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Learning objectives
TOPIC 5
After studying this topic, you should be able to:
• Understand the criteria to identify and recognize an
intangible asset.
• Understand the recognition and measurement of
intangible assets
• Determine the cost and carrying amount of intangible
assets.
• Determine the depreciation methods which are suitable
for intangible assets
• Discuss the information of intangible assets that is
presented and disclosed in financial statements.

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Contents Sources of IFRS

1. Scope & Definitions • IAS 16 - Property, Plant and Equipment
2. Recognition • IAS 23 – Borrowing costs
3. Initial measurement • IAS 36- Impairment
4. Subsequent measurement • IAS 38 – Intangible assets
5. Disclosures • Amendment to IAS 16 and 38
• IFRS 3 – Business combinations

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Scope Definition
IAS 38 shall be applied in accounting for intangible assets, Long-lived, Revenue-producing Assets
except:
a) intangible assets that are within the scope of another
Standard; Expected to Benefit Future Periods
b) financial assets, as defined in IAS 32 Financial Instruments:
Presentation;
c) the recognition and measurement of exploration and Intangible
evaluation assets (see IFRS 6 Exploration for and Evaluation No Physical
of Mineral Resources); and Substance
d) expenditure on the development and extraction of minerals,
oil, natural gas and similar non-regenerative resources.
An intangible asset is an identifiable non-monetary
asset without physical substance. (IAS 38.8)

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Intangible Assets Intangible Assets ─ Patents

• An exclusive right recognized by law and granted by a
sovereign state for a limited period (usually 20 years.)
Lack physical Exclusive • Holder has the right to use, manufacture, or sell the
substance. Rights. patented product or process without interference or
infringement by others.
• Some R & D costs that lead to an internally developed
Intangible patent are expensed in the period incurred, while
others are capitalized
Assets

Future benefits less certain

than tangible assets.

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Intangible Assets Intangible Assets

Copyrights
• A form of protection given by
law to authors of literary,
musical, artistic, and similar
works.
• Copyright owners have
exclusive rights to print, reprint,
copy, sell or distribute, perform
and record the work.
• Generally, the legal life of a
copyright is the life of the
author plus 50-100 years (or a
finite period for anonymous or
corporate creations).
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Franchise A contractual arrangement where the franchisor
grants the franchisee exclusive rights to use
Trademarks the franchisor’s trademark within a certain
 A symbol, design, or logo area for a specified period of time.
associated with a business.
 If internally developed,
trademarks have no
Goodwill
recorded asset cost.
 If purchased, a trademark is Occurs when one Only purchased
recorded at cost. company buys goodwill is an
 Registered with relevant another company. intangible asset.
national authority and
renewable indefinitely in
(usually) 10-year periods. The amount by which the
consideration exchanged exceeds
the fair value of net assets acquired.
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Goodwill Recognition

Eddy Company paid $1,000,000 to purchase all of

James Company’s assets and assumed James
Company’s liabilities of $200,000. James Company’s
assets were appraised at a fair value of $900,000. What
amount of goodwill should Eddy company record as a How recognize an
result of the purchase? intangible asset?

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Recognition Recognition
2. Ghi nhận TSVH Identifiability
• Recognition Criteria:
IAS 38 states that an intangible meets the
1. Whether the intangible asset can be identified
identifiability requirement if:
separately from other aspects of the business
1. 1. It is separable (i.e., is capable of being
entity;
separated or divided from the entity and
2. Whether the use of the intangible asset is sold, transferred, licensed, rented or
controlled by the entity as a result of its past exchanged, either individually or together
actions and events; with a related contract, asset or liability);
3. Whether future economic benefits can be or
expected to flow to the entity; and 2. It arises from contractual or other legal
4. Whether the cost of the asset can be measured rights, regardless of whether those rights
reliably. are transferable or separable from the
entity or from other rights and obligations.

