Definition

An intangible asset is an identifiable non-monetary asset without physical

substance' (IAS 38, para 8)

Intangible assets include items such as:

• licences and quotas
• intellectual property, e.g. patents and copyrights
• brand names
• trademarks

For an asset to be identifiable IAS 38 Intangible Assets states that it must fall
into one of two categories:

It is separable – the asset can be bought or sold separately from the rest
of the business

It arises from legal/contractual rights – this will arise as part of purchasing

an entire company. This will be looked at further in the consolidated
financial statements chapters.

It must also meet the normal definition of an asset:

• controlled by the entity as a result of past events (normally by enforceable

legal rights)
• a resource from which future economic benefits are expected to flow
(either from revenue or cost saving).

Recognition

• 'the definition of an intangible asset, and

• meet the recognition criteria' of the framework (IAS 38, para 18)
– it is probable that future economic benefits attributable to the asset
will flow to the entity
– the cost of the asset can be measured reliably.

If these criteria are met, the asset should be initially recognised at cost.

A) Purchased intangible assets

If an intangible asset is purchased separately (such as a licence, patent, brand

 name), it should be recognised initially at cost.

Measurement after initial recognition

There is a choice between:

• the cost model
• the revaluation model.

i) The cost model

The intangible asset should be carried at

Cost (-) Amortisation (-) Impairment losses.

Note Amortisation works the same as depreciation. The intangible asset is amortised
over the useful life, with the annual expense being shown in the statement of
profit or loss each year.

Amortisation

ii) The revaluation model

• The intangible asset may be revalued to a carrying amount of fair value

less subsequent amortisation and impairment losses.

• Fair value should be determined by reference to an active market**.

 As a guide, indicators of an active market **would include:

• the items traded within the market are homogeneous (identical)

• prices are available to the public.

Most intangible assets have value because of their uniqueness, and are
therefore unlikely to be homogeneous. Certain licences may fit this model and
could possibly be revalued, but most other intangible assets will not.

B) Internally-generated intangible assets

Generally, internally-generated intangible assets cannot be capitalised, as the

costs associated with these cannot be identified separately from the costs
associated with running the business.

The following internally-generated items may never be recognised:

• goodwill ('inherent goodwill')
• brands
• mastheads
• publishing titles
• customer lists

Note • The accounting treatment of brands has been a matter of

controversy for some years. IAS 38 Intangible Assets has now
ended the controversy by stating that internally-generated brands
and similar assets may never be recognised.

• Expenditure on internally-generated brands cannot be distinguished

from the cost of developing the business as a whole, so should be
written off as incurred.

• Where a brand name is separately acquired and can be measured

reliably, then it should be separately recognised as an intangible
non-current asset, and accounted for in accordance with the general
rules of IAS 38.

Illustration How should the following intangible assets be treated in the

financial statements?
• A publishing title acquired as part of a subsidiary company.
• A licence purchased in order to market a new product.
Solution

• Publishing title – The answer depends on whether the asset can

be valued reliably. If this is possible, the title will be recognised at its
fair value, otherwise it will be treated as part of goodwill on
acquisition of the subsidiary.

• Licence – As the licence has been purchased separately from a

business, it should be initially capitalised at cost.
 The nature of goodwill

Goodwill = Value of a business as a whole (- ) Aggregate of the fair values of its separable net assets

Separable net assets are those assets and liabilities which can be
identified and sold off separately without necessarily disposing of the
business as a whole. They include identifiable intangible assets such as
patents, licences and trademarks.

Fair value is defined in IFRS 13 as ‘the price that would be received to

sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date’ (IFRS 13

Goodwill may exist because of any combination of a number of possible

factors:
• reputation for quality or service
• technical expertise
• possession of favourable contracts
• good management and staff.

Purchased and non-purchased goodwill

i) Purchased goodwill:
• arises when one business acquires another as a going concern
• includes goodwill arising on the consolidation of a subsidiary ( Consideation Paid > Net as
• will be recognised in the financial statements as its value at a
particular point in time is certain.

ii) Non-purchased goodwill:

• is also known as inherent goodwill
• has no identifiable value
• is not recognised in the financial statements.

Note Accounting for non-purchased goodwill

Non-purchased goodwill should not be recognised in the financial

statements. It certainly exists, but fails to satisfy the recognition criteria in
the Framework, since it is not capable of being measured reliably.
of its separable net assets

Assets 10 m
Lia 2m
Net Assets8 m
Pay 12 m
Good will 4 m

( Consideation Paid > Net assets Acquired of subsidiary )

 Research is original and planned investigation undertaken with the
prospect of gaining new scientific knowledge and understanding'

Development 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

Accounting treatment Commercail

Start
Research expenditure: write off as incurred to the statement of profit or loss.

Development expenditure: recognise as an intangible asset if, and only if, an

entity can demonstrate all of the following:

• Probable flow of economic benefit from the asset, whether through sale or
internal cost savings.
• Intention to complete the intangible asset and use or sell it
• Reliable measure of development cost
• Adequate resources to complete the project
• Technical feasibility of completing the intangible asset so that it will be
available for use or sale
• Expected to be profitable, i.e. the costs of the project will be exceeded by
the benefits generated.

Note Development expenditure recognised as an

expense in profit or loss cannot subsequently be reinstated as an asset.
Note
If an item of plant is used in the development process, the depreciation on the
plant is added to the development costs in intangible assets during the period
that the project meets the development criteria. That is because the economic
benefit gained from the plant in this period is only realised when the development
project is complete and production is underway. It will be taken to the statement
of profit or loss as amortisation within the amortisation of the development costs.

