IAS 38 Intangible Assets

IAS 38 Intangible assets
1118/23 Importance of intangibles

.
IAS 38 - overview
 What are they?

 Scope exclusions
 Recognition – purchased
 Recognition – internally generated
 Measurement at cost and revalued amount
 Amortisation
 Disclosures
What are intangible assets?
•
phitin te
“ … an identifiable, non-monetary asset
without physical substance” ·
s hinh thai vat
“Asset is that i the?
• a resource controlled by an entity as a
result of past events
• from which future economic benefits are
expected to flow to the entity”
Identifiable
 Separable
• From the entity – so not goodwill
• Could be sold, transferred , leased etc.
• Individually or with a related asset
 Or from legal or contractual rights alone
• Example, a non-transferable licence
Other definition elements
 Non-monetary – not a financial instrument

 Without physical substance – boundary
between IAS 38 and IAS 16
• For example intellectual property content and
its physical storage system
• Software included in machinery
 Control – legally enforceable mostly but need
not be
 Lack of control for example over workforce,
customer relationships, market share – so not
assets
Other definition elements
 Flow of economic benefits expected

 Can be revenue generation or cost savings
Scope exclusions – when covered by
another IFRS
 Goodwill (IFRS 3)
 Financial instruments (IFRS 9)
 In contracts with customers (IFRS 15)
 Held for disposal (IFRS 5)
 Employee benefits assets (IAS 19)
 Deferred tax assets etc (IAS 12)
 Insurance contracts (IFRS 4 & 17)
 Extractive industries’ exploration and
development costs (IFRS 6)
 Leases of intangibles – option to use IFRS 16
Recognition
Recognise if and only if:

 Meets the definition of an intangible asset
 Probable that economic benefits will flow
• Probability based on reasonable and
supportable assumptions at recognition
 Cost can be measured reliably
Separate acquisition or purchase
Recognition follows the requirements just set

out:
 Cost = purchase price plus any other directly
attributable costs in bringing the asset to its
intended use
 Professional fees, employment costs, testing
 Any implicit finance costs
 Should not include costs of marketing,
changing the business operations
• Administrative overheads
• Initial operating losses
Special cases
 Exchanges of assets
 To be treated at fair value
 Must be a transaction with commercial
substance
 If no fair value then use carrying amount of
asset given up
As part of a business combination
 Not restricted to intangibles previously recognised

by acquired company
 Identifiable (separable or arising from legal rights)
intangible assets acquired in a business
combination are recognised at fair value
 Probable inflow of economic benefits will always
apply
 Reliable measurement of fair value will always
apply
 Total acquisition price will be known, fair value is a
way of allocating that price to assets acquired and
leaving goodwill
158123
Internally generated intangibles
 Much more restrictive

 Cannot recognise internally generated goodwill
brands, titles, customer lists and similar items
as assets
 Goodwill not identifiable
 Start-up costs, training, advertising, promotion,
re-organisation must be expensed
 Cannot recognise research expenditure – too
uncertain economic benefits
Development costs
 Only internally generated intangible asset that

is allowed
 But wide definition – can be development costs
of prototypes, pilot plants, new technology
 New or improved materials, devices, products,
processes or services
 But must capitalise if and when they meet all
six criteria
Development costs – capitalisation
criteria
1. Technical feasibility
2. Intention to complete for use or sale
3. Ability to use or sell
4. Probable economic benefits – market for the
output or benefits from use
5. Availability of resources to complete
development
6. Reliable measure of cost
Development costs – recognition
 Only from the date when the 6 criteria are met –

no retrospective capitalisation
 All directly attributable costs to produce and
prepare the asset
 Materials, services, labour, fees
 May include interest (IAS23)
 Not to include
• selling or administrative costs
• Inefficiencies and initial operating losses
• Staff training
Subsequent accounting
 Choice of cost model or revaluation

 Cost less amortisation and impairment (IAS36)
 Amortisation – requires estimates of useful life,
method and residual value
 Useful life – can be finite or indefinite
 Judgment required from many factors to decide
on a useful life
 Examples include: usage, legal limits,
technological obsolescence, change etc
Amortisation – finite life assets
 Legal life of for example a licence

