IAS 38: Intangible assets

IAS 38 Intangible assets was originally published in September 1998. It has recently been revised to reflect changes introduced by the revision of IF S 3 Business combinations. !he ob"ectives of the standard are#

a. !o establish the criteria for when an intangible asset may or should be recognised b. !o specify how intangible assets should be measured c. !o specify the disclosure requirements for intangible assets
IAS 38 applies to all intangible assets with certain exceptions: deferred ta$ assets %IAS 1&'( leases that fall within the scope of IAS 1)( financial assets( insurance contracts( assets arising from employee benefits %IAS 19'( non*current assets held for sale( and mineral rights and e$ploration and e$traction costs for minerals %although some of this material is covered by IAS 38'. It does not apply to goodwill ac+uired in a business combination( which is dealt with under IF S 3 Business. combinations. Definition !he definition of an intangible asset is a ,ey aspect of the standard( because the rules for deciding whether or not an intangible asset may be recognised in the accounts of an entity are based on the definition of what an intangible asset -$amples of items that might be considered as intangible assets include computer*software( patents( copyrights( motion picture films( customer lists( franchises and fishing rights. An item should not be recognised as an intangible asset( however( unless it fully meets the definition in the standard. !he guidelines go into great detail on this matter. An intangible asset must be identifiable in order to distinguish it from goodwill. .ith non*physical items( there may be a problem with /identifiable

a. If an intangible asset is acquired separately through purchase, there may be a transfer of a

legal right that would help to ma,e an asset identifiable. b. An intangible asset may be identifiable if it is separable, ie if it could be rented or sold separately. 0owever( /separability/ is not an essential feature of an intangible asset. Another element of the definition of an intangible asset is that it must be under the control of the entity as a result of a past event. !he entity must therefore be able to en"oy the future economic benefits from the asset( and prevent the access of others to those benefits. A legally enforceable right is evidence of such control( but is not always a necessary condition.

a. 1ontrol over technical kno ledge or kno !ho only e$ists if it is protected by a legal
right" b. !he s,ill of employees( arising out of the benefits of training costs, are most unli,ely to be recognisable as an intangible asset( because an entity does not control the future actions of its staff. c. Similarly( market share and customer loyalty cannot normally be intangible assets( since an entity cannot control the actions of its customers. #xpected future economic benefits An item can only be recognised as an intangible asset if economic benefits are e$pected to flow in the future from ownership of the asset. -conomic benefits may come from the sale of products or services( or from a reduction in e$penditures %cost savings'.

An intangible asset( when recognised initially( must be measured at cost" It should be recognised if( and only if( both the following occur.

a. It is probable that the future economic benefits that are attributable to the asset will flo to
the entity" b. !he cost can be measured reliably" 2anagement has to e$ercise its "udgement in assessing the degree of certainty attached to the flow of economic benefits to the entity. -$ternal evidence is best.

a. If an intangible asset is acquired separately, its cost can usually be measured reliably as its
purchase price %including incidental costs of purchase such as legal fees( and any costs incurred in getting the asset ready for use'. b. .hen an intangible asset is ac+uired as part of a business combination %ie an ac+uisition or ta,eover'( the cost of the intangible asset is its fair value at the date of the ac+uisition. IF S 3 e$plains that the fair value of intangible assets ac+uired in business combinations can normally be measured with sufficient reliability to be recognised separately from goodwill. IF S 13 re+uires that the following are considered in determining fair value#

a. !he asset or/ liability being measured b. !he principal mar,et %ie that where the most activity ta,es place' or where there is no
principal mar,et( the most advantageous mar,et %ie that in which the best price could be achieved' in which an orderly transaction would ta,e place for the asset or liability. c. !he highest and best use of the asset or liability and whether it is used on a standalone basis or in con"unction with other assets or liabilities d. Assumptions that mar,et participants would use when pricing the asset or liability. IF S 13 provides a hierarchy of inputs for arriving at fair value. It re+uires that level 1 inputs are used where possible# $e%el & 3uoted prices in active mar,ets for identical assets that the entity can access at the measurement date. $e%el ' Inputs other than +uoted prices that are directly or indirectly observable for the asset. $e%el 3 4nobservable inputs for the asset. In accordance with IAS &5( intangible assets ac+uired by way of government grant and the grant itself may be recorded initially either at cost %which may be 6ero' or fair value. Internally generated good ill !he standard deliberately precludes recognition of internally generated goodwill because it re+uires that( for initial recognition( the cost of the asset rather than its fair value should be capable of being measured reliably and that it should be identifiable and controlled. !hus you do not recognise an asset which is sub"ective and cannot be measured reliably. (esearch and de%elopment costs esearch activities by definition do pot meet the criteria for recognition under IAS 38. !his is because( at the research stage of a pro"ect( it cannot be certain that future economic benefits will probably flow to the entity from the pro"ect. !here is too much uncertainty about the li,ely success or

otherwise of the pro"ect. (esearch costs should therefore be ritten off as an expense as they are incurred" #xamples of research costs

a. Activities aimed at obtaining new ,nowledge b. !he search for( evaluation and final selection of( applications of research findings or other
,nowledge c. !he search for alternatives for materials( devices( products( processes( systems or services d. !he formulation( design evaluation and final selection of possible alternatives for new or improved materials( devices( products( systems or services De%elopment 7evelopment costs may qualify for recognition as intangible assets provided that the following strict criteria can be demonstrated.