Amortisation

Development expenditure should be amortised over its useful life as soon as

commercial production begins
1/3/2020
R PL

30/09/2020
10 m
D Capitalised 2 m
12 m 10 life 1.2
1/2/2021
Question

Answer (a) These are research costs as they are only in the early design stage
and therefore should be written off to the statement of profit or loss
in the period.
(b) These would appear to be development stage costs as the new
production system is due to be in place fairly soon and will produce
economic benefits in the shape of reduced costs. Therefore these
should be capitalised as development costs.

Question

Answer (i) The brand name is a purchased intangible asset, so can be

capitalised at the cost of $200,000.

Intangible assets can only be revalued if an active market exists.

This is unlikely here, as the brand name will not be a homogeneous
item. Therefore the item should be held under the cost model.
The brand should be written off over its expected useful life. If this
has an indefinite useful life then no amortisation is charged.
However, an annual impairment review would be required.
 (ii) The $500,000 relates to research and development. Of the total,
$150,000 should be expensed to the statement of profit or loss, as
management had not displayed either the intention to complete, or
the release of the resources to complete.
Therefore $350,000 can be capitalised as an intangible asset as
development costs.

(iii) The training costs must be expensed in the statement of profit or

loss. The movement of staff cannot be controlled, and therefore
there is no way of restricting the economic benefits. If the staff
leave, the company receives no benefit.

Question Improve has deferred development expenditure of $600,000 relating to

the development of New Miracle Brand X. It is expected that the demand
for the product will stay at a high level for the next three years. Annual
sales of 400,000, 300,000 and 200,000 units respectively are expected
over this period. Brand X sells for $10.
How should the development expenditure be amortised?

Answer There are two possibilities for writing off the development expenditure:

• Write off in equal instalments over the three-year period, i.e.

$200,000 pa.

• Write off in relation to total sales expected (900,000 units).

Year 1 (400,000/900,000) × $600,000 = 266,667
Year 2 (300,000/900,000) × $600,000 = 200,000
Year 3 (200,000/900,000) × $600,000 = 133,333

Question Cowper plc has spent $20,000 researching new cleaning chemicals
in the year ended 31 December 20X0. They have also spent
$40,000 developing a new cleaning product which will not go into
commercial production until next year. The development project
meets the criteria laid down in IAS 38 Intangible Assets.

How should these costs be treated in the financial statements

of Cowper plc for the year ended 31 December 20X0?

A $60,000 should be capitalised as an intangible asset on the

statement of financial position.
B $40,000 should be capitalised as an intangible asset and
should be amortised; $20,000 should be written off to the
 statement of profit or loss.
C $40,000 should be capitalised as an intangible asset and
should not be amortised; $20,000 should be written off to the
statement of profit or loss.
D $60,000 should be written off to the statement of profit or loss

Question Which TWO of the following items below could potentially be

classified as intangible assets?
A purchased brand name
B training of staff
C internally generated brand
D licences and quotas

Question Sam Co has provided the following information as at 31 December

20X6:

(i) Project A – $50,000 has been spent on the research phase of

this project during the year.

(ii) Project B – $80,000 had been spent on this project in the

previous year and $20,000 this year. The project was
capitalised in the previous year however, it has been decided
to abandon this project at the end of the year.

(iii) Project C – $100,000 was spent on this project this year. The
project meets the criteria of IAS 38 and is to be capitalised.

Which of the following adjustments will be made in the

financial statements as at 31 December 20X6?

A Reduce profit by $70,000 and increase non-current assets by

$100,000
B Reduce profit by $150,000 and increase non-current assets by
$100,000
C Reduce profit by $130,000 and increase non-current assets by
$180,000
D Reduce profit by $130,000 and increase non-current assets by
$100,000

Question Which of the following statements concerning the accounting

treatment of research and development expenditure are true,
according to IAS 38 Intangible Assets?

(i) Research is original and planned investigation undertaken with

 the prospect of gaining new knowledge and understanding.

(ii) Development is the application of research findings.

(iii) Depreciation of plant used specifically on developing a new

product can be capitalised as part of development costs.

(iv) Expenditure once treated as an expense cannot be reinstated

as an asset.
A (i), (ii) and (iii)
B (i), (ii) and (iv)
C (ii), (iii) and (iv)
D All of the above

Question Which of the following should be included in a company’s

statement of financial position as an intangible asset under IAS
38 Intangible Assets?

A Internally developed brands

B Internally generated goodwill
C Expenditure on completed research
D Payments made on the successful registration of a patent.

Question During the year to 31 December 20X8 X Co incurred $200,000 of

development costs for a new product. In addition, X Co spent
$60,000 on 1 January 20X8 on machinery specifically used to help
develop the new product and $40,000 on building the brand identity.
Commercial production is expected to start during 20X9.
The machinery is expected to last 4 years with no residual value.

What value should be included within Intangible Assets in

respect of the above in X Co’s Statement of Financial Position
as at 31 December 20X8?
$ __________

Question Which TWO of the following criteria must be met before

development expenditure is capitalised according to IAS 38
Intangible Assets?

A the technical feasibility of completing the intangible asset

B future revenue is expected
C the intention to complete and use or sell the intangible asset
D there is no need for reliable measurement of expenditure