Non-current assets

IAS 38 Intangible Assets

By. Vicky Xu
Definition

An intangible asset is an identifiable non-monetary asset without

physical substance.

Identifiable if either:
• Capable of being separated and sold, licensed, transferred,
exchanged or rented separately;
• Arise from contractual or other legal rights.
 Recognition and Initial measurement

1) Separate acquisition
2) Acquired in business combination
3) Internally generated
4) Exchange of assets
5) Internally generated goodwill
 1) Separate acquisition

• Probable expected future economic benefits will flow to the

entity; and
• Cost can be reliably measured.
Recognition at cost.
 2) Acquired in business combination

• Probable → always met if fair value (FV) can be determined;

FV reflects expectation of future economic benefits.

• Cost → FV at acquisition date. Acquirer recognises it separately

from goodwill, irrespective of whether the acquiree had
recognised it before acquisition.
3) Internally generated

Research phase – expense costs as incurred.

Development phase – Capitalise if all criteria are met:
• Probable future economic benefits
• Intention to complete
• Resources (technical, financial, etc.) to complete
• Ability to use or sell the intangible asset
• Technical feasibility of completion of intangible asset
• Expenditure measured reliably.
4) Exchange of assets

• Measure acquired asset at its fair value

• If not possible, at book value of asset given up.
5) Internally generated goodwill

Internally generated goodwill is never recognised as it is not an

identifiable resource that can be measured reliably. Examples
include:
• Internally generated brands
• Customer lists
Subsequent measurement

Finite useful life Indefinite useful life

Cost model Revaluation model

• Useful life Fair value at revaluation date,
• Amortisation method determined by referring to active
• Residual value market. If no active market, use
• Review above annually cost model
 Cost model
• Determine useful life
• Determine amortisation method
• Residual value is assumed zero unless active market exists or a
commitment by 3rd party to purchase the intangible asset exists
• Review above annually
• Amortisation begins when available for use

Note:
Rebuttable presumption that revenue based amortisation is inappropriate.
Amortisation method reflects the pattern in which future economic
benefits are expected to be consumed.
Revaluation model

• Fair value determined by referring to active market

• If no active market, use cost model
• Revaluation done regularly
• Credit to revaluation surplus net of deferred tax
• Transfer to retained earnings on realisation
Indefinite useful life

• No foreseeable limit to future expected economic benefits

• Not amortised
• Test for impairment annually or when an indication exists
• Review annually if events and circumstances still support
indefinite useful life
• If no longer indefinite change to finite useful life
2020/12 Q3bii Corbel (31/12/20X7)

Corbel Co trades in the perfume sector. It has recently acquired a

company for its brand ‘Jengi’, purchased two additional brand
names, and has announced plans to close its Italian stores. Corbel
Co also opened a new store on a prime site in Paris.

Acquisition of perfume brands

In addition to now owning the Jengi Co brand, Corbel Co has
acquired two other perfume brand names to prevent rival companies
acquiring them.
2020/12 Q3bii Corbel (31/12/20X7)

The first perfume (Locust) has been sold successfully for many
years and has an established market. The second is a new perfume
which has been named after a famous actor (Clara) who intends to
promote the product. The directors of Corbel Co believe that the
two perfume brand names have an indefinite life.

Required:
How to account for intangible assets with an indefinite life and
whether the Locust and Clara perfume brand names can be regarded
as having an indefinite life? (6 marks)
2020/12 Q3bii Corbel (31/12/20X7)

Suggested answer:
Intangible assets have 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.

