CAF-6 · Chapter 12
IAS 38 Intangible Assets MCQs with Answers
15 multiple-choice questions on IAS 38 Intangible Assets for CAF-6 Corporate Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under IAS 38, how should a company account for the costs incurred during the 'research phase' of an internal project to create a new software system?
- A) Capitalize them as an intangible asset.
- B) Expense them in profit or loss as they are incurred.
- C) Capitalize them initially, then test for impairment annually.
- D) Defer them and amortize over the expected life of the software.
Show answer & explanation
Answer: B) Expense them in profit or loss as they are incurred.
IAS 38 strictly requires all expenditure incurred during the research phase of an internal project to be recognized as an expense when incurred, because an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits.
Question 2
Which of the following internally generated items can be recognized as an intangible asset if certain strict criteria are met?
- A) Brands
- B) Mastheads
- C) Development costs
- D) Customer lists
Show answer & explanation
Answer: C) Development costs
IAS 38 specifically prohibits the recognition of internally generated brands, mastheads, publishing titles, and customer lists. However, internally generated development costs can be capitalized if all PIRATE criteria (technical feasibility, intention to complete, ability to use/sell, etc.) are met.
Question 3
An entity acquires an intangible asset (a patent) in a business combination. The acquiree had not recognized the patent in its own financial statements because it was internally generated. How should the acquirer treat this patent?
- A) Ignore it, as it was not recognized by the acquiree.
- B) Recognize it as an intangible asset at its fair value at the acquisition date.
- C) Subsume its value into goodwill.
- D) Recognize it only when it is eventually sold to a third party.
Show answer & explanation
Answer: B) Recognize it as an intangible asset at its fair value at the acquisition date.
In a business combination, the acquirer recognizes the identifiable intangible assets of the acquiree at fair value, even if those assets (like an internally generated patent) were not recognized in the acquiree's separate financial statements.
Question 4
Alpha Tech applies the revaluation model to a specific class of intangible assets. Under IAS 38, this model is only permitted if:
- A) Management believes fair value provides more relevant information.
- B) The asset has an indefinite useful life.
- C) The fair value of the intangible asset can be determined by reference to an active market.
- D) The asset was internally generated.
Show answer & explanation
Answer: C) The fair value of the intangible asset can be determined by reference to an active market.
The revaluation model for intangible assets is only allowed if their fair value can be measured by reference to an active market, which is relatively rare for intangibles.
Question 5
A company holds a broadcasting license that is renewable every 10 years at a negligible cost. The company intends to renew it indefinitely and there is no foreseeable limit to the period over which it will generate net cash inflows. How should this asset be amortized?
- A) Over 10 years.
- B) Over 20 years maximum.
- C) It should not be amortized, but tested for impairment annually.
- D) It should be amortized straight-line over 50 years.
Show answer & explanation
Answer: C) It should not be amortized, but tested for impairment annually.
An intangible asset with an indefinite useful life is not amortized. Instead, it must be tested for impairment at least annually, and whenever there is an indicator of impairment.
Question 6
According to SIC 32 (Web Site Costs), how should a company account for the costs incurred during the 'Planning stage' of developing a website?
- A) Capitalize as an intangible asset.
- B) Capitalize as property, plant and equipment.
- C) Expense as incurred.
- D) Defer and amortize over 3 years.
Show answer & explanation
Answer: C) Expense as incurred.
Under SIC 32, the planning stage of a website is similar to the research phase. Therefore, all costs incurred during the planning stage must be recognized as an expense when incurred.
Question 7
During 20X6, Beta Ltd spent Rs. 500,000 on developing a new manufacturing process. The criteria for capitalization were met on 1 September 20X6. Costs of Rs. 300,000 were incurred before 1 September, and Rs. 200,000 after. What amount is capitalized?
- A) Rs. 0
- B) Rs. 200,000
- C) Rs. 300,000
- D) Rs. 500,000
Show answer & explanation
Answer: B) Rs. 200,000
Only costs incurred on or after the date the capitalization criteria are met can be capitalized. The Rs. 300,000 incurred before 1 September must be expensed and cannot be reinstated as an asset later.
