IAS 38 INTANGIBLE ASSETS

ACC 304: Accounting Theory and International Financial Reporting

INTRODUCTION:

❑IAS 38 Intangible assets prescribe the accounting treatment for intangible

assets as well as the relevant disclosures in respect intangible asset in the
financial statement. IAS 38 was revised in March 2004 and applies to
intangible assets acquired in business combinations occurring on or after
31 March 2004, or otherwise to other intangible assets for annual periods
beginning on or after 31 March 2004.

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 DEFINITIONS:

❑Intangible Asset: This is an identifiable non-monetary asset without physical substance.

❑Asset: A resource controlled by an entity as a result of past events and from which future economic benefits are
expected to flow.
❑Amortization: This is systematic allocation of the depreciable amount of an intangible asset over its useful life
❑Entity Specific Value: This is the present value of cash flow an entity expects to derive from the continuing use of the
asset and from the disposal at the end of its useful life or expect to incur when settling liability.
❑Impairment Loss: This is the amount by which the carrying amount of an asset exceed the recoverable amount
❑Fair Value: This price that would be received to sell an asset or paid to transfer liability in a orderly transaction
between market participants at the measurement date.
❑IAS 38 applies to all Intangible with exception of those covered by other standards.

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 IDENTIFYING INTANGIBLE ASSETS
❑ The standard establishes similar rule to those set for other assets (Mainly IAS 16) especially tangible assets. However, there is a
general acknowledgement that it can be difficult to identify the existence of an intangible asset. The standard therefore gave a broad
guidance on identifying an intangible asset. For an asset to be classified as intangible it must possess the following:

❑ 1. Identifiability: This is only characteristic that differentiate other intangible asset from goodwill. The word identifiable in the
definition of intangible asset means the following:

• It is separable, i.e it is capable of being separated or divided from the entity and sold, licensed, transferred, rented or
exchanged.

• It arises from contractual or other legal right, regardless of whether those rights are transferrable or separable from the entity
or from other rights and obligation

❑ 2. Non-Monetary: This simply means that intangible asset is just like their tangible counterpart which does not represent a right
to receive a fixed amount or determinable amount of cash. All item of PPE is non-monetary asset.

❑ 3. Without Physical Substance: This is most obvious characteristic of an intangible asset. It simply means intangible asset are
identifiable non-monetary asset that cannot be touched or seen. Examples of intangible assets include:

Computer software

❖ Patent ❖ Copyrights ❖Customer list ❖Franchise ❖Customer loyalty ❖ Brands

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 RECOGNITION OF INTANGIBLE ASSETS:

❑This has to do with the inclusion of an intangible asset in the financial statement. An intangible asset is recognized
WHEN and ONLY WHEN, the following two condition are met:
✓ It is probable that the future economic benefit that will flow from the use of the intangible asset will flow into
the entity
✓ The cost incurred on the asset can be measured reliably.

❑If the above are met sufficiently, then the entity can recognize such item as an intangible asset in the financial
statements as a NON-CURRENT ASSET

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 MEASUREMENT OF INTANGIBLE ASSET:

❑This has to do with assigning monetary value to the item of intangible asset in the financial statement. All intangible
asset should be measured at cost when first recognized. However, the amount taken as cost on initial recognition
depends largely on how the intangible asset was acquired.

❑Therefore, for simplicity, we will consider the measurement of intangible asset under the following headings:
➢ Intangible Asset acquired separately
➢ Intangible Asset acquired in a business combination
➢ Intangible Asset acquired by way of government grant
➢ Intangible Asset by way of exchange of assets
➢ Intangible assets developed or generated internally

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 MEASUREMENT OF INTAGIBLE ASSET ACQUIRED
SEPARATELY:
❑ When an intangible is acquired the amount of cost in initial recognition is relatively easy and there is not much of a difficulty in such
meeting the recognition criteria. Usually, the cost can be measured to be the amount of consideration (in form of cash or other
monetary asset) paid to acquire the intangible asset. IAS 38 gave a guidance on what the component of cost to be capitalized should
comprise of (this is similar to guidance under IAS 16):

1. Purchase price, including any import duties and non-refundable purchase taxes, deducting any trade discount and rebate

2. Any cost directly attributable to preparing the asset for its intended use. For example

➢ cost of employee benefit arising directly from bringing the asset to its working condition

➢ professional fees for legal services

➢ cost of testing whether the asset is functioning properly

❑ 3. Deferred payment included at present value and any difference treated as expense

❑ Note: capitalization of cost must stop when the intangible asset is in the condition necessary for it to be capable of operating in the
manner intended by management.