An intangible asset with an indefinite useful life should not be

amortised. IAS 36 Impairment of Assets, requires an entity to test
for impairment annually, and whenever there is an indication that
the intangible asset may be impaired.
 2020/12 Q3bii Corbel (31/12/20X7)

The useful life of an intangible asset that is not being amortised

should be reviewed each period to determine whether events and
circumstances continue to support an indefinite useful life
assessment for that asset. If they do not, the change in the useful life
assessment from indefinite to finite should be accounted for as a
change in an accounting estimate in accordance with IAS 8 Account
Policies, Changes in Estimates and Errors.
2020/12 Q3bii Corbel (31/12/20X7)

Corbel Co should consider various factors to determine whether the

brand names can be considered to have a useful life. These will
include the extent to which Corbel Co is prepared to support the
brand and the extent to which the brand has long-term potential and
has had proven success. Perfume is often subject to market and
fashion trends and therefore, an assessment of how resistant the
brands are to change should be made.
 2020/12 Q3bii Corbel (31/12/20X7)

The Locust perfume has been sold successfully in the market for
many years and could be deemed to have an indefinite life. The
Clara perfume is linked to the popularity of the actor and therefore,
it is difficult to assess whether the brand has an indefinite life as it
is likely to be dependent upon the longevity of the popularity of the
actor. In the case of the Clara perfume, it is likely to have a finite
life.
2020/3 Q3bi Leria (31/10/20X5)

Television programme content rights

Leria Co has its own subscription-based television station. As a
result, it has material intangible assets which relate to the content
rights associated with the television programmes. The budgeted
costs of production are based on the estimated future revenues for
the television programme. These costs of production are then
capitalised as an intangible asset and called ‘contents rights’. The
directors of Leria Co believe that the intellectual property in the
content rights is consumed as customers view the television
programmes.
2020/3 Q3bi Leria (31/10/20X5)

Consequently, Leria Co currently amortises the content rights based

upon estimated future revenues from the television programme. For
example, if a television programme is expected to generate $8
million of revenue in total and $4 million of that revenue is
generated in year 1, then the intangible asset will be amortised by
50% in year 1. However, the industry practice is to amortise the
capitalised cost of the programme, less its recoverable amount, over
its remaining useful life.
2020/3 Q3bi Leria (31/10/20X5)

Suggested answer:
Leria Co’s accounting policy to base the amortisation of the
intangible asset for content rights on revenue stemming from the
rights seems reasonable and systematic. However, IAS 38 sets out a
rebuttable presumption that amortisation based on revenue
generated by an activity which includes the use of an intangible
asset is not appropriate. This presumption can be overcome when it
can be demonstrated that revenue and the consumption of the
economic benefits of the intangible asset are highly correlated.
2020/3 Q3bi Leria (31/10/20X5)

The intellectual property embodied in the television programmes

will generate cash flows through the television channel
subscriptions and the estimated revenues for a television
programme determine the amount to be spent on producing the
television programme. Therefore, revenue reflects a proxy for the
pattern of consumption of the benefits received. Revenue and
consumption of the economic benefits of the intangible asset seem
highly correlated and therefore a revenue-based amortisation
method seems appropriate.
2020/3 Q3bi Leria (31/10/20X5)

The industry practice method is also acceptable and conceptually

sound as it is based on an analysis of the remaining useful life of the
programme and the recoverable amount. Such an approach does not
contradict IAS 38’s prohibition on revenue-based amortisation
because it is not based on direct matching of revenue and
amortisation.

IAS 38 also states that if a pattern of amortisation cannot be

measured reliably, the straight-line method must be used.
2018/9 Q3bi Skizer

External disclosure of information on intangibles is useful only

insofar as it is understood and is relevant to investors. It appears
that investors are increasingly interested in and understand
disclosures relating to intangibles. A concern is that, due to the
nature of disclosure requirements of IFRS Standards, investors may
feel that the information disclosed has limited usefulness, thereby
making comparisons between companies difficult.
2018/9 Q3bi Skizer

Many companies spend a huge amount of capital on intangible

investment, which is mainly developed within the company and
thus may not be reported. Often, it is not obvious that intangibles
can be valued or even separately identified for accounting purposes.

