Expenditure recognised as an expense

Learning objectives

• Identify the expenditure that is always recognised as an expense (start-up, training, advertising, reorganisation).L1, L2
• Recognise advertising or training expenditure as an expense.L1, L2
• Determine when advertising or catalogue expenditure is recognised as an expense and the treatment of a prepayment.L2

Normative references

• IAS 38 §68Principle: expenditure on an intangible item is recognised as an expense when it is incurred unless (a) it forms part of the cost of an intangible asset that meets the recognition criteria (paras. 18 to 67) or (b) the item is acquired in a business combination and cannot be recognised as an intangible asset: it then forms part of the goodwill recognised at the acquisition date (IFRS 3).
• IAS 38 §69Some expenditure is incurred to provide future benefits without creating any asset that can be recognised: it is recognised as an expense when the entity has a right to access the goods or when it receives the services. Examples: start-up costs (legal and secretarial costs of establishing a legal entity, pre-opening and pre-operating costs, unless included in the cost of property, plant and equipment under IAS 16), training, advertising and promotional activities (including mail order catalogues), relocating or reorganising part or all of the entity.
• IAS 38 §69AAn entity has a right to access goods when it owns them, or when a supplier has made them available in accordance with the terms of a supply contract and the entity could demand delivery in return for payment. Services are received when they are performed by a supplier in accordance with a contract to deliver them to the entity, and not when the entity uses them to deliver another service (for example, to deliver an advertisement to customers).
• IAS 38 §70Paragraph 68 does not preclude recognising a prepayment as an asset when payment for goods has been made in advance of the entity obtaining a right to access them, or payment for services has been made in advance of receiving them; the prepayment ceases to be an asset once the right of access is obtained or the services are received.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