❑ Accounting Entries : ❖ DR: intangible Asset ❖ CR: Bank (or payable is the amount is unpaid)

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 MEASUREMENT OF INTAGIBLE ASSET ACQUIRED
BY WAY OF GOVERNMENT GRANT:
A government transfers or allocates intangible assets such as airport landing rights, licenses to operate radio or television stations, import
licenses or quotas or rights to access other restricted resources. An intangible asset may be acquired free of charge, or for nominal
consideration, by way of a government grant.
IAS 20: Accounting for Government Grants and Disclosure of Government Assistance, allows the intangible asset and the grant to be
recorded at: ❖ fair value initially or ❖ at a nominal amount plus any expenditure that is directly attributable to preparing the asset for
its intended use.
Therefore, on initial recognition the double entry will be
➢DR: Intangible Asset………. with the fair value of intangible asset
➢ CR: Deferred grant Income (i.e Liability) …………… with the fair value of intangible asset

MEASUREMENT OF INTAGIBLE ASSET ACQUIRED IN EXCHANGE TRANSACTION:

❑ An intangible asset may be acquired in exchange or part exchange for another intangible asset or another asset.
❑ The cost of such items is measured at fair value unless:
➢ the exchange transaction lacks commercial substance; or,
➢ the fair value of neither the asset received nor the asset given up is reliably measurable.
If the acquired item is not measured at fair value it is measured at the carrying amount of the asset given up.
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 MEASUREMENT OF INTERNALLY GENERATED
INTANGIBLE INTAGIBLE ASSET:
❑An internally-generated intangible asset is an asset created by a company through its own efforts. (An internally-
generated asset differs from an acquired asset that has been purchased from an external seller.) For example, a
publishing company may build up legal copyrights by publishing books.
❑ It can sometimes be difficult for a company to assess whether an internally generated asset qualifies for recognition as
an asset in the financial statements because:
➢ it is not identifiable: or
➢ its cost cannot be determined reliably.
The standard however prohibits the recognition of the following internally generated intangible asset in the financial
statement, rather they will be expensed to SOP/L in the period in which they are occurred. These intangible assets include
the following:
1. Brands 4. Customer lists
2. Masthead 5. Staff list
3. Publishing Rights 6. Items of similar substance to any of the five mentioned above.
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 RECOGNITION OF INTANGIBLE ASSETS:

❑Intangible Asset: This is an identifiable non-monetary asset without physical substance.

❑Asset: A resource controlled by an entity as a result of past events and from which future economic benefits are
expected to flow.
❑Amortization: This is systematic allocation of the depreciable amount of an intangible asset over its useful life
❑Entity Specific Value: This is the present value of cash flow an entity expects to derive from the continuing use of the
asset and from the disposal at the end of its useful life or expect to incur when settling liability.
❑Impairment Loss: This is the amount by which the carrying amount of an asset exceed the recoverable amount
❑Fair Value: This price that would be received to sell an asset or paid to transfer liability in a orderly transaction
between market participants at the measurement date.
❑IAS 38 applies to all Intangible with exception of those covered by other standards.

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 MEASUREMENT OF INTAGIBLE ASSET ACQUIRED BY
WAY OF BUSINESS COMBINATION:

❑Any intangible asset identified in a business combination will be recognized as both recognition criteria are deemed to
be recognized. If an asset acquired in a business combination is separable or arises from contractual or other legal
rights, sufficient information exists to measure reliably the fair value of the asset.
❑On initial recognition the intangible asset acquired in the business combination should be measured at fair value on
the day of acquisition
❑Accounting Entries:
DR: Intangible Asset………. with the fair value of intangible asset
CR: Net Asset of Subsidiary at DOA and DOC …………… with the fair value of intangible asset

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 SPECIFIC GUIDANCE ON RESEARCH AND
DEVELOPMENT COST:

❑The term ‘research and development’ is commonly used to describe work on the innovation, design, development and
testing of new products, processes and systems.
❑ Assessment of whether an internally generated intangible asset meets the criteria for recognition requires a company
to classify the generation of the asset into:
➢ a research phase; and
➢ a development phase.
❑ If the research phase cannot be distinguished from the development phase the expenditure on the project is all
treated as that incurred on the research phase.

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 SPECIFIC GUIDANCE ON RESEARCH AND
DEVELOPMENT COST (cont’d):
Research is defined as an original and planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding.
Examples of research activities include:
➢ Activities aimed at obtaining new knowledge.
➢ The search for and evaluation of applications of knowledge obtained from research.
➢ The search for alternative materials, products or processes.
➢ The formulation and testing of possible alternatives for new materials, products or processes.
Research costs cannot be an intangible asset. Expenditure on research should be recognized as an expense as it is
incurred and included in profit or loss for the period.
Accounting entries for all research cost:
DR: P/L (Expense)
CR: Cash (or payables if the amount is unpaid)
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 SPECIFIC GUIDANCE ON RESEARCH AND
DEVELOPMENT COST (cont’d):
Development on the other hand is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or services before the start
of commercial production or use.
Examples of development activities include:
➢ The design, construction and testing of pre-production prototypes and models.
➢ The design of tolls involving new technology.
➢ The construction and operation of a pilot plant that is not large enough for economic commercial production.
➢ The design, construction and testing of new materials, products or processes.