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Recognition Recognition
Control Future economic benefit
The future economic benefits may take
Control implies the power to both obtain future
the form of revenue from the sale of
economic benefits from the asset as well as
products or services, cost savings or
restrict others’ access to those benefits.
other benefits resulting from the use of
Normally, entities register patents, copyrights, etc. the intangible asset by the entity.
to ensure control over these intangible assets,
although entities often have to engage in litigation A good example of other benefits resulting from the use of
to preserve that control. the intangible asset is the use by an entity of a secret
formula (which the entity has protected legally) that leads to
reduced levels of competition in the marketplace, thus
enhancing the prospects for substantial and profitable future
sales and reduced expenditures on such matters as product
development and advertising.
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Measurement of the Cost of Intangibles
Separate acquisition
The cost of a separately acquired intangible asset
includes:
1. Its purchase price, including legal and brokerage
fees, import duties and nonrefundable purchase
taxes, after deducting trade discounts and rebates;
and
2. Any directly attributable costs incurred to prepare
the asset for its intended use.
Directly attributable costs would include costs of employee
benefits or costs of employee benefits arising directly from
bringing the asset to its intended use, and professional fees
incurred in bringing the asset to its working condition, costs of
testing whether the asset is functioning properly.
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R&D Costs
Research phase
Examples of research activities are:
a) activities aimed at obtaining new knowledge;
b) the search for, evaluation and final selection of,
applications of research findings or other knowledge;
c) the search for alternatives for materials, devices,
products, processes, systems or services; and
d) the formulation, design, evaluation and final selection of
possible alternatives for new or improved materials,
devices, products, processes, systems or services.
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Research and Development (R&D)
Research
• Research is original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and
understanding. . .
Development
• Development is the application of research findings or other
knowledge into a plan or design for the production of new or
substantially improved materials, devices, products, process,
systems or services before the start of commercial production or
use . . .
Most R&D costs are expensed as incurred. (Must be disclosed if material.)
 R&D costs incurred under contract for other companies are capitalized
as inventory and carried forward into future years.
 Costs of assets purchased for R&D purposes are expensed in the
period unless they have alternative future uses.
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R&D Costs
Development phase
Examples of development activities are:
a) the design, construction and testing of pre-production or
pre-use prototypes and models;
b) the design of tools, jigs, moulds and dies involving new
technology;
c) the design, construction and operation of a pilot plant that
is not of a scale economically feasible for commercial
production; and
d) the design, construction and testing of a chosen
alternative for new or improved materials, devices,
products, processes, systems or services.
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R&D Costs
R&D Costs Capitalization Criterion
 All expenditure in the research phase are to be expensed
when incurred.
 Expenditure incurred in the development phase, but
before the R&D is successfully completed, are to be
capitalized

Costs Operating
Expensed Costs Costs
as R&D Capitalized and Amortization

Start of Capitalization R&D Completed Sale of

R&D Criterion Successfully Product PIRATE
Activity (Enter Development Phase)
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Example of development cost capitalization Start-up Costs and Software

