ACCA Financial Reporting (F7) Practice Exam

Under what conditions is an intangible asset recognized?

1. It must be valuable, owned by the entity, and available for sale

2. It must be identifiable, controlled by the entity, and expected to bring economic benefits

3. It must be long-lived, with a definable market

4. It must be easily valued and tradable on financial markets

The correct answer is: It must be identifiable, controlled by the entity, and expected to bring economic benefits

An intangible asset is recognized when it meets specific criteria that are outlined in financial reporting standards, primarily IAS 38 – Intangible Assets. The correct answer highlights three critical conditions: the asset must be identifiable, controlled by the entity, and expected to bring future economic benefits. Firstly, the asset must be identifiable, meaning it can either be separable from the entity or arise from contractual or other legal rights. This identification is vital as it distinguishes intangible assets from goodwill, which is not separately identifiable. Secondly, control is paramount. The entity must have the power to obtain future economic benefits flowing from the asset and restrict others from accessing those benefits. This control is essential to establishing ownership and the right to benefit from the asset's potential. Lastly, there must be an expectation of future economic benefits. This expectation is generally satisfied if the asset contributes to revenue generation, cost reduction, or enhancement of the entity’s market position. These criteria ensure that only those intangible assets that truly represent future economic value to the entity are recognized on the balance sheet. This recognition emphasizes the importance of both legal rights and the ability to generate economic benefits from such assets, which are foundational to financial reporting and decision-making.