IAS 38: Intangible Assets

IAS 38 Intangible Assets

About

Identifiability criteria:

Excludes:

Definition

  • Identifiable
  • Non-monetary
  • Without physical substance
  • Separable
  • Legal right (constructive/other)
  • Financial instruments
  • Deferred tax
  • Leases
  • Goodwill (IFRS 3)
  • Employee benefits
  • Inventories
  • IFRS 5 (Intangible asset)

Initial

Measurement

Recognition:

1.Definition

  1. Probable Future economic beneftis
  1. Cost measured reliably
  1. Par 57 for internally generated

Measured at Cost

Subsequent

  1. Revaluation Model:
  • FV in active
    market
  • Gains/losses to OCI (RS), realised through use /on sale to RE

Cost Model

INDEFINITE useful life

FINITE useful life

NOT
AMORTISED

Test for impairment ANNUALLY

AMORTISE:

RV = zero, unless active market/ buyer

Straight-line basis

INDEFINITE useful life

FINITE useful life

  • AMORTISE:
  • REVALUE
  • RV = zero, unless active market/ buyer
  • Straight-line basis
  • NOT AMORTISED
  • REVALUE

Test for impairment ANNUALLY

DERECOGNITION

No future economic benefits

Disposal

Remember

Definition

Asset

• A resource controlled by the entity as a result of past events,

• From which future economic benefits are expected to flow to the entity

Intangible asset

• An identifiable non-monetary asset
without physical substance

Identifiability criterion is met when an intangible item:

Is separable

Arises from contractual or other
legal rights

Control criterion is met when:

Exchange transactions for the same or similar item (= separable)

Other

Legal rights that are enforceable in a court of law

IAS 38 applies to all intangible assets other than:

• Computer software
• Patents
• Copyrights
• Motion picture films
• Customer lists
• Mortgage servicing rights
• Licenses
• Import quotas
• Franchises
• Customer and supplier relationships
• Marketing rights

• financial assets

• exploration and evaluation assets (extractive industries)

• expenditure on development and extraction of minerals, oil, natural gas, and similar resources

• intangible assets arising from insurance contracts issued by insurance companies

• intangible assets covered by another IFRS, such as

  • intangibles held for sale
  • deferred tax assets
  • lease assets
  • assets arising from employee benefits
  • and goodwill (IFRS 3)

Initial measurement

At cost

Acquisition in a business combination

Internally generated intangibles

Separately acquired

Acquisition cost

Cost equals fair value

Expenditure incurred in development phase

Internally Generated Intangible Assets

Development phase

Research phase

EXPENSE

• Entity cannot demonstrate that FEB are probable

• Expense in PL as incurred

Dr Research expense (PL) x
Cr Bank/Exp/Asset x

CAPITALISE (par 57)

EXPENSE

Dr Develop expense (PL) x
Cr Bank/Exp/Asset x

• Expensed unless capitalised ito par 57
• Expensed unless part of goodwill in business combination

• Technical feasibility

• Intention to complete

• Ability to use / sell

• How FEB will be generated

• Availability of resources to complete

• Measure development costs reliably

Dr IGA (FP) x
Cr Bank/Exp/Asset x

  • No capitalisation of costs previously expensed
  • IAS 23 for treatment of interest to be capitalised

Costs to be expensed

• Costs that do not meet recognition criteria are expensed (including not meeting the definition of an intangible asset)

  • Internally generated goodwill
  • Internally generated brands, mastheads, publishing titles, customer lists and items “similar in substance”
  • Research
  • Start-up costs (establishment, pre-opening and pre-operating costs)
  • Training
  • Advertising and promotional activities
  • Relocating and re-organising (restructuring)

Intangibles can be acquired

• by separate purchase

• as part of a business combination

• by a government grant

• by exchange of assets

Separately identifiable intangible assets acquired

Recognition criteria:

2. Costs reliably measured

1. Probable future economic benefits

Probability of Future Economic Benefits:
Price will reflect expectations concerning probability, i.e., entity expects an inflow of FEB even if there is uncertainty regarding timing or amount of the inflow

∴ Probability criteria always satisfied for separately acquired intangible assets

  • Costs comprise:
  • Recognition of costs ceases when asset is in condition necessary to operate per management intention
  • PV cost if deferred payment terms

Directly attributable expenditure on preparing asset for its intended use

Purchase price + import duties + non-refundable purchase taxes - trade discounts – rebates

  • e.g., employee benefits,
    professional fees, function testing

Separate acquisition

Excludes:

Cost includes:

Directly attributable expenditure on preparing the asset for its intended use - e.g., employee benefits, professional fees, function testing

Purchase price + import duties + non-refundable purchase taxes - trade discounts - rebates

• Cost of introducing a new product or service (advertising/promotion)

• Costs of conducting business in a new location or with new class of customers (staff training)

• Admin and general overhead costs

• Incidental operations

Acquisition as part of business combination

Cost = fair value at date of acquisition
Intangible Asset recognised seperately from goodwill. Must meet definition of an asset and be identifiable (seperable or legal / contractual rights)

Value measured reliably

Fair Value

No Active Market = what would entity have paid in arms length transaction (between knowledgable willing parties) for the asset? Reference:

Active market = most recent
transaction price or bid

  • Discounted cash flows models
  • Estimating costs the entity will avoid

Why? If identifiable then sufficient information will exist to measure reliably.

Range of outcomes? Uncertainty accounted for in the valuation estimate

Reliable measurement Always satisfied if acquired via a business combination.

NB!! You only capitalise direct costs and not indirect costs

Note!! that capitalization will apply once Par 57 is met. Therefore, during the development phase when Par 57 is met and the product is functional, those costs will be capitalized in the SFP. When the development is complete, the costs incurred at that time will be expensed.

There are three periods...Research Phase> Research meets Par 57> Complete product...look for this in the question paper

Amortisation and impairment

Intangible assets

Indefinite useful lives

Finite useful lives

Amortise over useful life

Test for impairment, when there is an indication

Test for impairment

• annually, and

• whenever there is an indication that the intangible asset may be impaired

Derecognition

Retirements and disposals

• Apply the criteria in IAS 18 to determine date of disposal

• Apply IFRS 5 when asset is held for sale

• IAS 17 applies to disposal by sale and leaseback

• Generally recognise a gain or loss in profit or loss when the asset is derecognised

• An asset is derecognised:

  • On disposal (e.g., sale or finance lease); or
  • When no future economic benefits are expected from its use or disposal

Disclosure

For each class of intangible asset, disclose:

• Useful life / amortisation rate

• Amortisation method

• Gross carrying amount

• Accumulated amortisation and impairment losses

• Line items in profit or loss in which amortisation is included

Recon of CA at beginning and the end of the period showing

  • additions (business combinations separately)
  • assets held for sale
  • retirements and other disposals
  • revaluations
  • impairments
  • reversals of impairments
  • amortisation
  • foreign exchange differences

Basis for determining that intangible has an indefinite life

• Description and CA 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

• Additional disclosures are required about:

  • Intangible assets measured at revalued amounts
  • Amount of research and development expenditure recognised as expense in the current period