future economic benefits, available resources, and reliable measurement of expenditure. A government grant is not a requirement.

5. Question 5

   Alpha Ltd has successfully developed a new brand name internally, spending Rs. 2 million on marketing and design. How should this internally generated brand be accounted for?

   • A) Capitalized as an intangible asset at Rs. 2 million.
   • B) Recognized as an expense in profit or loss.
   • C) Capitalized but immediately impaired by 50%.
   • D) Recorded as a revaluation surplus in equity.
   Show answer & explanation

   Answer: B) Recognized as an expense in profit or loss.

   Internally generated brands, mastheads, publishing titles, and customer lists cannot be distinguished from the cost of developing the business as a whole and shall not be recognized as intangible assets.

6. Question 6

   Beta Inc. acquires an intangible asset in exchange for a non-monetary asset. The transaction lacks commercial substance. How should the acquired intangible asset be initially measured?

   • A) At the fair value of the asset given up.
   • B) At the fair value of the asset received.
   • C) At the carrying amount of the asset given up.
   • D) At a nominal value of zero.
   Show answer & explanation

   Answer: C) At the carrying amount of the asset given up.

   If an exchange transaction lacks commercial substance, the cost of the acquired intangible asset is measured at the carrying amount of the asset given up.

7. Question 7

   Which of the following conditions must be met for an entity to use the revaluation model for an intangible asset?

   • A) The asset must have an indefinite useful life.
   • B) The fair value must be measured by reference to an active market.
   • C) The asset must be internally generated.
   • D) The entity must also use the revaluation model for all its property, plant, and equipment.
   Show answer & explanation

   Answer: B) The fair value must be measured by reference to an active market.

   For the purpose of revaluations under IAS 38, fair value shall be measured strictly by reference to an active market, which is uncommon for most intangibles.

8. Question 8

   Gamma Corp determines that a purchased broadcasting license has an indefinite useful life. How should this license be subsequently measured?

   • A) Amortized over a maximum presumed life of 10 years.
   • B) Amortized over 20 years.
   • C) Not amortized, but tested for impairment annually or when there is an indication of impairment.
   • D) Expensed immediately.
   Show answer & explanation

   Answer: C) Not amortized, but tested for impairment annually or when there is an indication of impairment.

   An intangible asset with an indefinite useful life is not amortized. Instead, it must be tested for impairment annually or whenever there is an indication of impairment.

9. Question 9

   What is the assumed residual value of an intangible asset with a finite useful life, according to IAS 38?

   • A) 10% of its initial cost.
   • B) Zero, unless there is a commitment by a third party to purchase it or an active market exists for it.
   • C) The fair value at the end of the reporting period.
   • D) The salvage value determined by an independent valuer.
   Show answer & explanation

   Answer: B) Zero, unless there is a commitment by a third party to purchase it or an active market exists for it.

   The residual value of an intangible asset with a finite useful life is assumed to be zero unless a third party is committed to buying it at the end of its life, or an active market exists.

10. Question 10

    If an entity reassesses an intangible asset's useful life from 'indefinite' to 'finite', how is this change treated?

    • A) As a correction of a prior period error.
    • B) As a change in accounting policy applied retrospectively.
    • C) As a change in an accounting estimate applied prospectively.
    • D) It triggers immediate derecognition of the asset.
    Show answer & explanation

    Answer: C) As a change in an accounting estimate applied prospectively.

    The change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate under IAS 8, which is applied prospectively.

11. Question 11

    Under SIC 32, when an entity develops a website for internal or external access, which costs can be capitalized as an intangible asset?

    • A) Planning costs and feasibility studies.
    • B) Application and infrastructure development costs, provided IAS 38 recognition criteria are met.
    • C) Expenditure on training employees to operate the website.
    • D) Costs incurred to register the domain name only.
    Show answer & explanation

    Answer: B) Application and infrastructure development costs, provided IAS 38 recognition criteria are met.

    Under SIC 32, application and infrastructure development (like developing code) may be capitalized if they meet the recognition criteria for development costs under IAS 38.

12. Question 12

    Which of the following costs should be included in the initial cost of a separately acquired intangible asset?

    • A) Costs of introducing a new product or service.
    • B) Initial operating losses incurred while demand builds up.
    • C) Non-refundable purchase taxes and import duties.
    • D) Costs of training staff to operate the asset.
    Show answer & explanation

    Answer: C) Non-refundable purchase taxes and import duties.

    The cost of a separately acquired intangible asset includes its purchase price, import duties, and non-refundable purchase taxes, after deducting trade discounts.

13. Question 13

    Delta Corp acquired an intangible asset in a business combination. How should the cost of this asset be initially measured?

    • A) At the historical cost recorded by the acquired entity.
    • B) At its fair value at the acquisition date.
    • C) At net realizable value.
    • D) It cannot be recognized separately from goodwill.
    Show answer & explanation

    Answer: B) At its fair value at the acquisition date.

    The cost of an intangible asset acquired in a business combination is its fair value at the acquisition date.

14. Question 14

    When does the amortisation of an intangible asset with a finite useful life commence?

    • A) When the asset is fully paid for.
    • B) At the beginning of the financial year following the purchase.
    • C) When the asset is available for use, in the location and condition intended by management.
    • D) When the asset actually starts generating revenue.
    Show answer & explanation

    Answer: C) When the asset is available for use, in the location and condition intended by management.

    Amortisation begins when the asset is available for use, meaning it is in the location and condition necessary for it to be capable of operating in the manner intended by management.

15. Question 15

    Which of the following disclosures is NOT mandatory for intangible assets under IAS 38?

    • A) Whether the useful lives are indefinite or finite.
    • B) The amortisation methods used for assets with finite lives.
    • C) A list of all competitors operating with similar intangible assets.
    • D) A reconciliation of the carrying amount at the beginning and end of the period.
    Show answer & explanation

    Answer: C) A list of all competitors operating with similar intangible assets.

    IAS 38 requires disclosures of useful lives, amortisation methods, and a reconciliation of carrying amounts, but does not require any disclosure regarding competitors.