CHAPTER 21: PAS 38 - INTABGIBLE ASSETS

INTANGIBLE ASSET 
An intangible asset is simply defined as an identifiable nonmonetary asset without physical substance. 

The intangible asset must be controlled by the entity ae s result of past event and from which future economic
benefits are expected to flow to the entity. 

Accordingly, there are three essential criteria in the definition of an intangible asset, namely: 
a. Identifiability 
b. Control
c. Future economic benefits 

Identifiability

The definition of an intangible asset requires that an intangible asset must be identifiable in order to
distinguish it clearly from goodwill. 

With nonphysical items, there may be a problem with identifiability. 

An asset is identifiable when: 

a. It is separable. 
This means that the asset is capable of being separated from the entity and sold, transferred, licensed,
rented or exchanged, either individually or together with a related asset or liability. 
b. It arises from contractual or other legal rights. 
This is regardless of whether these rights are transferable or separable from the entity or from other
rights and obligations. 

Control 

Another element in the definition of an intangible asset is that it must be under the control of the entity as a
result of a past event. 

Control is the power of the entity to obtain the future economic benefits flowing from the intangible asset and
restrict the access of others to those benefits. 

In other words, the entity must be able to enjoy the future economic benefits from the asset and prevent
others from enjoying the same benefits. 

The capacity of an entity to control the future economic benefits from an intangible asset normally would
stem from legal rights that are enforceable in a court of law. 

The capacity to control future economic benefits is much pronounced in the case of trademark, copyright and
patent. 

In the absence of legal rights, it is more difficult to demonstrate control. 

Future economic benefits 

CHAPTER 21: PAS 38 - INTABGIBLE ASSETS

Future economic benefits may include revenue from the sale of products or services, cost savings or other
benefits resulting from the use of the asset by the entity. 

For example, the use of intellectual property in a production process or the legal right to use a new
technology, may reduce future production costs rather than increase future revenue. 

Recognition of an intangible asset

An intangible asset shall be recognized if the following conditions are present: 

a. It is probable that future economic benefits attributable to the asset will flow to the entity. 
b. The cost of the intangible asset can be measured reliably. 

Initial measurement of intangible asset 

PAS 38, paragraph 24, provides that an intangible asset shall be measured initially at cost.

If an intangible asset is acquired separately, the cost of the intangible asset can be measured reliably,
particularly so if the purchase consideration is in the form of sash or other. monetary asset. 

The cost of a separately acquired intangible asset comprises: 

a. Purchase price 
b. Import duties and nonrefundable purchase tax
c. Directly attributable costs of preparing the asset for the intended use 

Directly attributable costs include the following: 

a. Cost of employee benefit arising directly from bringing the asset to its working condition. 
b. Professional fee arising directly from bringing the asset to its working condition. 
c. Cost of testing whether the asset is functioning properly 

Costs which are not capitalizable 

Examples of costs that are not included in the cost of an intangible asset but expensed immediately are: 

a. Cost of introducing a new product or service, including cost of advertising and promotional activity 
b. Cost of conducting business in a new location or with a new class of customer, including cost of staff
training 
c. Administration and other general overhead cost 
d. Cost incurred while an asset capable of operating in a manner intended by management has yet to be
brought into use
e. Initial operating loss 

Internally generated intangible asset 

CHAPTER 21: PAS 38 - INTABGIBLE ASSETS

The cost of an internally generated intangible asset comprising all directly attributable costs necessary to
create, produce ang prepare the asset to be capable of operating it in the manner intended by management. 

Examples of directly attributable costs are: 

a. Cost of materials and services used or consumed in generating the intangible asset. 
b. Cost of employee benefit arising from the generation of the intangible asset. 
c. Fee to register a legal right. 
d. Amortization of patent used to generate the intangible asset. 

However, the following expenditures are not components of the cost of an internally generated intangible
asset: 

a. Selling, administrative and other general overhead

b. Clearly identified inefficiency and initial operating loss 
c. Expenditure on training staff to operate the asset 

PAS 38, paragraph 63, explicitly provides that internally generated brand, masthead, publishing title, customer
list and other item similar in substance shall not be recognized as intangible asset. 

Such items cannot be identified separately from the cost of developing the business as a whole.

Instead, such items are seen as being component of internally generated goodwill.

PAS 38, paragraph 48, provides that internally generated goodwill shall not be recognized as an asset. 

Accordingly, such expenditures shall be expensed when incurred. 

Recognition as an expense 

1. An expenditure on an intangible item that does not meet the recognition criteria for an intangible asset
shall be expensed when incurred. 

2. Examples of expenditures that are expensed when incurred include: 

a. Start up costs

Start up costs may consist of organization costs such as legal and secretarial costs incurred in
establishing a legal entity. 

