IAS # 38-Intangibles

Objective of IAS 38

 The objective of IAS 38 is to prescribe the

accounting treatment for intangible assets. The
principal issues are the timing of recognition
of assets, the determination of their carrying
amounts, the amortization charges to be
recognized and specific disclosures about
intangible assets.
 Scope
 IAS 38 does not apply to
1. Intangible that are within the scope of
another standard
2. Financial instruments
3. Recognition and measurement of exploration
and evaluation of assets
 Definitions
 Intangible assets
 Active market
 Carrying amount
 Cost
 Depreciable amount
 Research
 Development
 Fair value
 Impairment loss
 Definition of intangible assets
IAS 38 defines an intangible asset as an identifiable
non-monetary asset without physical substance.
The key characteristics of intangible assets may
be summarized as follows:
• They are resources controlled by an entity from
which the entity expects to derive future economic
benefits.
• They lack physical substance.
• They are identifiable.
 Intangible assets
 3 criteria are:
1. Identifiability
2. Control
3. Future economic benefit
An asset will be idenfiable when
a) sold, transferred, licensed, rented, exchanged either
individually or together with a related contract
b) Arises from contractual or legal right
 Recognition and measurement
 Items of intangible assets require an entity the
followings to recognized as assets when
1.Definition criteria
2.Recognition criteria
 Recognition and measurement
 Recognition criteria
1. Economic benefits are probable
2. the cost of the asset can be measured reliably.
 Recognition criteria
Recognition of intangible assets acquired separately
Normally, the price an entity pays to separately acquire an
intangible asset will reflect expectations about the
probability that the expected future economic benefits
embodied in the asset will flow to the entity. In other
words, the entity expects there to be an inflow of
economic benefits, even if there is uncertainty about the
timing or the amount of the inflow. Therefore, the
probability recognition criterion is considered to be
satisfied for separately acquired intangible assets
 Recognition criteria (Continued)
Recognition of internally generated intangible assets
Intangible assets that are developed or generated internally must
satisfy both criteria for recognition (see IAS 38 para 21).
It is sometimes difficult to assess whether an internally generated
intangible asset qualifies for recognition because of problems in:
a) Identifying whether and when there is an identifiable asset that
will generate expected future economic benefits; and
b) determining the cost of the asset reliably. In some cases, the
cost of generating an intangible asset internally cannot be
distinguished from the cost of maintaining or enhancing the
entity’s internally generated goodwill or of running day-to-day
operations
Recognition of an internally generated
intangible asset
Entity A is a major supplier to airlines and has two lines of
business: sweet and salty snacks. The sweet snack unit
comprises six brands, and the salty snack unit has four
brands.
Entity A is continually seeking to innovate and attract new
customers. It incurs expenditure related to research and
development of new products, such as design of variations to
current products and designs of new products. Research and
development expenditure of EUR 2m for the sweet snack
unit, and EUR 3.5m for the salty snack unit was incurred
during 2010. The expenditure cannot be allocated separately
to any specific product, but can be associated with a line of
business.
Should research and development costs be capitalised?
Explain why.
Example 9.1 Recognition of an internally
generated intangible asset (Continued)
The research and development costs should not be
capitalized as an internally generated intangible
asset. An intangible asset should be identifiable and
attributable to a specific product or project in order
to meet the recognition criteria for an intangible
asset. Therefore, entity A should be able to identify
the future economic benefits that will flow from each
separate intangible asset that it recognizes. It is not
possible to meet the recognition criteria for an
intangible asset if management is unable to identify
the individual product or project.
 Research and development

