IAS 38 – Intangible Assets | Humayun Atif (CMA, CPA)

IAS 38 deals with the accounting treatment for intangible assets.

Intangible asset is an asset which is:

• Identifiable,
• non-monetary, and
• without physical substance.

Intangible asset should be

• identifiable and
• There must be future economic benefits associated with it.

Examples of intangible assets are

• franchise agreements
• computer software and internet domains
• Web sites
• trademarks
• import quotas
• motion pictures
• customer data
• royalty
• marketing rights

This Standard shall be applied for intangible assets except: 

• intangible assets that are within the scope of another Standard;
• financial assets, as per IAS 32;
• the recognition and measurement of exploration and evaluation assets, IFRS 6;
• expenditure on the development and extraction of minerals, oil, natural gas and similar non‑regenerative resources.

 Recognition

IAS 38 requires an entity to recognize an intangible asset only if:

1. Future economic benefits will flow to the entity; and
2. Cost can be measured reliably.

If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognized as an expense.

Measurement of intangible assets

Initial measurement:  At Cost. (Para 24)

Subsequent measurement:

IAS 38 recommends two models as below:

Cost Model

Intangible assets shown at cost less accumulated amortization and after accumulated impairment losses.

Revaluation Model:

• In this model, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be measured with reference to an active market. It is uncommon for an active market to exist for an intangible asset, although this may happen.
• 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 shall be carried at its cost less any accumulated amortization and impairment losses.
• If an intangible asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss.
• If an intangible asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of that asset. The decrease recognized in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.

Classification of Intangible assets

• Indefinite life: Intangible assets with indefinite useful life should not be amortized but tested for impairment annually.
• Finite life: An intangible asset with a finite useful life is amortized and is subject to impairment testing.

The amortization period should be reviewed at least annually. The amortization charge is recognized in profit or loss unless another IFRS requires that it be included in the cost of another asset.

The asset should also be assessed for impairment in accordance with IAS 36.

Recommended Reading:   https://accountingblogger.com/ias-36-impairment-of-assets/

IAS 36 – Impairment Of Assets | Humayun Atif (CMA, CPA)

 Research and Development Costs

Initial recognition

Research Cost: As future economic benefit is not certain so charge all research cost to expense. Example may be activities aimed at obtaining new knowledge.

Development costs: As per paragraph 57, an intangible asset arising from development (or from the development phase of an internal project) shall be recognized if, and only if, an entity can demonstrate all of the following:

(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 to 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. Among other things, the entity can 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) the 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.

Goodwill:

• Goodwill acquired in a business combination is accounted for in accordance with IFRS 3 and is outside the scope of IAS 38.
• Internally generated goodwill is within the scope of IAS 38 but is not recognised as an asset because it is not an identifiable resource.
• Inherent goodwill may exist in a business but it is not recognized as an asset as no value can be assign to it.
• Reversal of impairment of goodwill is prohibited.
• Goodwill is not amortized but tested for impairment.
• Negative goodwill can be due to bargain purchase or due to error in measuring fair value.

Disclosure

There are many disclosure requirements stated in paragraph 118 to 128 and below are few of them:

Disclose for each class of intangible asset:

• useful life or amortization rate and method
• gross carrying amount
• accumulated amortization and impairment losses
• line items in the income statement in which amortization is included

Reconciliation of the carrying amount at the beginning and the end of the period showing:

• additions
• assets held for sale
• retirements and other disposals
• revaluations / impairments / reversals of impairments / amortization
• foreign exchange differences / other changes
• basis for determining that an intangible has an indefinite life
• description and carrying amount of individually material intangible assets
• certain special disclosures about intangible assets acquired by way of government grants
• information about intangible assets whose title is restricted
• contractual commitments to acquire intangible assets.

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is also a published author of the book ‘IFRS Made Easy’. Atif has worked with some of the world’s largest brands in Canada and Dubai. He is a tax and IFRS coach and the founder of accountingblogger.com