a. !he technical feasibility of completing the intangible asset so that it will be available for use
or sale.

b. Its intention to complete the intangible asset and use or sell it. c. Its ability to use or sell the intangible asset. d. 0ow the intangible asset will generate probable future economic benefits. Among other
things( the entity should demonstrate the e$istence of a mar,et for the output of the intangible asset or the intangible asset itself or( if it is to be used internally( the usefulness of the intangible asset. e. Its ability to measure the e$penditure attributable to the intangible asset during its development reliably. In contrast with research costs development costs are incurred at a later stage in a pro"ect( and the probability of success should be more apparent. -$amples of development costs include the following.

a. !he design( construction and testing of pre*production or pre*use prototypes and models b. !he design of tools( "igs( moulds and dies involving new technology c. !he design( construction and operation of a pilot plant that is not of a scale economically
feasible for commercial production d. !he design( construction and testing of a chosen alternative for new or improved materials( devices( products( processes( systems or services !he standard prohibits the recognition of internally generated brands, mastheads, publishing titles and customer lists and similar items as intangible assets. !hese all fail to meet one or more %in some cases all' the definition and recognition criteria and in some cases are probably indistinguishable from internally generated goodwill. )ost of an internally generated intangible asset !he costs allocated to an internally generated intangible asset should be only costs that can be directly attributed or allocated on a reasonable and consistent basis to creating( producing or preparing the asset for its intended use. !he principles underlying the costs which may or may not be included are similar to those for other non*current assets and inventory.

!he cost of an internally generated intangible asset is the sum of the expenditure incurred from the date hen the intangible asset first meets the recognition criteria" If( as often happens( considerable costs have already been recognised as e$penses before management could demonstrate that the criteria have been met( this earlier e$penditure should not be retrospectively recognised at a later date as part of the cost of an intangible asset. #xample A company is developing a new production process. 7uring &589( e$penditure incurred was 9155(555( of which 995(555 was incurred before 1 7ecember &589 and 915(555 between 1 7ecember &589 and 31 7ecember &589. !he company can demonstrate that( at 1 7ecember &589( the production process met the criteria for recognition as an intangible asset. !he recoverable amount of the ,now*how embodied in the process is estimated to be 9:5(555. 0ow should the e$penditure be treated; At the end of &589( the production process is recognised as an intangible asset at a cost of 915(555. !his is the e$penditure incurred since the date when the recognition criteria were met( that is 1 7ecember &589. !he 995(555 e$penditure incurred before 1 7ecember &589 is e$pensed( because the recognition criteria were not met. It will never form part of the cost of the production process recognised in the statement of financial position. All e$penditure related to an intangible which does not meet the criteria for recognition either as an identifiable intangible asset or as goodwill arising on an ac+uisition should be expensed as incurred" !he IAS gives e$amples of such e$penditure.

* *

Start up costs !raining costs

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Advertising costs =usiness relocation costs

>repaid costs for services( for e$ample advertising or mar,eting costs for campaigns that have been prepared but not launched( can still be recognised as a prepayment. *easurement subsequent to initial recognition !he standard allows two methods of valuation for intangible assets after they have been first recognised. Applying the cost model, an intangible asset should be carried at its cost, less any accumulated amortisation and less any accumulated impairment losses. !he re%aluation model allows an intangible asset to be carried at a revalued amount( which is its fair %alue at the date of revaluation( less any subse+uent accumulated amortisation and any subse+uent accumulated impairment losses.

a. !he fair value must be able to be measured reliably with reference to an acti%e market in that
type of asset.

b. !he entire class of intangible assets of that type must be revalued at the same time %to prevent
selective revaluations'. c. If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no acti%e market for this asset( the asset should be carried at its cost less any accumulated amortisation and impairment losses" d. evaluations should be made with such regularity that the carrying amount does not differ from that which would be determined using fair value at the reporting date.