Assume that Creative Incorporated incurs substantial research and Development Costs
development costs for the invention of new products, many of which • Start-up costs, including pre-operating costs and
are brought to market successfully. In particular, Creative has incurred
costs during 20XX amounting to €750,000, relative to a new establishment costs, are expensed in the period
manufacturing process. Of these costs, €600,000 was incurred prior to incurred.
December 1, 20XX. As of December 31, the viability of the new process • IFRS applies the same accounting treatment for R&D
was still not known, although testing had been conducted on December
expenditure to software development costs.
1. In fact, results were not conclusively known until February 15,
20XX+1, after another €75,000 in costs was incurred post-January 1.
Creative’s financial statements for 20XX were issued February 10, Disclosure
20XX+1, and the full €750,000 in research and development costs was Statement of financial position
expensed, since it was not yet known whether a portion of these • The unamortized portion of capitalized computer software cost is
qualified as development costs under IAS 38. When it is learned that an asset.
feasibility had, in fact, been shown as of December 1, Creative’s
Income Statement
management asks to restore the €150,000 of post-December 1 costs
as a development asset. Under IAS 38 this is prohibited. However, the • Amortization expense associated with computer software cost.
20XX+1 costs (€75,000 thus far) would qualify for capitalisation, in all • R&D expense associated with computer software development
likelihood, based on the facts known. cost.
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Subsequently Incurred Costs
The capitalization of any subsequent costs
incurred on recognized intangible assets are
subject to the same recognition criteria as initial
costs.
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Subsequently Incurred Costs
Example (cont.)
The entity would account for these costs as
follows:
• Research and development costs incurred in
20XX-1, amounting to €200,000, should be
expensed, as they do not meet the recognition
criteria for intangible assets. The costs do not
result in an identifiable asset capable of
generating future economic benefits.
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Subsequently Incurred Costs
Example:
An entity is developing a new product. Costs incurred
by the R&D department in 20XX-1 on the “research
phase” amounted to €200,000. In 20XX, technical and
commercial feasibility of the product was established.
Costs incurred in 20XX were €20,000 personnel costs
and €15,000 legal fees to register the patent. In 20XX,
the entity incurred €30,000 to successfully defend a
legal suit to protect the patent.
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Subsequently Incurred Costs
Example (cont.)
The entity would account for these costs as follows:
• Personnel and legal costs incurred in 20XX,
amounting to €35,000, would be capitalised as
patents. The company has established technical and
commercial feasibility of the product, as well as
obtained control over the use of the asset. The
standard specifically prohibits the reinstatement of
costs previously recognised as an expense. Thus,
€200,000, recognised as an expense in the previous
financial statements, cannot be reinstated and
capitalised.
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Subsequently Incurred Costs Measurement Subsequent to Initial Recognition

Example (cont.)
The entity would account for these costs as follows:
• Legal costs of €30,000 incurred in 20XX to defend the Measurement & Recognition Models
entity in a patent lawsuit should be expensed. These
could be considered as expenses incurred to maintain
the asset at its originally assessed standard of Amortization Cost
performance, and would not meet the recognition
criteria.
• Alternatively, if the entity were to lose the patent lawsuit,
then the useful life and the recoverable amount of the Impairment loss Revaluation
intangible asset would be in question. The entity would
be required to provide for any impairment loss, and in all
probability even to fully write off the intangible asset.
What is required must be determined by the facts of the
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Measurement Subsequent to Initial Recognition Revaluation model

The unique features of IAS 38 are as follows:
Models Fair value of an intangible asset should only be determined
• Intangible assets may be
reported at (1) cost less by reference to an active market in that type of intangible
Cost accumulated amortization or (2) asset.
fair value, if fair value can be Active markets providing meaningful data are not expected
determined in an active market. to exist for such unique assets as patents and trademarks,
• If revaluation is chosen, all and thus it is presumed that revaluation will not be applied
Revaluation assets within the class of to these types of assets in the normal course of business.
intangibles must be revalued on As a consequence, the standard effectively restricts
a regular basis. revaluation of intangible assets to freely tradable intangible
• Goodwill cannot be revalued. assets.

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Revaluation model Revaluation model

Example:
Example:
The entries to reflect these events are as follows:
A patent right is acquired July 1, 20XX-1, for €250,000; 7/1/20XX-1 Patent €250,000
while it has a legal life of 15 years, due to rapidly changing Cash, etc. €250,000
technology, management estimates a useful life of only five 12/31/20XX-1 Amortisation expense €25,000
years. Straight-line amortisation will be used. At January 1, Patent €25,000
20XX, management is uncertain that the process can 1/1/20XX Loss from asset impairment €150,000
actually be made economically feasible, and decides to Patent €150,000
write down the patent to an estimated market value of 12/31/20XX Amortisation expense €25,000
€75,000. Amortisation will be taken over three years from Patent €25,000
that point. On January 1, 20XX+2, having perfected the 12/31/20XX+1 Amortisation expense €25,000
related production process, the asset is now appraised at a Patent €25,000
depreciated replacement cost of €300,000. Furthermore, 1/1/20XX+2 Patent €275,000
the estimated useful life is now believed to be six more Gain on asset value recovery €100,000
years. Other comprehensive income €175,000
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Amortization of Intangible Assets Amortization of Intangible Assets

Torch, Inc. has developed a new device. Patent
The amortization process also uses the straight-line
registration costs consisted of $2,000 in attorney fees and
method, but usually assumes residual value = 0.
$1,000 in federal registration fees. The device has a
contractual (useful) life of 5 years. The legal life is 20
Amortization period is the shorter of years.
the asset’s legal or contractual life. For year 1, what is Torch’s amortization expense?