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 ACCOUNTING TREATMENT OF DEVELOPMENT COSTS:

Development costs are capitalized when they meet certain further criteria. (These comprise more detailed guidance on
whether it is probable that future economic benefits from the asset will flow to the entity and whether the cost can be
measured reliably).
Development costs must be recognized as an intangible asset, but only if all the following conditions can be
demonstrated:
➢ It is technically feasible to complete the development project.
➢ The company intends to complete the development of the asset and then use or sell it.
➢ The asset that is being developed is capable of being used or sold.
➢ It is probable that future economic benefits can be generated. This might be proved by the existence of a
market for the asset’s output or the usefulness of the asset within the company itself.
➢ Resources are available to complete the development project.
➢ The development expenditure can be measured reliably (for example, via costing records).

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 ACCOUNTING TREATMENT OF DEVELOPMENT COSTS
(cont’d):
❑ If any one of these conditions is not met, the development expenditure must be treated in the same way as research
costs and recognized in full as an expense when it is incurred.
❑ Only expenditure incurred after all the conditions have been met can be capitalized.
❑ Once such expenditure has been written off as an expense, it cannot subsequently be reinstated as an intangible
asset.
❑ Accounting entries if criteria are met:
DR: Intangible Asset ………………….. with development cost
CR: Cash ………………….. with development cost
❑ If criteria are not met:
DR: P/L (Expense) ………………….. with development cost
CR: Cash ………………….. with development cost

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 MESUREMENT AFTER INITIAL RECOGNITION:

❑ As stated earlier, Intangible assets are recognized at cost when first acquired. IAS 38 allows a business to choose one
of two measurement models as its accounting policy for property, intangible assets after acquisition.
❑ The same model should be applied to all assets in the same class. The two measurement models for intangible assets
after acquisition are:
➢ cost model (i.e. cost less accumulated depreciation less accumulated impairment loss); and
➢ revaluation model (i.e. revalued amount less accumulated depreciation since the most recent
revaluation and subsequent impairment loss).
❑ Note: Revaluation model is used only when the fair value of the asset can be measured reliably

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 AMORTIZATION OF INTANGIBLE ASSET:

The company must first assess whether the intangible asset has a finite or infinite useful life as this will determine the
amortization of such intangible asset.

If the useful life of the asset is finite, the company should assess the useful life of the intangible asset and amortize it over
such useful life. However, amortization should cease at the earlier of the following
➢ The intangible asset being classified as held for sale in accordance with IFRS 5
➢ The intangible asset being derecognized in the books
Note: the standard stipulates the residual of any intangible asset should always be assumed to be zero.

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 AMORTIZATION OF INTANGIBLE ASSET (cont’d):

❑ When an intangible asset has an indefinite useful life, the following applies:

➢ The intangible asset should not be amortized.

➢ Impairment review should be carried out at the end of each reporting year.

❑ The useful life of an intangible asset that is not being amortized must be reviewed each period to determine whether events and
circumstances continue to support an indefinite useful life assessment for that asset.

❑ If they do not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate
in accordance with IAS 8. This means that the carrying amount at the date of the change is amortized over the estimated useful life
from that date.

DISPOSALS OF INTANGIBLE ASSETS:

❑ The rules for de-recognition of intangible assets (accounting for their ‘disposal’) are the same as for property, plant and
equipment under IAS 16. There is a gain or loss on disposal equal to the difference between the net disposal proceeds
and the carrying value of the asset at the time of disposal.

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 DISCLOSURE REQUIREMENTS:

❑ In the financial statements, disclosures should be made separately for each class of intangible asset. (Within each class, disclosures
must also be made by internally-generated intangibles and other intangibles, where both are recognised.)

❑ Most of the disclosure requirements are the same as for tangible non-current assets in IAS 16. The only additional disclosure
requirements are set out below:

✓ Whether the useful lives of the assets are finite or indefinite.

✓ If the useful lives are finite, the useful lives or amortization rates used.

✓ If the useful lives are indefinite, the carrying amount of the asset and the reasons supporting the assessment that the asset has
an indefinite useful life

❑ For any intangible asset that is individually material to the financial statements, the following disclosure is required:

✓ a description

✓ its carrying amount

✓ the remaining amortisation period.

✓ The total amount of research and development expenditure written off (as an expense) during the period must also be
disclosed.
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