IAS 38 INTANGIBLE ASSETS

Recognition and measurement

Definition
An intangible asset is an identifiable non-monetary asset without physical substance.

Identifiable
In order to be identifiable the asset must either
be separable – capable of being separately bought and sold, or
arise from legal/contractual rights.

Recognition
An intangible asset must meet the above definition
generate a probable flow of economic benefit
be capable of reliable measurement.

Measurement
Purchased intangibles are initially measured at cost. Subsequently there is a choice between:

Cost model – cost less amortisation

Revaluation model – revalued amount less amortisation.

The revaluation model is rare in practice as its use demands the existence of an active market.

Active markets require: Homogeneous (identical) products Willing buyers and sellers Prices available to
the public.
Amortisation
Intangible assets with a finite useful life are amortised over that life, usually on a straight-line basis, unless
another basis is more appropriate.

Intangible assets with an indefinite useful life are not amortised, but are tested annually for impairment.

Internally generated intangible assets

Generally, internally generated intangible assets cannot be capitalised, as the cost of their creation is not
capable of reliable measurement

Goodwill

Calculation
Goodwill is the difference between the value of a business as a whole and the fair value of its identifiable net
assets.

Purchased v non-purchased
Purchased goodwill arises when an entity acquires a business and is discussed in more detail in Consolidation
Non-purchased, or inherent, goodwill is not recognised within the financial statements because it is not
separable from the business.

Negative goodwill
Where an acquiring entity pays less for a business than the fair value of its separable net assets, the negative
goodwill created is immediately recognised as income in the statement of profit or loss
Research and development

Definitions
Research is original and planned investigation to gain new scientific knowledge or understanding.
Development is the application of knowledge to create some new or improved material, product, service,
process or device.

Accounting treatment
Research expenditure is written off as incurred to the statement of profit or loss.

Development expenditure is capitalised only once all the recognition criteria are satisfied.

Recognition criteria

Probable flow of economic benefit

Intention to complete the project
Reliable measurement of development cost
Adequate resources available to complete the project
Technically feasible
Expected to be profitable.

Amortisation
Amortisation of development expenditure commences as soon as commercial production begins, either on a
straight-line basis or in relation to expected production levels