33 questions

• An entity acquires new management software from a vendor. Which of these costs is recognised as an expense when incurred?L1
• The consultancy Talvio reviews the following items. Which ones can meet the definition of an intangible asset?L2
• At the reporting date, Ombrel presents the items below as intangible assets. Which one is a classification error?L2
• Quorvel funds a six-month certification course for its maintenance technicians. The technicians remain free to resign at any time. Management believes that the skills acquired will generate lasting productivity gains. How should the cost of this training be accounted for?L2
• Corvalis has set up an in-house academy that trains its engineers in advanced technologies every year. The technical director proposes to recognise as intangible assets, first, the academy's cost for the year and, second, the know-how of its lead engineer, which he considers irreplaceable. No contract or legal right protects this know-how and the engineer can leave the entity freely. Write a judgement memo on these two proposals.L3
• Pellane opens a new regional branch. It incurs legal costs for setting up the branch and start-up costs for the branch's activity. The finance director proposes to capitalise them, because the branch will be profitable and the invoices allow the cost to be measured reliably. What should be concluded?L2
• Mardelle, a commodity trader, acquires for a fixed price an exclusive three-year contractual right to a market data feed: the supplier undertakes not to sell this feed to any other player in the region. Mardelle expects to derive probable trading gains from it. It also organises, at its own expense, training for its traders on using the feed. Write a memo concluding on the accounting for these two items of expenditure.L3
• A testing laboratory, Biomeris, acquires a licence for sample-processing software. Which of the following items of expenditure is directly attributable to preparing the asset?L2
• The veterinary clinic network Vetalia acquires patient-records software for 120,000. Before going live, it incurs 9,000 of consultants' fees to adapt the interfaces, 3,000 of testing and 6,000 of salaries of its internal project team spent on configuration. The IT department also allocates 4,000 of general overheads to the project, and training the vets costs 5,000. What is the cost of the intangible asset?L3
• A travel agency acquires an online booking engine. Which of the following items of expenditure must be expensed rather than included in cost?L1
• The ferry company Marivo acquires an online ticketing system for 300,000 and pays 20,000 for testing before it is capable of operating as intended, on 1 April 20X1. After that date, it incurs 15,000 of training for port agents, 30,000 for a launch campaign and 8,000 of fees to adjust screens while the system already operates as intended; the online business also suffers 10,000 of start-up losses. What is the initial cost of the system?L3
• True or false? Training and promotion expenditure that strengthens an entity's reputation may be accumulated in internally generated goodwill as soon as it is probable that it will produce future economic benefits.L2
• During the year, Helvan funds a training programme for its sales staff and an advertising campaign, in order to strengthen its reputation and customer loyalty. How is this expenditure treated?L1
• Pellia creates its own clothing brand: logo design by a graphic designer and launch advertising campaigns. How does it treat the brand thus generated internally?L1
• Through its loyalty programme, Ondine has built up internally a file of 80,000 customers, which a consultant values at 600,000. To recruit these customers, it spent 90,000 on promotional campaigns. What amount is recognised as an intangible asset for this file?L2
• Which of the following statements about internally generated brands, titles and customer lists are correct?L2
• True or false? Expenditure on an advertising campaign launching a new product, broadcast during the year, is recognised as an expense, even if management expects sales from it over several years.L1
• True or false? The cost of a training programme for sales staff may be recognised as an intangible asset, because the skills acquired will generate future sales.L1
• True or false? The costs of relocating the head office to another city, including moving the teams, may be recognised as an intangible asset and amortised over the term of the new lease.L2
• Which of these expenditures is recognised as an expense, with no possibility of being included in the cost of an intangible asset?L1
• Norvelle group sets up a new subsidiary to start a bicycle rental business. It incurs legal costs to incorporate the company and start-up costs for the business before opening. How is this expenditure treated?L2
• Which of the following expenditures are recognised as an expense? More than one answer may be correct.L1
• Maraval, a retail chain, launches online sales. During the year, it incurs the expenditure below; the ordering module developed internally has met the recognition criteria since the beginning of the year. Which items are recognised as an expense? More than one answer may be correct.L2
• Lumeo launches a new range of drinks and pays {advertising} in cash for a television advertising campaign, broadcast during the year. Management expects the campaign to support sales for three years. Record the entry.L1
• Ombrelle, an architecture firm, moves its design team to new premises. It receives, not yet paid, an invoice of {training} to train the team on a new modelling tool and an invoice of {relocation} for moving and team transfer costs, with no fit-out works. The administrative director proposes to recognise them as an intangible asset. Record the correct entry.L2
• Altivo, a cosmetics company, created its own brand two years ago. In 20X5, it spends 300,000 on advertising and promotion of this brand and 40,000 to train its sales advisers. The CFO proposes to recognise 340,000 as an asset labelled Altivo brand, amortised over five years, because brand awareness has clearly grown. Which position do you take?L2
• Prisméa, an industrial group, reorganises its packaging division in 20X6: 120,000 of consultants' fees to redesign the organisation and 45,000 to move a team to another site. The board wishes to spread this 165,000 over the three years in which it expects productivity gains. Which treatment complies with IAS 38?L2
• Keldar is developing marine navigation software. In 20X1, as the criteria were not met, it recognised {prior_year_expensed} of development expenditure as an expense. The criteria have been met since 1 January 20X2; in 20X2, it incurs {current_year_costs} of costs directly attributable to the software and {launch_advertising} of advertising for its launch. Management wishes to recognise as an asset all the project expenditure since its inception. What is the cost of the intangible asset at 31 December 20X2?L2
• During the year, Ombrevalle incurred {research_costs} of research expenditure on new materials, {development_before_criteria} of development expenditure on a sensor before all the capitalisation criteria were demonstrated, then {development_capitalised} of development expenditure capitalised once the criteria were met. It also incurred {launch_advertising} of advertising for the sensor launch. What amount of research and development expenditure recognised as an expense must it disclose?L2
• In 20X2, the video game publisher Kalmira carried out an exploratory study of graphics engines for {research_costs}. It then developed a new game: {development_before_criteria} was incurred from January to April, before all the criteria were demonstrated on 1 May, and {development_capitalised} was capitalised from May to December. Finally, training the support teams for the new game cost {staff_training}. What amount of research and development expenditure recognised as an expense in 20X2 must be disclosed?L2
• Fleurdane, a mail-order retailer, has its spring catalogue printed. The printer delivers the catalogues on 12 December 20X1; Fleurdane becomes their owner on that date and sends them to its customers in January 20X2. The reporting period ends on 31 December 20X1. When is the cost of the catalogues recognised as an expense?L2
• Pradelys has a reporting date of 31 December 20X1. It has paid two invoices from its advertising agency: first, {prepaid_campaign}, paid on 15 December 20X1, for a television campaign that the agency will produce and have broadcast in February 20X2; second, {produced_spots} for advertising spots that the agency fully produced and delivered in November 20X1, and that Pradelys will itself show on the screens in its stores in January 20X2. What amount is recognised as a prepayment asset at 31 December 20X1, and what amount is recognised as an expense in 20X1?L2
• The Corvalis group acquires Lumetra in a business combination within the scope of IFRS 3. Part of the price pays for the collective experience of Lumetra's sales teams; according to the analysis performed under IFRS 3, this item cannot be recognised as an intangible asset. How is the corresponding amount accounted for?L2