IAS 38 Intangible assets

Definition
Definition

An intangible asset is an identifiable non-monetary asset without

physical substance. The asset must be:
a) Controlled by the entity as a result of events in the past
b) Something from which the entity expects future economic
benefits to flow
Examples of items that might be considered as intangible assets
include computer software, patents, copyrights, motion picture
films, customer lists, franchises and fishing rights.
Intangible asset: must be identifiable

If an intangible asset is acquired separately through

purchase, there may be a transfer of a legal right that
would help to make an asset identifiable.
 Ex1
Darby’s accounting assistant has read something which states that
intangible assets are identifiable, non-monetary items without physical
substance.
Which TWO of the following relate to items being classed as
identifiable?
A. Items must have probable future economic benefits
B. Items must arise from legal or contractual rights
C. Items must have a measurable cost
D. Items must be separable
 Ex1
Answer B, D
Whilst items A and D are necessary for an item to be capitalised as an
asset, they are not linked to the characteristic of them being identifiable.
Intangible asset: control by the entity

a) Control over technical knowledge or know-how only

exists if it is protected by a legal right.
b) The skill of employees, arising out of the benefits of
training costs, are most unlikely 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
 Ex2
Which TWO of the following factors is a reason why key staff
cannot be capitalised as an intangible asset by an entity?
A. They do not provide expected future economic benefits
B. They cannot be controlled by an entity
C. Their value cannot be measured reliably
D. They are not separable from the business as a whole
 Ex2
Answer B,C
Key staff cannot be capitalised as firstly they are not controlled by
an entity. Secondly, the value that one member of key staff
contributes to an entity cannot be measured reliably.
Intangible asset: expected future economic benefits

An item can only be recognised as an intangible asset if

economic benefits are expected to flow in the future
from ownership of the asset. Economic benefits may
come from the sale of products or services, or from a
reduction in expenditures (cost savings).
 2015/06 - Q2
Which of the following statements relating to intangible assets is
true?
A. All intangible assets must be carried at amortised cost or at an
impaired amount; they cannot be revalued upwards
B. The development of a new process which is not expected to
increase sales revenues may still be recognised as an
intangible asset
C. Expenditure on the prototype of a new engine cannot be classified
as an intangible asset because the prototype has been assembled
and has physical substance
D. Impairment losses for a cash generating unit are first applied to
goodwill and then to other intangible assets before being applied
to tangible assets
Recognition
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 flow to the entity.
b) The cost can be measured reliably.
Management has to exercise its judgement in assessing the
degree of certainty attached to the flow of economic benefits
to the entity. External 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) When an intangible asset is acquired as part of a
business combination (ie an acquisition or takeover),
the cost of the intangible asset is its fair value at the date
of the acquisition.
internally generated intangible assets

The standard prohibits the recognition of internally

generated brands, publishing titles and customer lists
and similar items as intangible assets.
Recognition – R&D
Research and development costs