Start up costs also include preopening costs or expenditures to open a new facility or business,
and preoperating costs or expenditures for commencing new operation or launching new product. 

b. Training costs

c. Advertising and promotional costs

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d. Business relocation or reorganization costs 

Subsequent expenditure 

As a rule, a subsequent expenditure on an intangible asset shall be recognized as expense. 

The reason is that most subsequent expenditures are likely to maintain only the expected future economic
benefits embodied in the intangible asset. 

However, the subsequent expenditure may be capitalized or added to the cost of the intangible asset if the
following recognition criteria for an intangible asset are met: 

a. It is probable that future economic benefits that are attributable specifically to the subsequent
expenditure will flow to the entity. 
b. The subsequent expenditure can be measured reliably. 

Identifiable intangible assets

PAS 38 specifically pertains to identifiable intangible assets 

If the intangible asset is acquired through purchase, there is a transfer of legal right that would make the asset
identifiable. 

Moreover, if the asset could be sold, transferred, licensed, rented or sold separately, the intangible asset is
identifiable, 

Examples of identifiable intangible assets are: 

a. Patent 
b. Copyright 
c. Franchise 
d. Trademark or brand name
e. Customer list 
f. Computer software 
g. Broadcasting license, airline right and fishing right 

Unidentifiable intangible asset 

An intangible asset is unidentifiable if it cannot be sold, transferred, licensed, rented or exchanged separately. 

The intangible asset is inherent in a continuing business and can only be identified with the entity as a whole. 

This unidentifiable intangible asset squarely describes a goodwill. 

Measurement after recognition 

CHAPTER 21: PAS 38 - INTABGIBLE ASSETS

An entity shall choose either the cost model or revaluation model as an accounting policy. 

1. Cost model - An intangible asset shall be carried at cost, less any accumulated amortization and any
accumulated impairment loss.

2. Revaluation model - An intangible asset shall be carried at a revalued amount, less any subsequent
amortization and any subsequent accumulated impairment loss. 

The revalued amount is the fair value at the date of revaluation and is determined by reference to an
active market. 

Thus, an intangible asset can only be carried at revalued | amount if there is an active market for the
asset. 

Amortization of intangible assets 

PAS 38 provides the following on the amortization of intangible assets: 

1. Paragraph 97 states that intangible assets with limited or finite life are amortized over their useful
life. 

2. Paragraphs 107 and 108 state that intangible assets with indefinite life are not amortized but are
tested for impairment at least annually and whenever there is an indication that the intangible asset
may be impaired. 

Impairment of intangible assets 

Intangible assets with finite useful life are tested for impairment whenever there is an indication of
impairment at the end of reporting period. 

Intangible assets with indefinite useful life are tested for impairment at least annually and whenever there is
an indication of impairment.

An impairment loss on an intangible asset is recognized if the recoverable amount is less than the carrying
amount. 

Definition of amortization 

Amortization is the systematic allocation of the amortizable amount of an intangible asset over the useful life.

The amortizable amount is the cost of the intangible asset less residual value. 

The amortization is recorded by debiting amortization expense and crediting the intangible asset account. 
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Normally, the intangible asset account is credited directly for the periodic amortization but an accumulated
amortization account may be maintained. 

Amortization period 

The amortizable amount of an intangible asset shall be amortized on a systematic basis over the useful life. 

Amortization shall begin when the asset is available for use, meaning, when the asset is in the location and
condition for the intended use. 

Amortization shall cease when the intangible asset is derecognized. 

Useful life

The useful life of an intangible asset must be assessed as either indefinite or finite. 

If finite, the useful life may be expressed in terms of years or the number of units to be produced. 

The useful life of an intangible asset is indefinite when there is no foreseeable limit to the period over which
the asset is expected to generate net cash flows. 

In other words, the useful life is indefinite when there are no legal, contractual, competitive and other factors
that would limit the useful life of the intangible asset. 

The major problem for an intangible asset is determining the useful life. 

Factors affecting useful life

a. Technical, technological, commercial or other type of obsolescence

b. Expected action by competitors of potential competitors 
c. Expected usage of the asset by the entity.
d. Typical product life cycle for the asset 
e. Stability of the industry in which the asset operates
f. Level of maintenance expenditure required to obtain the expected future economic benefits from the
asset
g. The useful life of the asset may be dependent on the useful life of other assets of the entity
h. Period of control over the asset and legal or similar limits on the use of the asset, such as expiry dates
of related leases. 

Amortization method 

The method of amortization shall reflect the pattern in which the future economic benefits from the asset are
expected to be consumed by the entity. 
CHAPTER 21: PAS 38 - INTABGIBLE ASSETS

However, if such pattern cannot be determined reliably, the straight line method of amortization shall be
used.