 But may be renewable
 Renewal periods can be taken into account
based on evidence or if cost of renewal not
significant
 Begins when ready for use
Amortisation – finite life assets
 Method should reflect consumption of benefits

 Revenue based methods generally not
acceptable – not reflecting the consumption of
the benefits
 Straight line as the default
 Residual value is assumed to be nil
 Unless a sale is arranged or there is an active
market
 Useful lives and methods should be reviewed
at least annually
Indefinite life intangibles
 No amortisation
 Annual impairment tests or when indication of
loss of value or life is now finite
 Like goodwill
 IAS 36 covers how to do this
Revaluation model
 Initial recognition at cost

 Can be revalued subsequently
 But only if there is an active market for the
asset – probably not very common
 More restrictive than for IAS16 PP&E
revaluations
 Model similar otherwise to IAS16 – keep the
valuations up to date, amortisation on the
revalued carrying amount, changes through
OCI
Revaluation example
 Year 1 purchases a licence for $40 with 10

years remaining
 There is an active market in these licences
 At the end of Year 1 the fair value of the licence
is $45
 At the end of year 2 the fair value is $42
 What would be shown in the Statement of
Comprehensive Income in year 1 and 2?
Revaluation example
 Year 1
 Amortisation in profit/loss $4
 In Other Comprehensive Income (OCI)
revaluation gain of $9 (45 – 36)
 Year 2
 Amortisation in profit/loss $5 (45 over 9
remaining years)
 In OCI a further gain of $2 (42 – 40)
Disclosures of intangible assets
 Disclosure by classes of intangible assets

 Internally generated separated from others
 Indefinite and reasons supporting that
 Finite assets – useful lives, depreciation
methods
 Reconciliation of movement by class –
additions, disposals, amortisation,
impairments, revaluations etc.
 Any individual material asset
Disclosures
 Carrying amounts pledged as security

 Contractual commitments
 Where amortisation appears in income
statement
 Total R&D expenditure
Question 1
Company F operates a number of car showrooms
They establish a new one and they invest in training the new
staff and running costs while it is established
Can this investment be recognised as an asset?

Question 2
Company G buys from Company T two best selling products JKL and
XYZ together with the knowhow and the plant to make them, the sales
force and the customers.
T developed JKL themselves but bought XYZ a few years ago and it is
recognised as an asset in their balance sheet.
Which of the following should G recognise as an asset after the
acquisition?
1. Brand value of JKL?

2. Brand value of XYZ?
3. Knowhow
4. Customer lists of T?
5. Sales team of T?
Exercises
Question 2
A company had $20 million of capitalised development expenditure at cost
·
brought forward at 1 October 20X7 in respect of products currently in
production and a new project began on the same date.
The research stage of the new project lasted until 31 December 20X7 and
incurred $1.4 million of costs. From that date the project incurred
development costs of $800,000 per month. On 1 April 20X8 the directors
became confident that the project would be successful and yield a profit
well in excess of costs. The project was still in development at 30
September 20X8. Capitalised development expenditure is amortised at 20%
per annum using the straight line method.
What amount will be charged to profit or loss for the year ended 30
September 20X8 in respect of research and development costs?

IAS 38 Intangible Assets

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IAS 38 Intangible assets

1118/23 Importance of intangibles

 What are they?

 Non-monetary – not a financial instrument

 Flow of economic benefits expected

Recognise if and only if:

Recognition follows the requirements just set

 Not restricted to intangibles previously recognised

 Much more restrictive

 Only internally generated intangible asset that

 Only from the date when the 6 criteria are met –

 Choice of cost model or revaluation

 Legal life of for example a licence

 Method should reflect consumption of benefits

 Initial recognition at cost

 Year 1 purchases a licence for $40 with 10

 Disclosure by classes of intangible assets

 Carrying amounts pledged as security

Can this investment be recognised as an asset?

1. Brand value of JKL?

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