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Chapter 8 Notes

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21 views5 pages

Chapter 8 Notes

Uploaded by

Mnuna Zimkita
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ADVANCED FINANCIAL REPORTING

IAS 38 – INTANGIBLE ASSETS

CHAPTER 8 – IAS 38: INTANGIBLE ASSETS

1. DEFINITION
Intangible asset – an identifiable non-monetary asset without physical substance.
Examples of intangible assets include:
• Licences;
• Import quotas;
• Computer software;
• Trademarks;
• Films;
• Patents; and
• Copyrights.

An asset is identifiable if it is:


• Separable (can be bought or sold separately); or
• Arises from contractual or other legal rights.

Because goodwill arising from the acquisition of a business cannot be sold separately,
it is not covered under IAS 38.

2. RECOGNITION AND MEASUREMENT


To be recognised in the financial statements, an intangible asset must meet:
• The definition of an intangible asset; and
• The recognition criteria.

Internally generated intangible assets


• Generally, internally generated intangible assets are not capitalised, as the they
cannot be identified separately from the costs associated with running the
business. The following internally generated assets can never be recognised:
o Goodwill;
o Brands;
o Publishing titles;
o Newspaper mastheads;
ADVANCED FINANCIAL REPORTING
IAS 38 – INTANGIBLE ASSETS

o Customer lists; and


o Intellectual property.
• Goodwill should not be recognised because it is not identifiable and not capable
of reliable measurement;
• Other intangible assets should be initially recognised at cost if the recognition
criteria is met.

Purchased intangible assets


• Separately purchased intangible assets should be recognised at cost if the
recognition criteria is met.
• Intangible assets purchased as part of a business combination should be
recognised at FV, assuming the asset is identifiable and the FV is reliable.
Otherwise, the asset should be included in goodwill.

3. SUBSEQUENT MEASUREMENT
After initial recognition, an intangible asset can be measured using one of the following
methods:

Cost model
• The intangible asset should be carried at cost less amortisation and any
impairment losses;
• An intangible with an indefinite useful life should not be amortised, but should
be tested for impairment.

Revaluation model
• Intangible assets may be valued to their fair value, and this FV should be
determined by an active market.
• An active market exists where the following conditions are met:
o Items traded in the market are homogeneous;
o Willing buyers and sellers can be found at any time; and
o Prices are available to the public.
ADVANCED FINANCIAL REPORTING
IAS 38 – INTANGIBLE ASSETS

4. DERECOGNITION OF INTANGIBLE ASSETS


An intangible asset is derecognised:
• On disposal; or
• When no future economic benefits are expected from it.

5. RESEARCH AND DEVELOPMENT COSTS

Research costs
Research is defined as an investigation undertaken to gain new knowledge and
understanding, and no future economic benefits are expected. Hence, research costs
should be expensed.

Development costs
Development costs suggest that the entity is able to estimate the future economic
benefit, hence, these costs should be capitalised if the following criteria is met.
• The company should demonstrate how the asset will generate future economic
benefits, through an external market or the internal use.
• The company should have the intention to use or sell the developed asset;
• Resources to complete the development should exist;
• The company should have the ability to use or sell the developed asset;
• It should be technically feasible to complete the development; and
• The expenditure should be reliably measured.

If the above criteria is not met at any point, the associated development costs should
be expensed, and these cannot be capitalised in subsequent periods. Capitalised
development costs should be amortisation from the day the developed asset is
available for use.

Costs that may be capitalised are only those that are directly attributable to creating,
producing and preparing the asset such that it will be able to operate in the manner
intended.
• The amortisation of assets used in the creation of intangible assets should be
capitalised;
ADVANCED FINANCIAL REPORTING
IAS 38 – INTANGIBLE ASSETS

• Borrowing costs of loans used to fund the development costs should be


capitalised on condition that the criteria set in IAS 23: Borrowing costs is met.

The costs below should never be capitalised:


• Selling, administrative and other general overheads unless they are directly
attributable to preparing the asset for use.
• Costs due to identified inefficiencies occurring before the asset reaches its
planned performance level.
• Costs reflecting initial operating losses because the asset had not yet reached
its planned performance level.
• Costs of training staff how to operate the asset.

HOMEWORK

Lab Ltd began researching and developing a wireless modem – one which truly did
not have wires – something they planned to call the ‘Less-wire Wireless’. In 2022, the
following costs were incurred:
• 31 January 2022 - Research costs R150 000
• 1 June 2022 – Development costs R256 000
• 1 August 2022 – Development costs R562 000
• 25 August 2022 – Training costs R150 000

The criteria to capitalise development costs was fully met on 28 July 2022, and the
asset was available for use on 10 August 2022. The training costs were for training
that will operate the developed asset.

REQUIRED
Apply your understanding of IAS 38: Intangible Assets and discuss how the above
costs should be recognised in the financial statements of Lab Ltd for the year ended
31 December 2022.
ADVANCED FINANCIAL REPORTING
IAS 38 – INTANGIBLE ASSETS

REFERENCES
International Financial Reporting Standards (IFRS). 2023. IAS 38 Intangible Assets.
https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/
[Accessed 12 April 2023].

Kaplan. 2019. Advanced Financial Reporting (F2), CIMA Official Study Text, 2019
Edition. London: Kaplan Publishing.

Service, C. 2022. Gripping GAAP: Your guide to International Financial Reporting


Standards, 22nd Edition. Durban: LexisNexis.

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