!he guidelines state that there ill not usually be an acti%e market in an intangible asset? therefore the revaluation model will usually not be available. For e$ample( although copyrights( publishing rights and film rights can be sold( each has a uni+ue sale value. In such cases( revaluation to fair value would be inappropriate. A fair value might be obtainable however for assets such as fishing rights or +uotas or ta$i cab licences. .here an intangible asset is revalued upwards to a fair value( the amount of the revaluation should be credited directly to e+uity under the heading of a re%aluation surplus" 0owever( if a revaluation surplus is a re%ersal of a re%aluation decrease that was previously charged against income( the increase can be recognised as income. .here the carrying amount of an intangible asset is revalued downwards( the amount of the do n ard re%aluation should be charged as an e$pense against income( unless the asset has previously been revalued upwards. A revaluation decrease should be first charged against any previous revaluation surplus in respect of that asset. #xample An intangible asset is measured by a company at fair value. !he asset was revalued upwards by 9@55 in &588( and there is a revaluation surplus of 9@55 in the statement of financial position. At the end of &589( the asset is valued again( and a downward valuation of 9:55 is re+uired. 0ow is the downward revaluation accounted for; In this e$ample( the downward valuation of 9:55 can first be set against the revaluation surplus of 9@55. !he revaluation surplus will be reduced to 95 and a charge of 9155 made as an e$pense in &589. .hen the revaluation model is used( and an intangible asset is revalued upwards( the cumulative revaluation surplus may be transferred to retained earnings when the surplus is eventually realised. !he surplus would be realised when the asset is disposed of. 0owever( the surplus may also be realised over time as the asset is used by the entity. !he amount of the surplus realised each year is the difference between the amortisation charge for the asset based on the revalued amount of the asset( and the amortisation that would be charged on the basis of the asset/s historical cost. !he realised surplus in such case should be transferred from revaluation surplus directly to retained earnings( and should not be ta,en through profit or loss. +seful life An entity should assess the useful life of an intangible asset( which may be finite or indefinite" An intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is e$pected to generate net cash inflows for the entity. 2any factors are considered in determining the useful life of an intangible asset( including# e$pected usage? typical product life cycles? technical( technological( commercial or other types of obsolescence? the stability of the industry? e$pected actions by competitors? the level of maintenance e$penditure re+uired? and legal or similar limits on the use of the asset( such as the e$piry dates of related leases. 1omputer software and many other intangible assets normally have short lives because they are susceptible to technological obsolescence. 0owever( uncertainty does not "ustify choosing a life that is unrealistically short. !he useful life of an intangible asset that arises from contractual or other legal rights should not e$ceed the period of the rights( but may be shorter depending on the period over which the entity e$pects to use the asset.

Amortisation An intangible asset with a finite useful life should be amortised over its expected useful life"

a. Amortisation should start when the asset is a%ailable for use" b. Amortisation should cease at the earlier of the date that the asset is classified as held for sale
in accordance with IF S : Non-current assets held for sale and discontinued operations and the date that the asset is derecognised" c. !he amortisation method used should reflect the pattern in which the asset/s future economic benefits are consumed. If such a pattern cannot be predicted reliably( the straight*line method should be used. d. !he amortisation charge for each period should normally be recognised in profit or loss" !he residual %alue of an intangible asset with a finite useful life is assumed to be ,ero unless a third party is committed to buying the intangible asset at the end of its useful life or unless there is an active mar,et for that type of asset %so that its e$pected residual value can be measured' and it is probable that there will be a mar,et for the asset at the end of its useful life. !he amortisation period and the amortisation method used for an intangible asset with a finite useful life should be re%ie ed at each financial year!end" Indefinite useful li%es An intangible asset with an indefinite useful life should not be amortised" %IAS 3A re+uires that such an asset is tested for impairment at least annually.' !he useful life of an intangible asset that is not being amortised should be re%ie ed each year to determine whether it is still appropriate to assess its useful life as indefinite. eassessing the useful life of an intangible*asset as finite rather than indefinite is an indicator that the asset may be impaired and therefore it should be tested for impairment. Disposals-retirements of intangible assets An intangible asset should be eliminated from the statement of financial position when it is disposed of or when there is no further e$pected economic benefit from its future use. Bn disposal the gain or loss arising from the difference bet een the net disposal proceeds and the carrying amount of the asset should be ta,en to profit or loss as a gain or loss on disposal %ie treated as income or e$pense'.

Disclosure requirements !he standard has fairly e$tensive disclosure re+uirements for intangible assets. !he financial statements should disclose the accounting policies for intangible assets that have been adopted. For each class of intangible assets, disclosure is re+uired of the following.

.hether the useful life is indefinite or finite !he method of amortisation used !he useful life of the assets or the amortisation rate used !he gross carrying amount, the accumulated amortisation and the accumulated impairment losses as at the beginning and the end of the period !he line in the statement of profit or loss in which any amortisation of intangible assets is included A reconciliation of the carrying amount as at the beginning and at the end of the period %additions( retirementsCdisposals( revaluations( impairment losses( impairment losses reversed( amortisation charge for the period( net e$change differences( other movements' !he carrying amount of internally!generated intangible assets

!he financial statements should also disclose the amount of research and development e$penditure that have been charged as e$penses of the period.