Residual value

The residual value of an intangible asset shall be presumed to be zero, except:

a. When a third party is committed to buy the intangible asset. at the end of the useful life. 

b. When there is an active market for the intangible asset so that the expected residual value can be
measured and if is probable that there will be a market for the asset at the end of the useful life. 

The residual value is reviewed at each financial yearend. 

A change in the residual value is accounted for as a change in accounting estimate.

Derecognition of an intangible asset 

An intangible asset shall be derecognized or eliminated from the statement of financial position: 

a. On disposal of the asset. 

b. When no future economic benefits are expected from its use and disposal. 

Gain and loss arising from the derecognition of an intangible asset shall be determined as the difference
between the net disposal proceeds and the carrying amount of the asset. 

Research and development 

PAS 38, paragraph 52, provides that to assess whether an internally generated intangible asset meets the
criteria for recognition, an entity classifies the generation of the asset into a research phase and a
development phase. 

PAS 38, paragraph 53, provides that if an entity cannot distinguish the research phase from the development
phase, the entity treats the expenditure as if it were incurred in the research phase only. 

Definition of research 

Research is original and planned investigation undertaken with the prospect of gaining scientific or technical
knowledge and understanding. 

Otherwise stated, a research activity is undertaken to discover new knowledge that will be useful in developing
new product. 

Definition of development cost 

CHAPTER 21: PAS 38 - INTABGIBLE ASSETS

Development is the application of research findings or other knowledge to a plan or design for the production
of new or substantially improved material, device, product, process, system or service, prior to the
commencement of commercial production. 

Simply stated, a development activity involves the application of research findings to develop a new product. 

Examples of research activities 

a. Laboratory research aimed at obtaining or discovering new knowledge. 

b. Searching for application of research finding and other knowledge. 

c. Conceptual formulation and design of possible product or process alternative.

d. Testing in search for product or process alternative.

Examples of development activities

a. Design, construction, and testing of preproduction prototype and model. 

b. Design of tools, jigs, molds and dies involving new technology. 

c. Design, construction and operation of a pilot plant that is not of a scale economically feasible to the
entity for commercial production.

d. Design, construction and testing of a chosen alternative for new or improved product or process. 

Activities not considered research and development

Research and development activities typically occur prior to the beginning of commercial production, and
distribution of a product or process. 

Accordingly, activities that relate to commercial production do not result to research and development cost. 

Examples of activities not considered R and D 

a. Engineering follow through in an early phase of commercial production.

b. Quality control during commercial production including routine testing. 

c. Trouble shooting breakdown during production. 

d. Routine on-going effort to refine, enrich or improve quality of an existing product. 

e. Adaptation of an existing capability to a particular requirement or customer need. 

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f. Periodic design changes to existing products.

g. Routine design of tools, jigs, molds and dies. 

h. Activity, including design and construction engineering related to construction, relocation,

rearrangement or start-up of facilities and equipment. 

Accounting for research cost 

PAS 38, paragraph 54, provides that expenditure on research or on the research phase of an internal project
shall be recognized as expense when incurred. 

The reason is that at the research phase of a project, an entity cannot be certain that future economic benefits
would probably flow to the entity. 

At the research stage, there is too much uncertainty about the likely success of the project. 

In the research phase, an entity cannot demonstrate that an intangible asset exists that will generate probable
future economic benefits.

Accounting for development cost 

In contrast with research cost, development cost is incurred at a later stage in a project and the probability of
success may be more apparent. 

Development cost may or may not be recognized as an intangible asset depending on very strict criteria. 

Criteria for recognition 

Development cost may qualify as intangible asset if and only if the 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. 

This is achieved when a prototype or model is produced. 

The entity has completed the testing of the model and it is now convinced that it has a product to sell
or use that is significantly better than any other product available on the market. The entity plans to
file a patent application for the product. 

b. The intention to complete the intangible asset and use or sell it.
c. The ability to use or sell the intangible asset. 

d. How the intangible asset will generate probable future economic benefits. 

Among other things, the entity shall demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself. 
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e. Availability of resources or funding to complete development and to use or sell the asset. 

f. The ability to measure reliably the expenditure attributable to the intangible asset during its
development. 

Capitalizable expenditures 

Expenditures for research and development which have alternative future use, ether in additional research
project or for productive purposes, can be capitalized. 

This means that costs incurred for materials, equipment ang intangible asset related to research and
development activities which have an alternative future use can be capitalized.

Subsequently, the following should be charged to research and development expense: 

a. Cost of materials used 

b. Depreciation of equipment used in research and development 

c. Amortization of intangible asset used in research and development