PAS. A ne PAS 38 Intangible Assets Learning Objectives SSS 1. Define an intangible asset. 2. State the initial measurement of intangible assets that are (@ | extemally acquired and (6) internally generated. 3. State the subsequent measurement of intangible assets that @ have finite useful life and (b) indefinite useful life. Introduction PAS 38 applies to all intangible assets except those that are specifically dealt with under other Standards. For example, PAS 38 does nat apply to goodwill acquired in a business combination (PFRS 3), intangible assets held as inventory (PAS 2), and intangible assets classified as held for sale (PERS 5). Intangible asset Intangible asset is “an identifiable non-monetary asset without physical substance.” (PAS 38.8) Intangible assets normally refer to “intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licenses, intellectual property, market knowledge and trademarks (including brand names and publishing titles).” (PAs 38.9) Common examples include “computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licenses, import quotas, franchises customer or supplier relationships, customer loyalty, market share and marketing rights.” (PAS 38.9) These items, however, are recognized as intangible asse's only if they have the essential elements of an intangible asset meet the recognition criteria. PR Reece aadintngitle Assets pe — essential elements of an intangible asset is ese patty ~ aM asset is identifiable if it either Py h| Q, ie is nie © ¥&, Capable of being separated and divided rf oy EVIE oes j me and sold, transferred, licensed, rented - ote acuta Or together with a related 1 © asset or liability, whether the entity intends to do aa =— b, arises from contractual or oth , J j ier legal rights, regardless of whether ose rights are transferable or separable from the entity or from other rights and obligations.” (Pas 38.12) a An intangible asset must be identifiable to distinguish it from goodwill. Goodwill does not have physical substance (ie., neither ‘seen nor touched) but is outside the scope of PAS 38 because it is unidentifiable (i.e, goodwill cannot be sold separately). Goodwill is accounted for under PFRS 3 Business Combinations, PFRS 10 Consolidated Financial Statements and PAS 36. Some financial assets, such as deposits in banks, receivables, and other debt instruments, do not have physical substance but are also outside the scope of PAS 38 because they are monetary assets. The definition of an intangible asset encompasses an asset that is identifiable, non-monetary and has no physical substance. 1 — control means the entity has the ability to benefit 2 Contro. prevent others from benefitting from the intangible asset or from it, / Control of an intangible asset normally arises from Je in a court of law. However, legal rights that are enforceab! jor legal enforceability of a right is not a necessary condition for control because an entity may be able to control an asset's future economic benefits in some other way- Market and technical knowledge meet the control ctiterion if the knowledge is protected Py Jegal rights, such as406 - PAS 36 ae PAS ee copyrights, restraint of trade agreement or legal duty om employees to maintain confidentiality. Employees’ skills developed from training Provided py the entity are not recognized as intangible assets because the entity does not control the future actions of its employees, This is true even if the entity expects that the employees wil) continue to make their skills available to the entity, Training costs are expensed when incurred. Similarly, specific managerial or technical talent ig not recognized as intangible asset, unless it is protected by legal rights and it also meets the other elements of the definition, Customer relationships and loyalty are usually nop recognized as intangible asset unless they are Protected by legal rights or other ways of control and they also meet the other elements of the definition. 3. Future economic benefits - the future economic benefits from an intangible asset may include revenue from the sale of producis or services, cost savings (e.g., reduction in production costs rather than increase in revenues), or other benefits resulting from the entity’s use of the asset. Assets with both intangible and tangible elements Some assets may have both intangible and tangible elements. In determining whether such an asset is to be accounted for as a PPE or an intangible asset, the entity uses judgment to assess which element is more significant. If the intangible component is an integral part of the asset as whole, the intangible element is treated as PPE. Otherwise, it is treated as a separate intangible asset, For example, the computer software of a computer-controlled machine that cannot operate without the software is an integral part of the related hardware and, therefore, the software is treated as PPE. The same applies to the operating system (e.g, Microsoft Windows 10) of a computer. A computer cannot operate without icalptangible Assets ~ ~ oe operating software. Th : yes t of the cor us, the Perating soft the cos! mputer, which ig classified ware forms part of Ssified as PPE, ifthe software is not an integral Part of the relat ted hardware (e. Br i plication software, such as an a ‘counting system), it is treated asa separate intangible asset, Financia statement presentation Intangible assets accounted separately from goodwill, hee 38 are presented and presented! as one line item under the nesting aggregated assets” or “Other intangible assets” in the sitenen Intangible position. The breakdown of the line item is eee a Goodwill is presented separately under a line item des fed oc “Goodwill.” scribed as Recognition An intangible asset is recognized when it meets the definition of an intangible asset as well as the asset recognition criteria of "probable future economic benefits” and “reliable measurement of cost.” Initial measurement Intangible assets are initially measured at cost. The measurement of cost depends on how the intangible asset is acquired. Intangible assets may be acquired through: a Separate acquisition; b. Acquisition as part of a business combination; ©. Acquisition by way of a government grant; d. Exchanges of assets; oF ® Internal generation ry etl red intangible asset comprises: cost of arately acquired intang! : a "Its arilaee rice, iene import duties and non-refundable Purchase ne after deducting trade discounts and rebates; and408 ee =——— PAS 3g b. Any directly attributable intended use.” cost of preparing the asset fo, Ps its {PASS Examples of directly attributable costs: a. Costs of employee benefits arising directly from bringing the asset to its working condition b. Professional fees arisin working condition c. Costs of testin; (PAS 38.29) ig directly from bringing the asset to its ig whether the asset is functioning properly The following costs are not part of the cost of an intangible asset: % Costs of introducing a new product or service (including costs of advertising and promotional activities) >. Costs of conducting business in a new location or with a new class of customer (including costs of staff training) c. Administration and other general overhead costs (PAS 38.29) If the payment is deferred, the cost is the cash price equivalent. The difference between this amount and the total Payments is recognized as interest expense over the credit period, unless it qualifies for capitalization under PAS 23, Acquisition as part of a business combination The cost of an intangible asset acquired in a business combination is its fair value at the acquisition date, The acquirer recognizes an intangible asset at the acquisition date, separate from goodwill, whether or not the intangible asset had been recognized by the acquiree before the business combination. The acquirer can recognize the acquiree’s research and development project as an intangible asset if the project meets the definition of an intangible asset and is identifiable.