To assess whether an internally generated

intangible asset meets the criteria for recognition,
an entity should classify the generation of the asset
into:
a) a research phase; and
b) a development phase (IAS 38 para 52).
Examples of research activities:
a) Activities aimed at obtaining new knowledge;
b) the search for, evaluation and final selection of,
applications of research findings or other
knowledge;
c) the search for alternatives for materials, devices,
products, processes, systems or services; and
d) the formulation, design, evaluation and final
selection of possible alternatives for new or
improved materials, devices, products,
processes, systems or services .
Examples of development activities are:
a) the design, construction and testing of pre-
production or pre-use prototypes and models;
b) the design of tools, moulds and dies involving
new technology;
c) the design, construction and operation of a pilot
plant that is not of a scale economically feasible
for commercial production; and
d) the design, construction and testing of a chosen
alternative for new or improved materials,
devices, products, processes, systems or
services
No intangible asset arising from research (or from
the research phase of an internal project) should
be recognised. Expenditure on research (or on the
research phase of an internal project) should be
recognised as an expense as incurred
(IAS 38 para 54).
In the research phase of an internal project, an
entity cannot demonstrate that an intangible asset
exists that will generate probable future economic
benefits. Therefore, this expenditure should be
recognised as an expense as incurred (IAS 38
para 55).
In order to recognise an intangible asset, an entity
should be able to demonstrate all of the following
criteria:
a) 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 future economic benefits will probably be
generated. Among other things, the entity should
demonstrate the existence of a market for the
output of the intangible asset or the intangible
asset itself or, if it is to be used internally, the
usefulness of the intangible asset;
e) availability of adequate technical, financial and
other resources to complete the development
and to use or sell the intangible asset;
f) its ability to measure reliably the expenditure
attributable to the intangible asset during its
development.
 cost not recognized as an asset
IAS 38 gives examples of the types of cost that, being indistinguishable
from the costs of developing the business as a whole, should be
expensed as incurred. These include:
• Research expenditure (except where it forms part of the cost of a
business combination).
• Start-up costs, unless such costs (for example, costs of
commissioning) are included in the cost of a tangible fixed
asset in accordance with IAS 16. Costs that should be expensed as
incurred include preliminary expenses of establishing a legal entity,
expenditure on opening a new facility or business (pre-opening
costs) or expenditure on starting up a new operation or launching a
new product or process.
cost not recognized as an asset (Cont’d)
• Training costs.
• Advertising and promotion costs.
• Relocation expenses.
• Re-organisation costs.
 Recognition and measurement
 Initial measurement:
Should be recorded at cost.
 Initial measurement of intangible
assets acquired separately
The cost of a separately acquired intangible asset can
usually be measured reliably. This is particularly so when
the purchase consideration is in the form of cash or other
monetary assets (IAS 38 para 26).
 Initial measurement of intangible
assets acquired separately (Continued)
The cost of a separately acquired intangible asset comprises:
(a) its purchase price, including import duties and non-refundable
purchase taxes, after deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing the asset for its
intended use, including employee benefits, professional fees and
costs of testing the proper functioning of the asset. However, costs
of introducing a new product or service including advertising and
promotion costs, costs of conducting a business in a new location
including staff training costs and administrative or other general
overhead costs are not part of the cost of an intangible asset (IAS
38 paras 27 to 29).
 Example

Entity X acquires copyrights to the original recording of

a famous singer. The agreement with the singer allows
the entity to record and re-record the singer for a period
of five years. During the initial six-month period of the
agreement, the singer is very ill and consequently cannot
record. The studio time that was booked by the entity
had to be paid for the period the singer could not sing.
The costs incurred by the entity were:
 Example 9.3 (Continued)

a) Legal costs of acquiring the copyrights €15m

b) Operational costs (studio time lost, etc.)
during the start-up period € 1m
c) Advertising campaign to launch the artist € 1m

Which of the above is a cost that can be capitalized as an

intangible asset?
 Example 9.3 (Continued)

