IAS 38 INTANGIBLE NON CURRENT ASSETS

Definition

An intangible non-current assets is a identified non-monetary asset without physical

substance example patent right, trade mark, license, computer software etc

Note: non-monetary means can not be easily converted to cash

Recognition criteria for intangible assets

There are four key criteria to be in place before recognition is appropriate.

a) Identification
The intangible assets need to be identifiable, that mean capable of being
separate from the entity and sold or transferred. Example license like mining
license it arises from contractual or other legal right, fishing license etc
b) Control
The entity need to control the intangible asset. Control is achieved by
i. Power to obtain future economic benefit
ii. Power to restrict access of those benefits to others
Example
Expenditure on staffs training may be expected to increase skills of the
staffs and generate future economic benefit. However the entity incurring
this expenditure may be little over the staffs. Staffs may decide to leave
the entity therefore training cost lack control on skills of the staffs.
Hence should not be capitalized as intangible asset.
c) It is probable that future economic benefit will flow to the entity
d) The cost of an asset can be measured reliably

Initial measurement of intangible assets

After the recognition, the measurement process depend upon the model of acquisition

Model of acquisition

1. Separately acquired intangible assets e.g license

This should be measured at cost. The cost includes purchase price plus direct
attributable costs
2. Intangible assets acquired on business combination (e.g goodwill on acquisition
of subsidiary or associates)
This should be measured a fair value on the date of acquisition. The fair value
(market value) will become the deemed cost for initial measurement and for
subsequent accounting.
3. Intangible assets acquired by any way of government grant e.g patent rights,
license etc.
This should be measured at fair value/ market value
By: Sumawe (MSc; Finance & Investment; CPA(T)). 1
 4. Intangible assets acquired by the way of exchange by other non-monetary
assets.
This should be measure at fair value of asset exchanged.

Subsequent measurement of intangible assets

After initial measurement, an intangible asset should be measured at either cost mode
or revaluation model

Cost model

Under this model an intangible asset is carried at cost less amortization and any
impairments

Note: Amortization means allocating the cost of an intangible asset systematically over
its useful economic life.

Amortizations begin when the process/production is to commercially started. An

intangible asset with indefinitely useful life is not amortized but will be tested for
impairment at least annually.

Revaluation model

After the initial measurement an intangible asset can be carried at revalued amount
Gain or loss on revaluation should be accounted
Internally generated intangible assets
Certain intangible assets can be internally developed by the entity by its own
resources; example includes advertisement costs, customer royalty, brand name,
publishing title, business location etc.
Such intangible assets are impossible to separate their cost and benefits with other
assets of the entity and therefore are never recognized as assets.
Research and development expenditure
Research
Is original and planned investigation under taken with the prospect of gaining new
scientific or technical knowledge and understanding. In simple word research means
trying out different possibilities and checking their outcomes. It has an element of trial
and error. In research people expect a particular outcome but are not certain about it.

Accounting treatment for research costs

Expenditure on research should be recognized as an expense and not as an intangible
asset
Reason
The reason is that at this stage an entity cannot demonstrate that an asset exists and
that future economic benefit will flow to the entity. (This treatment has been
emphasized because previously research cost were capitalized in book of accounts)
Development expenditure

By: Sumawe (MSc; Finance & Investment; CPA(T)). 2

Is an application of research findings or other knowledge to a plan or design for the
production if new or improved materials, devices, product, systems or services before
the start of commercial production or use.
Accounting treatment for development expenditure
Development expenditure are recognized as intangible assets if and only if
An entity can demonstrate
i. The technical feasibility of completing intangible asset so that it will be available
for use or sale
ii. Its intention to complete intangible asset and to use it or to sell it
iii. Its ability to use or sale an intangible asset
iv. How the intangible asset will generate the future economic benefit
v. The availability of adequate technical, financial and other resources
vi. Its ability to measure reliably the expenditure during the development of the
assets
REVIEW QUESTION
a. IAS 38 – Intangible assets – deals with the recognition and subsequent
measurement of intangible assets
Required
Explain the following
i. The meaning of the term ‘intangible asset’ as defined by IAS 38
ii. The criteria that needed to be satisfied before expenditure can recognized
as an intangible asset under IAS 38
iii. How recognized intangible assets should be subsequently measured
b. XYZ is a listed entity that prepares consolidated financial statements. XYZ
measures assets using the revaluation model wherever this is possible under
international financial reporting standards. During its financial year ended 31
March 2011 XYZ entered into the following transactions.
i. On 1 October 2009 XYZ began a project to investigate a more efficient
production process. Expenses relating to the project of Tshs 2 millions
were charged in the statement of comprehensive income in the year
ended 31 March 2010. Further cost of Tshs 1.5 million was incurred in
the three month period to 30 June 2010. On that date it became
apparent that the project was technically feasible and commercially
viable. Further expenditure of Tshs 3 million was incurred in the period
from 1 July 2010 to 31 December 2010. The new process which began
on 1 January 2011 was expected to generate cost saving of at least Tshs
600,000 per annum over the 10 years period commencing 1 January
2011.
ii. On 1 April 2010 XYZ acquire a new subsidiary, Omicron. The directors
of XYZ carried out a fair value exercise as required by IFRS 3 – Business
combination – and concluded that the brand name of Omicron had a fair
value of Tshs 10 millions and would be likely to generate economic
benefits for a ten year period from 1 April 2010. They further concluded

By: Sumawe (MSc; Finance & Investment; CPA(T)). 3

 the expertise of the employees of Omicron contributed Tshs 5 millions to
the overall value of Omicron. The estimated average remaining service
lives of the Omicron employees was eight years form 1 April 2010.
iii. On 1 October 2010 XYZ renewed its license to extract minerals that are
needed as part of its production process. The cost of renewal of the
license was Tshs. 200,000 and the license is for a five year period
starting on 1 October 2010. There is no active market for this type of
license. However the directors of XYZ estimated that at 31 March 2011
the fair value less costs to sell of the license wa Tshs 175,000. The
further estimate that over the remaining 54 months of its duration the
license would generate net cash flows for XYZ that had a present value
at 31 March 2011 of Tshs 185,000.

Required

Assuming the XYZ group has no intangible asset other than those mentioned above
compute the carrying amount of intangible assets in the statement of financial
position of XYZ as at 31 March 2011

By: Sumawe (MSc; Finance & Investment; CPA(T)). 4