The Integrated Reporting Framework may be one way to solve this

problem.
2018/9 Q3bi Skizer

Required:
(i) Discuss the potential issues which investors may have with:
– accounting for the different types of intangible asset acquired in a
business combination;
– the choice of accounting policy of cost or revaluation models,
allowed under IAS 38 Intangible Assets for intangible assets;
– the capitalisation of development expenditure. (7 marks)
2018/9 Q3bi Skizer
Suggested answer:
– accounting for the different types of intangible asset acquired in a
business combination;
[企业合并取得的无形资产，其公允价值能够可靠计量的，应当单
独确认为无形资产] Under IFRS 3, acquired intangible assets must be
recognised and measured at fair value if they are separable or arise from
other contractual rights, irrespective of whether the acquiree had
recognised the assets prior to the business combination occurring.

This is because there should always be sufficient information to reliably

measure the fair value of these assets.
2018/9 Q3bi Skizer
[使用寿命有限的无形资产/摊销，使用寿命不确定的无形资产/每
年进行减值测试] IAS 38 requires intangible assets with finite lives to
be amortised over their useful lives and intangible assets with indefinite
lives to be subject to an annual impairment review.

[商誉] However, it is unlikely that all intangible assets acquired in a

business combination will be the same. E.g., customer lists, which is
generated within entity, it may make sense to account for these assets
within goodwill without armotisation. Investors require greater detail
about the nature of the identified intangible assets.
2018/9 Q3bi Skizer
– the choice of accounting policy of cost or revaluation models,
allowed under IAS 38 Intangible Assets for intangible assets;
IAS 38 requires an entity to choose either the cost model or the
revaluation model for each class of intangible asset. Under the cost
model, after initial recognition intangible assets should be carried at cost
less accumulated amortisation and impairment losses. Under the
revaluation model, intangible assets may be carried at a revalued amount,
based on fair value, less any subsequent amortisation and impairment
losses only if fair value can be determined by reference to an active
market. Such active markets are not common for intangible assets.
2018/9 Q3bi Skizer
– the capitalisation of development expenditure.
[研发支出费用化，除非满足海盗条件] IAS 38 requires all research
costs to be expensed with development costs being capitalised only after
the technical and commercial feasibility of the asset for sale or use has
been established.

If an entity cannot distinguish the research phase of an internal project to

create an intangible asset from the development phase, the entity treats
the expenditure for that project as if it were incurred in the research
phase only.
2018/9 Q3bi Skizer
[主观，不连贯，披露不充分] The problem for investors is disclosure
in this area as companies do not have a consistent approach to
capitalisation. It is often unclear from disclosures how the accounting
policy in respect of research and development was applied and especially
how research was distinguished from development expenditure.

Intangible asset disclosure can help analysts answer questions about the
innovation capacity of companies and investors can use the disclosure to
identify companies with intangible assets for development and
commercialisation purposes.
De-recognition

An intangible asset shall be derecognised:

(a) on disposal; or
(b) when no future economic benefits are expected from its use or
disposal.

The gain or loss arising from the derecognition of an intangible

asset shall be determined as the difference between the net disposal
proceeds, if any, and the carrying amount of the asset. It shall be
recognised in profit or loss when the asset is derecognised.
Disclosure

Disclosures include but are not limited to:

• Whether the useful lives are indefinite or finite and, if finite, the
useful lives or the amortisation rates used;
• The amortisation methods used for intangible assets with finite
useful lives;
• For intangible assets assessed as having an indefinite useful life,
the carrying amount of that asset and the reasons supporting the
assessment of an indefinite useful life;
• The date of any revaluations, if applicable, as well as the
methods and assumptions used;
Disclosure

• A reconciliation of the carrying amount of intangibles at the

beginning and end of the reporting period;
• A class of intangible assets is a grouping of assets of a similar
nature and use in an entity’s operations; . Examples of separate
classes may include brand names, computer software, licences
and franchises, etc.;
• The aggregate amount of research and development expenditure
recognised as an expense during the period.
Thank You
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