The amortization entry is: Use the shorter of contractual life (5 years) or
legal life (20 years).
Amortization expense .................................. $$$
Intangible asset ………………........ $$$ Amortization = Cost ÷ Contractual life
To record amortization expense. = $3,000 ÷ 5 years
= $ 600 per year
A contra-asset account is generally not used when
Amortization expense ................................... 600
recording the amortization of intangible assets. Patent ………………........................ 600
To record amortization of patent.
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Intangible Assets not Impairment of Value

Subject to Amortization
Accounting treatment differs.
IAS 36

Goodwill and Trademarks Long-term assets

to be held and used

Subject to assessment
for impairment of Intangible Intangible Goodwill
Not amortized.
value and may be with finite with
written down. useful lives indefinite Test for impairment of
useful lives value at least annually.

Test for impairment when events or changes in circumstances

indicate that book value may not be recoverable
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Example Derecognition of Intangible Assets

❖ An intangible asset shall be derecognised:
▪ A business has invested in a new process for extracting oil
form shale rock. Due to a change in oil prices, the process is (a) on disposal; or
under review for impairment. The predicted future cash (b) when no future economic benefits are expected from
flows are 100.000 $. The carrying amount is 150.000$ and its use or disposal.
the fair value is 120.000 $.
❖ The gain or loss arising from the derecognition of an
intangible asset shall be determined as the difference
This asset is impaired because the future cash flows are between the net disposal proceeds, if any, and the
less than the carrying amount carrying amount of the asset. It shall be recognised in
profit or loss when the asset is derecognised (unless
IFRS 16 requires otherwise on a sale and leaseback.)
❖ Gains shall not be classified as revenue.

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Disclosure Disclosure
An entity shall disclose the following for each class of A class of intangible assets is a grouping of assets of a
intangible assets, distinguishing between internally similar nature and use in an entity’s operations.
generated intangible assets and other intangible assets:
Examples of separate classes may include:
a) whether the useful lives are indefinite or finite and, if
finite, the useful lives or the amortisation rates used; (a) brand names;
b) the amortisation methods used for intangible assets (b) mastheads and publishing titles;
with finite useful lives;
(c) computer software;
c) the gross carrying amount and any accumulated
amortization (aggregated with accumulated impairment (d) licences and franchises;
losses) at the beginning and end of the period; (e) copyrights, patents and other industrial property rights,
d) the line item(s) of the statement of comprehensive service and operating rights;
income in which any amortisation of intangible assets is
(f) recipes, formulae, models, designs and prototypes; and
included;
e) a reconciliation of the carrying amount at the beginning (g) intangible assets under development.
and end of the period
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Disclosure
An entity shall also disclose:
a) for an intangible asset assessed as having an indefinite useful life,
the carrying amount of that asset and the reasons supporting the
assessment of an indefinite useful life.
b) a description, the carrying amount and remaining amortization
period of any individual intangible asset that is material to the
entity’s financial statements.
c) for intangible assets acquired by way of a government grant and
initially recognised at fair value: the fair value initially recognised for
these assets; their carrying amount; and whether they are
measured after recognition under the cost model or the revaluation
model.
d) the existence and carrying amounts of intangible assets whose title
is restricted and the carrying amounts of intangible assets pledged
as security for liabilities.
e) the amount of contractual commitments for the acquisition of
intangible assets.
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ROUND UP
• Intangible assets are non-current assets with no
physical substance.
• Expenditure on research must always be written off
in the period in which it is incurred.
• If the criteria laid down by IAS 38 are satisfied,
development expenditure must be capitalized as an
intangible asset. If it has a finite useful life, it
should then be amortised over that life. If the criteria
in IAS 38 are not satisfied, development expenditure
must be written off in the period in which it is
incurred.
• IAS 38 requires both numerical and narrative
disclosures for intangible assets.
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End of Topic 5