IAS 38

Intangible assets
 IAS 38 Scope
• IAS 38 covers all intangible assets unless the asset
falls within the scope of another accounting
standard, for example, intangible assets that:
– Are inventories (IAS 2)
– Are deferred tax assets (IAS 12)
– Are held under a lease (IFRS 16)
– Reflect goodwill arising from a business combination
(IFRS 3)
– Are non-current assets held for sale (IFRS 5)
– Are financial assets (IAS 32)
– Are assets involving revenue (IFRS 15)
 Definition
• An identifiable
• Non-monetary asset
• Without physical substance
• Examples:
– Patents
– Computer software
– Customer lists
– Fishing licences
– Import quotas
 Elements of definition:
Identifiability
Identifiable if it is:
• Separable; or
– Asset is separable when an entity can separate or
divide it from other assets & sell, transfer, rent or
exchange it
• Arises from contractual or other legal rights
 Example 1
A Ltd is a listed company that sells furniture. It is
estimated that the company currently has a 30% market
share, and as the company is expanding rapidly, it is
expected that this market share will increase to 35%
within the next three years. The financial manager wants
to recognize an intangible asset for the established
customer relationship this market share represents, as he
is certain that future economic benefits flowing to the
company depends on establishing such relationships.

Required: Discuss weather an intangible asset can be

recognized
 Solution
The market share of the company does not meet
the identifiability criterion, as it does not arise
from contractual or legal rights and cannot be
separated from the entity (i.e. it cannot be sold
without disposing of the entity as a whole). It
therefore does not meet the definition of an
intangible asset.
 Elements of definition:
Nonmonetary
• Monetary asset is:
– Money held
– Assets to be received in fixed or determinable
amounts
 Asset
Must be:
• A present economic resource
• Controlled by an entity
- must have ability to restrict others
- control usually comes from legal right
• As a result of past events
• From which future economic benefits are
expected to flow
 Future economic benefits
Benefits may consist of:
- Inflow of revenue
- Reduction in expenses
 Recognition of intangible asset
• Meets the definition of intangible assets
• Probable that future economic benefits will
flow
• Cost of asset can be measured reliably
 Initial measurement
• Initially measured at cost of which the
measurement depends on how the asses is
acquired:
– Separate acquisition
– Acquired as part of business combination
– Exchanging non-monetary asset for intangible
asset
– Internally generating the asset
 Separate acquisition
• Assume that benefits will flow
• Cost includes:
• purchase price plus import duties
• less discounts & rebates
• any costs to prepare asset for its intended use
• Costs excludes:
• Cost of introducing new products
• Cost of conducting business in a new location
• Administration and other general overheads
 Acquired as part of business
combination

• Assume recognition criteria (probability &

reliable measurement) is met because if its
separable or has legal rights over it, then there
is reliable measure of FV.
 Acquisition by way of government
grant
• Recognize if it meets the definition and recognition
criteria. Example fishing license/quota.
• The cost is measured at FV of asset acquired or
Nominal amount plus directly attributable costs.
Asset given by government for free
• Alternative 1
Dr Intangible asset (FV)
Cr Deferred Income (L)
• Alternative 2
Dr Intangible asset (Nominal value)
Cr Deferred income (P/L)
Any costs of preparing asset are capitalized
 Exchange of asset
• General- new asset measured at FV of asset
given up
• Exceptions
– FV of asset acquired is more evident, Then, use FV
of asset acquired.
– FV of both assets not measurable. Then, use
carrying amount of asset given up.
– Transaction lacks commercial substance. Then, use
carrying amount of asset given up.
 Internally generated asset
• There are two distinct stages (phases) that occur
during the process of creating an intangible
assets i.e. research phase and development
phase
• Research costs is expensed
• Development costs capitalized subject to certain
conditions being met.
• If a company buys in-process research and
development, the cost incurred may be
capitalized.
 Research phase
Research is the first stage in the creation of an
intangible item, where we are merely investigating
if there are possible future economic benefits to be
obtained from the item.
• Examples of research activities:
– Obtaining new scientific knowledge & understanding
of alternatives
– Search for alternative materials, products, processes,
etc.
– Final selection of alternatives
 Development phase
• Development is the second stage in creating an
intangible item. It involves applying the research
findings to the creation of a plan/design that will
be used or put into production. It may therefore
be possible to prove probable future economic
benefits.
• Examples of development activities:
– Design & testing of pre-production prototypes
– Design, construction & testing the chosen alternative
 Development phase
Capitalize when:
• There is technical feasibility of completing the asset
• There is intention to complete the asset
• There is ability to use or sell intangible asset
• Demonstration of ability to generate future benefits
• Availability of technical, financial & other resources to
complete development and to use or sell asset
• Ability to measure reliably the cost of development of
the asset
 Website costs (SIC 32)

