PAS 38: Intangible Assets

INTANGIBLE ASSETS (PAS 38)

 
An INTANGIBLE ASSET is an identifiable nonmonetary asset without physical substance.
It must be controlled by the entity as a result of past event and from which future
economic benefits are expected to flow to the entity. (PAS 38, par. 8)
 
ESSENTIAL CRITERIA IN INTANGIBLE ASSET DEFINITION
IDENTIFIABILITY
An asset is identifiable when:

 It is separable.
 It arises from contractual or other legal rights.

 
CONTROL

 It 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.

Example: Control arising from legal rights such as trademark, copyright or patent
 
FUTURE ECONOMIC BENEFITS

 It may include revenue from sale, cost savings and other benefits.

Example: Use of legal right to use a new technology to reduce future production costs
 
RECOGNITION
It is probable that the future economic benefits that are attributable to the asset will
flow to the entity.
The cost of the intangible asset can be measured reliably.
 
INITIAL MEASUREMENT
An entity shall measure an intangible asset initially at cost.
 
SUBSEQUENT MEASUREMENT
As its accounting policy, an entity shall choose either:

 COST MODEL (Cost – Accum. Amortization – Accum. Impairment Losses)

 REVALUATION MODEL (Revalued Amount – Subsequent Accum.
Amortization – Subsequent Accum. Impairment Losses)

Note:     An intangible asset can only be carried at revalued amount if there is an active
market for the asset.
 
COST OF AN INTANGIBLE ASSET
Acquired separately

 The cost comprises the purchase price, import duties, and nonrefundable
purchase taxes and any directly attributable cost of preparing the asset for its
intended use.
 When payment is deferred beyond normal credit terms, its cost is the cash
price equivalent.

 
Acquired as part of Business Combination

 When the FV of identifiable intangible asset can be measured with sufficient

reliability, the cost is based on its FV on acquisition date
 When there is an active market, the FV is based on quoted market
price/current bid price.
 When there is no active market, the FV is equal to the amount that would be
paid by the entity for the asset in an arm’s length transaction between
knowledgeable and willing parties.

Example: Discounted Net Cash Flows

 
Acquired by Government Grant(PAS 20)
Example: Airport land rights, licenses to operate radio or television stations, import
licenses

 Fair Value
 Nominal amount or zero plus any directly attributable expenditure.

 
Internally generated

 It comprises all directly attributable costs necessary to create, produce or

prepare the asset to be capable of operating it in the manner intended by the
management.

Examples:
Cost of materials and services used or consumed
Cost of employee benefits
Registration fee for a legal right
Amortization of patents or licenses used to generate the asset
 
Examples of costs excluded in the cost of an intangible asset and expensed when
incurred
Cost of introducing a new product or service, advertising and promotional
Relocation costs in a new location or with a new class of customers, reorganization costs
Cost of staff training
Administration and other general overhead costs
Cost incurred while an asset has yet to be brought in the manner intended by the
management
Initial operating losses, start-up costs
 

RESEARCH COSTS DEVELOPMENT COSTS

Probability of Success of
Very Uncertain More Apparent
Project

PAS 38, paragraph 54, states asset and use or sell it.
that no intangible asset
arising from research or from
the research phase of an
internal project shall be
Recognition
recognized. Expenditures on
research or on the research
phase of an internal project
shall be recognized as
expense when it is incurred. ·       The ability to use or
Accounting Treatment Recognized as an expense
PAS 38, paragraph 57, states
that an intangible asset
arising from development or
from development phase of
an internal project shall be
recognized if and only if the
entity can demonstrate all of
the following:
·       Availability of
resources or funding to
complete development and
to use or sell the asset.
·       The intention to
complete the intangible
·       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.
sell the intangible asset.
·       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.
·       The ability to measure
reliably the expenditure
attributable to the intangible
asset during its development.
Added to the carrying
 amount of the in-process
research and development
project if the recognition
criteria for an intangible
asset were satisfied.
Otherwise, it is recognized as
an expense.

 
TREATMENT OF SUBSEQUENT EXPENDITURE
GENERAL RULE : A subsequent expenditure on an intangible asset shall be recognized
as an expense.
 
EXCEPTION       : A subsequent expenditure may be capitalized when:
It is probable that future economic benefits that are attributable to the subsequent
expenditure will flow to the entity.
The subsequent expenditure can be measured reliably.
 
AMORTIZATION is the systematic allocation of the depreciable amount of an intangible
asset over the asset’s useful life.
METHOD
The amortization method shall reflect the pattern in which the economic benefits from
the asset are consumed. If such pattern cannot be determined reliably, the straight line
method is used.
 
RESIDUAL VALUE
GENERAL RULE : The residual value of an intangible asset shall be presumed to be zero.
 
EXCEPTION       :
When at the end of its useful life, there is a committed third party buyer.
When at the end of its useful life, there is an active market for its residual value.
 
IMPAIRMENT
Impairment of intangible assets is recognized in accordance with PAS 36 on impairment
of assets.
 
USEFUL LIFE
FACTORS IN DETERMINING THE USEFUL LIFE:
Technical, technological and other type of obsolescence
Expected action by competitors or potential competitors
Expected usage of the asset by the entity
Typical product life cycle for the asset
Stability of the industry in which the asset operates
Level of maintenance expenditure required to obtain the expected future economic
benefits from the asset
The useful life of the asset may be dependent on the useful life of other assets of the
entity
Period of control over the asset and legal or similar limits on the use of the asset
 
ASSESSMENT WHETHER:
Finite or Limited Life (amortized over their useful life)
Indefinite Life (tested for impairment at least annually and whenever there is an
indication of impairment)

 There is no foreseeable limit to the period over which the asset is expected to
generate net cash flows.

 
Note:     The useful life of an intangible asset that arises from contractual or other legal
rights shall not exceed the period of the contractual or legal rights.
If the limited term can be renewed, the renewal period shall be included only in cases of
renewal by the  entity with insignificant cost.
Gain/Loss from derecognition (Net disposal proceeds – CA of asset) shall be recognized
as other income/expense in the income statement.