a) The legal costs of acquiring the copyright can be

capitalized.
b) Operational costs during the start-up period should be
expensed and not capitalized.
c) The cost of the advertising campaign to launch the artist
should be expensed and no capitalized.
 cost
2. As part of business combination:
Cost of business combination less fair value of
the net asset acquired
 cost
3. Exchange:
The fair value of the asset given or received
which one is more clearly evident.
 cost
4. Internally generated goodwill:
Internally generated asset should not be recorded as
asset.
5. Internally generated intangible assets:
To assess whether an internally generated intangible
meets the criteria for recognition, an entity
classifies the generation of asset into:
i) A research phase
ii) A development phase
Initial measurement of internally generated
intangible assets
The cost of an internally generated intangible asset
comprises all directly attributable costs necessary to create,
produce, and prepare the asset to be capable of operating in
the manner intended by management. Examples of directly
attributable costs are:
(a) costs of materials and services used or consumed in
generating the intangible asset;
(b) costs of employee benefits incurred from the generation
of the intangible asset;
Initial measurement of internally generated
intangible assets (Continued)
(c) fees to register a legal right; and
(d) amortization of patents and licenses that are used to
generate the intangible asset.
IAS 23 – Borrowing Costs specifies criteria for the
recognition of interest as an element of the cost of an
internally generated intangible asset (IAS 38 para 66).
Initial measurement of internally generated
intangible assets (Continued)
The following are not components of the cost of an internally
generated intangible asset:
(a) selling, administrative and other general overhead
expenditure unless this
expenditure can be directly attributed to preparing the
asset for use;
(b) identified inefficiencies and initial operating losses incurred
before the asset achieves planned performance; and
(c) expenditure for training of staff to operate the asset (IAS 38
para 67).
Initial measurement of internally generated
intangible assets (Continued)
Recognition of an expense
Expenditure for an intangible item should be recognized as an
expense as incurred
(IAS 38 para 68). Examples of such expenditures include:
(a) expenditure for research;
(b) expenditure for start-up activities (i.e. start-up costs), unless
this expenditure is included in the cost of an item of property,
plant and equipment in accordance with IAS 16. Start-up costs
may consist of establishment costs such as legal and secretarial
costs incurred in establishing a legal entity,
Initial measurement of internally generated
intangible assets (Continued)
Recognition of an expense (Cont’d)
expenditure to open a new facility or business (i.e. pre-opening
costs) or expenditures for starting new operations or launching
new products or processes (i.e. pre-operating costs);
(c) expenditure for training activities;
(d) expenditure for advertising and promotional activities;
(e) expenditure for relocating or reorganizing part or all of an
entity (IAS 38 para 69).
 Measurement Subsequent to Initial
Recognition
 IAS 38 permits two accounting models:
 Cost Model. The asset is carried at cost less
accumulated amortization and impairment.
 Revaluation Model. The asset is carried at a
revalued amount, being its fair value at the
date of revaluation less subsequent
amortization, provided that fair value can be
measured reliably.
 The Revaluation Model

 For the purpose of the revaluation an active

market of the asset should exist. in an active
market
a) Items are homogeneous
b) Willing buyer and seller can normally be
found
c) Prices are available to the public
 The Revaluation Model

 Under the revaluation model, revaluations should be carried

out regularly, so that the carrying amount of an asset does not
differ materially from its fair value at the balance sheet date. [
 If an item is revalued, the entire class of assets to which that
asset belongs should be revalued.
 Revalued assets are amortized in the same way as under the
cost model .
 If a revaluation results in an increase in value, it should be
credited to equity under the heading "revaluation surplus"
unless it represents the reversal of a revaluation decrease of the
same asset previously recognized as an expense, in which case
it should be recognized as income.
 Amortization (Cost and Revaluation
Models)
 For all amortizable assets:
 The amortizable amount (cost less prior amortization
impairment, and residual value) should be allocated on a
systematic basis over the asset's useful life
 The residual value and the useful life of an asset should be
reviewed at least at each financial year-end and, if expectations
differ from previous estimates, any change is accounted for
prospectively as a change in estimate under
 The Amortization method used should reflect the pattern in
which the asset's economic benefits are consumed by the
enterprise
 Amortization
 The Amortization method should be reviewed at least
annually and, if the pattern of consumption of
benefits has changed, the Amortization method
should be changed prospectively as a change in
estimate under IAS 8.
 Amortization should be charged to the income
statement, unless it is included in the carrying amount
of another asset
 Amortization begins when the asset is available for
use and continues until the asset is derecognized,
even if it is idle.
 Amortization
Asset with indefinite useful life:
No amortization but subject to impairment
 Recoverability of the Carrying
Amount
 IAS 36 requires impairment testing and, if
necessary, recognition for Intangibles.
 Derecogniton (Retirements and
Disposals)

 An asset should be removed from the balance

sheet on disposal or when it is withdrawn from
use and no future economic benefits are
expected from its disposal. The gain or loss on
disposal is the difference between the proceeds
and the carrying amount and should be
recognised in the income statement.
 In the financial year ending 30 June 2008 X co. made the
following expenditures:
 i) Taka 250,000 on promoting the recognition of it’s brand
name
 ii) Taka 400,000 on the acquisition of a patent( a right to
produce a certain product)
 iii) Taka 90,000 on the acquisition of customer database, but X
co is not sure that the list will provide very many customers.
 iv)Taka 250,000 for a franchise agreement.
 In relation to the above expenditure which item or items will
be carried forward to the future period as tangibles? Justify
your answers.