Research costs should therefore be written off as an expense

as they are incurred.
In contrast with research costs development costs are incurred
at a later stage in a project, and the probability of success
should be more apparent.
Development costs can be recognised as an asset if they
meet certain criteria.
Development
Development costs may qualify for recognition as intangible assets
provided that the following strict criteria can be demonstrated.
a) The 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) How the intangible asset will generate probable future
economic benefits. The entity should demonstrate the existence
of a market for the output of the intangible asset or the
intangible asset itself
e) Its ability to measure the expenditure attributable to the
intangible asset during its development reliably
 Ex3
Which of the following CANNOT be recognised as an intangible non-current asset
in GHK's consolidated statement of financial position at 30 September 20X1?
A. GHK spent $132,000 developing a new type of product. In June 20X1 management
worried that it would be too expensive to fund. The finances to complete the project
came from a cash injection from a benefactor received in November 20X1.
B. GHK purchased a subsidiary during the year. During the fair value exercise, it was
found that the subsidiary had a brand name with an estimated value of $50,000, but
was not recognised by the subsidiary as it was internally generated.
C. GHK purchased a brand name from a competitor on 1 November 20X0, for
$65,000.
D. GHK spent $21,000 during the year on the development of a new product, after
management concluded it would be viable in November 20X0. The product is being
launched on the market on 1 December 20X1 and is expected to be profitable.
 Ex3
Answer A
The finance was only available after the year end. Therefore the criteria of recognising
an asset were not met, as the resources were not available to complete the project.
Even though the brand is internally generated in the subsidiary’s accounts, it can be
recognised at fair value for the group. Item C can be recognised as a purchased
intangible and item D meets the criteria for being capitalised has development costs.
 Ex4
Which of the following could be classified as development
expenditure in M's statement of financial position as at 31 March
20Y0 according to IAS 38 Intangible Assets?
A. $120,000 spent on developing a prototype and testing a new type
of propulsion system. The project needs further work on it as the
system is currently not viable.
B. A payment of $50,000 to a local university’s engineering faculty
to research new environmentally friendly building techniques.
C. $35,000 developing an electric bicycle. This is near completion
and the product will be launched soon. As this project is first of
its kind it is expected to make a loss.
D. $65,000 developing a special type of new packaging for a new
energy efficient light bulb. The packaging is expected to reduce
M's distribution costs by $35,000 a year.
 Ex4
Answer D
Item A cannot be capitalised because it does not meet all the criteria,
i.e. it is not viable.
Item B is research and cannot be capitalised.
Item C cannot be capitalised because it does not meet all the criteria,
i.e. making a loss.
Measurement
 Measurement of intangible assets subsequent to initial
recognition
The 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.
The revaluation model allows an intangible asset to be
carried at a revalued amount, which is its fair value at
the date of revaluation, less any subsequent
accumulated amortisation and any subsequent
accumulated impairment losses.
revaluation model

a) The fair value must be able to be measured reliably with

reference to an active market in that type of asset.
b) The 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 active market for this
asset, the asset should be carried at its cost less any
accumulated amortisation and impairment losses.
d) Revaluations should be made with such regularity that the
carrying amount does not differ from that which would be
determined using fair value at the end of the reporting period.
Useful 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
expected to generate net cash inflows for the entity.
Finite - amortisation method
An intangible asset with a finite useful life should be
amortised over its expected useful life.
The residual value of an intangible asset with a
finite useful life is assumed to be zero unless a third
party is committed to buying the intangible asset at the
end of its useful life or unless there is an active market
for that type of asset (so that its expected residual
value can be measured) and it is probable that there
will be a market for the asset at the end of its useful
life.
The amortisation period and the amortisation method
used for an intangible asset with a finite useful life
should be reviewed at each financial year-end.
Intangible assets with indefinite useful lives

An intangible asset with an indefinite useful life should not

be amortised. (IAS 36 requires that such an asset is tested
for impairment at least annually.)
The useful life of an intangible asset that is not being
amortised should be reviewed each year to determine
whether it is still appropriate to assess its useful life as
indefinite
Reassessing 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.
 Ex5
Amco Co carries out research and development. In the year ended 30 June
20X5, Amco incurred costs in relation to project X of $750,000. These were
incurred at the same amount each month up to 30 April 20X5, when the project
was completed. The product produced by the project went on sale from 31 May
20X5
The project had been confirmed as feasible on 1 January 20X5, and the product
produced by the project was expected to have a useful life of five years.
What is the carrying amount of the development expenditure asset as at 30
June 20X5?
A. $295,000
B. $725,000
C. $300,000
D. $0
 Ex5
Answer A
The costs of $750,000 relate to ten months of the year (up to April 20X5).
Therefore per month the costs were $75,000.
As the project was confirmed as feasible on 1 January 20X5, the costs can be
capitalised from this date. Therefore four months of these costs can be
capitalised = $75,000 x 4 = $300,000.
This asset should be amortised when the products go on sale. Therefore one
month’s amortisation should be charged to 30 June. Amortisation is
($300,000/5) x 1/12 = $5,000. The carrying amount of the asset at 30 June
20X5 is $300,000 - $5,000 = $295,000.
If you chose C you have forgotten to amortise the development costs. If you
chose B or D you have either capitalised the full amount or capitalised none of
the costs.
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