• Website solely for promoting & advertising

products:
– Expense all amounts & all stages

• Website has facility for placing orders:

– Capitalize some of them: see table below
 Website has facility for placing orders
EXPENDITURE INCURRED IN EACH STAGE ACCOUNTING TREATMENT
PLANNING STAGE RECOGNISE AS EXPENSE
APPLICATION & INFRASTRUCTURE DVPT CAPITALISE IF CRITERIA IS MET
STAGE
GEAOGRAPHICAL DESIGN DEVELOPMENT CAPITALISE IF CRITERIA IS MET
STAGE
CONTENT DEVELOPMENT STAGE CAPITALISE IF CRITERIA IS MET

OPERATING STAGE EXPENSE WHEN INCURRED- CAPITALISE

UNDER RARE CIRCUMSTANCES
OTHER EXPENSE WHEN INCURRED
- Selling & admin
- Inefficiencies
- Costs to train employees
 Internally generated brands,
mastheads, publishing titles,
customer lists & similar items

• Do NOT recognize as asset

• Costs cannot be distinguished from costs of
developing business
 Internally generated goodwill
• Do NOT recognize as asset
- not separable
- not reliably measured at cost
- not controlled by entity
 SUBSEQUENT MEASUREMENT
• Cost Model
– Carried at cost less any accumulated amortization
and any accumulated impairment losses
 SUBSEQUENT MEASUREMENT
• Revaluation model
– Carried at fair value less subsequent accumulated
amortization and subsequent impairment losses
– FV determined with reference to active
market(makes this model not permittable to most
intangible assets).
– Assets received as a government grant & initially
recorded at nominal value are also allowed to be
measured under revaluation model
 Revaluation model

• Revalue at sufficient regularity

• Active market ceases, carry asset at last
revaluation amount
• Difference on revaluation is recognized in OCI &
recorded in SoFP as revaluation surplus.
• Reversals only recognized in P/L if it reverses a
deficit of the same asset.
• Accumulated amortization on revaluation date
may be restated to reflect change in gross
carrying amount or may be eliminated against
gross carrying amt.
 Revaluation model
• Revaluation surplus transferred to Retained
Earnings on disposal or as asset is used (diff
between historical & revalued amortization).
• Revaluation surplus can also be left intact
 Intangible assets with an indefinite
useful life
Indefinite life
• No foreseeable limit to period over which asset
can generate cash inflows
• NOT to be amortized
• Test for impairment annually
• Review useful life annually

Infinite life
• No end to flow of economic benefits
Intangible assets with finite useful life
• Amortize on a systematic basis
• Depreciable amount is cost less residual value
• Amortization recognized as an expense in P/L
 Useful life
• Period expected to be in use or number of
production
• May be affected by legal & economic factors
• Useful life shorter of the 2 periods

Example 23.4 (renewal periods)

 Residual value
• Assume to be zero
• Exceptions
– commitment by 3rd party; or
– active market for asset & residual value can be
determined and probable that such market will
exist at end of asset’s useful life
 Amortization method
• Varied (straight-line, diminishing or units of
production)
• Must reflect pattern of benefit consumption
• Review method every year
 Timing of amortization
• Begin when asset is available for use
• Cease at date of derecognition or when
classified as held for sale
 Retirements & disposals
• Derecognize when no future benefits
expected
• Gain or loss in P/L
• Replacement capitalized, derecognize
replaced part
Disclosure