Question 8
An entity purchases a customer list for Rs. 2,000,000. It expects to use the list to generate sales for the next 4 years, after which it will be obsolete. Assuming straight-line amortization, what is the carrying amount after 18 months?
- A) Rs. 500,000
- B) Rs. 1,000,000
- C) Rs. 1,250,000
- D) Rs. 1,500,000
Show answer & explanation
Answer: C) Rs. 1,250,000
Amortization per year = 2,000,000 / 4 = 500,000. Amortization for 18 months (1.5 years) = 500,000 * 1.5 = 750,000. Carrying amount = 2,000,000 - 750,000 = Rs. 1,250,000.
Question 9
Which of the following is NOT an essential criterion for an item to meet the definition of an intangible asset?
- A) It must be identifiable.
- B) The entity must have control over the resource.
- C) It must have physical substance.
- D) It must provide future economic benefits.
Show answer & explanation
Answer: C) It must have physical substance.
By definition, an intangible asset is an identifiable non-monetary asset *without* physical substance.
Question 10
A company is developing a corporate website solely to provide information about its products and company history (an electronic brochure). How should the development costs of this website be treated according to SIC 32?
- A) Capitalized as an intangible asset and amortized.
- B) Capitalized as part of property, plant, and equipment.
- C) Expensed immediately as incurred.
- D) Capitalized only if the website costs exceed Rs. 1,000,000.
Show answer & explanation
Answer: C) Expensed immediately as incurred.
If a website is solely for promotional or advertising purposes (i.e., it cannot generate direct revenues like an e-commerce site), it does not demonstrate probable future economic benefits under SIC 32, so costs are expensed.
Question 11
An entity cannot distinguish the research phase from the development phase of an internal project. Under IAS 38, the entity must treat all expenditure on that project as if it were incurred in:
- A) The development phase only.
- B) The research phase only.
- C) A suspense account until the asset is completed.
- D) The proportion of 50% research and 50% development.
Show answer & explanation
Answer: B) The research phase only.
IAS 38 states that if an entity cannot distinguish the research phase from the development phase, it treats the expenditure as if it were incurred in the research phase only (i.e., it must all be expensed).
Question 12
Gamma Ltd acquires a patent. In addition to the purchase price, it incurs costs for training its staff to use the new patented process, and marketing costs to launch the new products. Which costs can be capitalized?
- A) Only the purchase price.
- B) The purchase price and the training costs.
- C) The purchase price, training costs, and marketing costs.
- D) None, patents must be expensed.
Show answer & explanation
Answer: A) Only the purchase price.
Directly attributable costs can be capitalized, but IAS 38 explicitly excludes staff training costs and marketing/promotional costs from the cost of an intangible asset.
Question 13
When does the amortization of an intangible asset begin?
- A) When the asset is acquired or internal development starts.
- B) When management officially signs off on the project.
- C) When the asset is available for use in the manner intended by management.
- D) At the beginning of the next financial year after acquisition.
Show answer & explanation
Answer: C) When the asset is available for use in the manner intended by management.
Amortization begins when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.
Question 14
If an intangible asset is revalued upwards, where is the initial increase generally recognized?
- A) In the statement of profit or loss.
- B) In other comprehensive income and accumulated in equity under 'revaluation surplus'.
- C) As deferred income in the liability section.
- D) Subtracted directly from accumulated amortization.
Show answer & explanation
Answer: B) In other comprehensive income and accumulated in equity under 'revaluation surplus'.
An initial revaluation increase is recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus.
Question 15
A company holds an intangible asset with a finite useful life. Management decides to change the estimated useful life from 10 years to 6 years. How should this change be accounted for?
- A) Retrospectively by restating prior year financial statements.
- B) Prospectively as a change in accounting estimate over the remaining revised useful life.
- C) By recognizing an immediate impairment loss for the difference.
- D) Ignored, as useful life cannot be changed once established.
Show answer & explanation
Answer: B) Prospectively as a change in accounting estimate over the remaining revised useful life.
A change in useful life is a change in accounting estimate. Under IAS 8, changes in accounting estimates are accounted for prospectively.