quality mark

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marea
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quality mark

Post by marea »

Hello everyone,

When a company receives a quality mark that its product is compliant with a certain standard, would the costs to obtain the mark be eligible for capitalisation or not. I have heard many different interpretations and I would like to hear your opinion.

IMO with this mark economic benefits will flow to the entity, it is identifiable, the entity can prevent others to use the mark and costs can be measured reliably.

What is your opinion can costs be capitalised or not?
JRSB
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Re: quality mark

Post by JRSB »

It seems clear to me that it should be capitalised.... without reference to anything...

I assume that's a one-off fee to examine and certify rather than some annual fee
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Marek Muc
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Re: quality mark

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this is marketing expense IMO, recognised immediately in P&L

https://ifrscommunity.com/knowledge-bas ... activities
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Marek Muc
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Re: quality mark

Post by Marek Muc »

unless it's required by law, then not marketing and can be capitalised :)
EDIT: I'm now not so sure about this, it can also be a levy under IFRIC 21, depends on details
JRSB
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Re: quality mark

Post by JRSB »

ok so we need to know more.... I'm thinking of something like getting a CE mark so it can be sold in the EU, rather than endorsement by Mickey Mouse.... :lol:
marea
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Re: quality mark

Post by marea »

Thank you both for your reply.

@ Marek. Thank you for the link. There, it is stated that "The entity and the doctors do not enter into agreements that create enforceable rights and obligations in relation to those goods". IMO when a company sells a product with a certification mark there usually is an agreement to provide a certified product which will be paid by the customer. Sometimes, such marks are required in order to be able to sell the product. Therefore, I am not sure whether this specific example can be seen as a pure promotional activities, but I could be wrong.....
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Marek Muc
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Re: quality mark

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I've just found that IFRS 3 explicitly states that certification marks are marketing-related intangible assets (IFRS 3.IE18), and those can be recognised only when acquired through business combinations
marea
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Re: quality mark

Post by marea »

Does this explicitly means that all certification marks that are not acquired via business combinations do not meet the criteria for capitalisation, even if purchased from third parties and are not for advetising purposes?
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Marek Muc
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Re: quality mark

Post by Marek Muc »

well, now I'm thinking that it wouldn't make sense to treat them differently (i.e. acquired through business combination vs acquired separately)

I'll admit that my opinion is not so strong after giving it a second thought, but I still think that this is not a stand-alone intangible asset. The only benefit of such certification (as I understand) is to persuade customers that the products are of high quality, how's that different from marketing expenses?
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Re: quality mark

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in another case, the whole intangible asset could be worth nothing in the absence of the attached certification
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Re: quality mark

Post by Marek Muc »

As I understand, there's no other intangible asset. You routinely sell some physical product or perform a service, and hire a third party to certify that your product/ service meets the specs
JRSB
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Re: quality mark

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I think this is a case of some more detail being useful @marea!
marea
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Re: quality mark

Post by marea »

as Marek said, the company receives the confirmation that the product meets certain requirements. My thought is that if the product can be sold with and/or without the certificate, the certificate alone is able to generate economic benefits and the costs can be measured reliably. As for being identifiable, it can be sold individually or with a related contract or identifiable asset, and it arises from contractual or legal rights.
I have also heard that there are cases where some certificates can be sold separately from the poduct.
marea
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Re: quality mark

Post by marea »

Additionally, I am still not sure wheher the intention of the standard was to make a distinction between such marks being acquired via a business combination or purchased from third parties otherwise. And according to the standard, even if acquired via a business combination they are still described as marketing related and meet the recognition criteria...

I think IAS 38 is in urgent need for a review, especially in the area of internally generetad IA.
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Marek Muc
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Re: quality mark

Post by Marek Muc »

I think I now understand what IFRS 3 means in IE18. It refers to the owner of the certification, i.e. the entity that grants the certification mark. This is what can be recognised as intangible asset acquired through business combination, because it is similar to brand.

I still think that on the receiving side, it's just a marketing P&L expense in your case.
marea wrote: 23 Mar 2021, 08:05 I think IAS 38 is in urgent need for a review, especially in the area of internally generetad IA.
what's IA?
marea
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Re: quality mark

Post by marea »

Thank you Marek for clarifying. It makes sense to me.

In a scenario where the receiving company would theoretically be able to sell the certificate on a separate basis, would in such case the certificate be a separate intangible asset (IA) and recognised as such on the balance sheet of the receiver, what do you think? Here, IMO the separability/identifiability criteria would have been met.

What if the certificate is required for the product to be sold, I don´t think that in such case this is a pure marketing topic.
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Re: quality mark

Post by Marek Muc »

don't know what you're aiming at with the theoretical scenario, separability/identifiability is not the issue here (internally generated brand also satisfies the separability/identifiability criterion)

re. if the certificate is required for the product to be sold - more details are needed, it can simply be a levy under IFRIC 21, or part of the cost of manufacturing equipment, generally I don't think that compliance with the law can be capitalised as a stand-alone intangible asset
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Re: quality mark

Post by JRSB »

the certification could be tantamount to a licence to distribute? I think it can only be addressed with specifics.
marea
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Re: quality mark

Post by marea »

I was just wondering what would happen in the event that the certificate was transferable (perhaps via a license as JRSB wrote), that is why I wrote theoretically. I was hoping that someone has already had a similar case since I have not seen it yet :-)
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Re: quality mark

Post by JRSB »

can you say what the product in question is?
marea
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Re: quality mark

Post by marea »

let´s assume that is a software.
marea
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Re: quality mark

Post by marea »

For example, if a company wants to obtain a CE mark. It will generate economic benefits, it is identifiable, the entity can prevent others to use the mark and costs can be measured reliably. So, IMO the criteria for recognition would be met, or would this still fall under marketing activities. What do you think?
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Re: quality mark

Post by Marek Muc »

marea wrote: 23 Mar 2021, 21:38 the entity can prevent others to use the mark
I'm pretty sure that lots of entities use this mark :)
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Re: quality mark

Post by JRSB »

personally I'm more on marketing for software (I assume the software isn't dangerous/highly regulated etc..)
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Marek Muc
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Re: quality mark

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sorry I don't get what you mean JRSB
marea
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Re: quality mark

Post by marea »

@ JRSB I suppose that it is not dangerous :-)
@ Marek: I understand that the entity must control the underlying asset and this would be the software IMO (IAS 38.13). Sure, other entities can also use the mark, but for their products.
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Re: quality mark

Post by Marek Muc »

and now I'm lost, what is the link between a piece of software and complying with the health and safety law (i.e. CE mark)?
marea
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Re: quality mark

Post by marea »

I will get back to you when more Information is available, in order to not waste your precious time on some theoretical scenarios.
However, I would like to thank you for the input you provided so far :-)
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