This chapter covers the following:

1. Introduction
Introduction
• Many businesses invest significant amounts with the intention of
obtaining future value on areas such as:
• scientific/technical knowledge
• design of new processes and systems
• licences and quotas
• intellectual property, e.g. patents and copyrights
• market knowledge, e.g. customer lists, relationships and loyalty
• trade marks.
• All of these expenses may result in future benefits to the business,
but not all can be recognised as assets.
Objective of IAS 38 Intangible assets
• To prescribe the specific criteria that must be met to recognise in F/S
• Definition
• An intangible asset is an identifiable non-monetary asset without physical
substance.
 • To meet the definition, the asset must be identifiable, i.e. separable from the rest
of the business or arising from legal rights.
• The asset is one
• controlled by the entity as a result of past events (normally by
enforceable legal rights)
• a resource from which future economic benefits are expected to flow
(either from revenue or cost saving).
• Recognition: Recognise when
• meet the definition of an intangible asset, and
• meet the recognition criteria of the framework: –
• it is probable that future economic benefits attributable to the
asset will flow to the entity
• the cost of the asset can be measured reliably.
• If above criteria are met, the asset should be initially recognised
at cost.
• Internally-generated intangibles
• The following internally-generated items may never be recognised:
• goodwill; brands; mastheads; publishing titles; customer lists.
• Purchased intangibles
• Intangible asset is acquired in a business combination, the fair value at the
date of acquisition is taken. Fair value is easy if active market exists
otherwise consider the amount paid in an arm’s length transaction.
• Where it can not be measured reliably in an acquisition has to be included in
goodwill.
• Internally-generated intangibles
• These intangibles cannot be measured reliably hence should not be recognised
• Brands
• Internally-generated brands and similar assets may never be recognised.
• Expenditure on internally-generated brands cannot be distinguished from the
cost of developing the business as a whole, so should be written off as
incurred.
• Where a brand name is separately acquired and can be measured reliably,
then recognised as an intangible non-current asset,
• Measurement after initial recognition: There is a choice between:
• the cost model
• the revaluation model.
• The cost model
• The intangible asset should be carried at cost less amortisation and any
impairment losses. This model is more commonly used in practice.
• The revaluation model
• The intangible asset may be re-valued to a fair value less subsequent
amortisation and impairment losses.
• Fair value should be determined by reference to an active market.
• Features of an active market are that:
• the items traded within the market are homogeneous
• willing buyers and sellers can normally be found at any time
• prices are available to the public.
• In practice such markets are rare.
• Amortisation
• An intangible asset with a finite useful life must be amortised over that life,
using the straight-line method with a zero residual value.
• An intangible asset with an indefinite useful life:
• should not be amortised
• should be tested for impairment annually, and more often if there is an
actual indication of possible impairment.
• The nature of goodwill
• Goodwill is the difference between the value of a business as a whole and
the aggregate of the fair values of its separable net assets.
• Separable net assets are those assets (and liabilities) which can be
identified and sold off separately without necessarily disposing of the
business as a whole. They include identifiable intangibles such as patents,
licences and trade marks.
• Fair value is the amount at which an asset or liability could be exchanged
in an arm’s length transaction between informed and willing parties, other
than in a forced or liquidation sale.
• Goodwill may exist because of any combination of a number of possible
factors:
• reputation for quality or service
• technical expertise
• possession of favourable contracts
• good management and staff.
• Purchased and non-purchased goodwill
• Purchased goodwill
• arises on business combinations and
• recognised in the financial statements as its value at a point in time is
certain
• Non-purchased goodwill:
• called inherent goodwill has no value
• do not recognise in financial statements.
• IFRS 3 revised Business combinations
• IFRS 3 revised governs accounting for all business combinations and deals
with the accounting treatment of goodwill .
• Goodwill is defined in IFRS 3 as an asset representing the future economic
benefits arising from assets acquired in a business combination that are not
individually identified and separately recognised.
 • Purchased goodwill is recognised within the financial statements because there
was a market value by which it can be measured. It is the difference between
fair value of separable net assets acquired and cost of investment made.
• Goodwill exists in any successful business, if the business has never changed
hands, then goodwill should not be recognised. It can only be subjectively
estimated. This is described as inherent goodwill or non-purchased
goodwill.
• A business which has acquired another and thus purchased goodwill arises
• Accounting for goodwill
• Non-purchased goodwill should not be recognised in the financial statements..
• Purchased goodwill is dealt with in two accounting standards, according to
how it arose. Goodwill arising on the purchase of a subsidiary is covered by
IFRS 3 revised, while all other goodwill is covered by IAS 38.
• Goodwill acquired on the purchase of a subsidiary should be carried at cost
less accumulated impairment losses. It must be tested for impairment annually,
or more frequently if events or circumstances indicate that it might be impaired.
• Research and Development Expenditure
• Definitions
• Research is original and planned investigation undertaken with the
prospect of gaining new scientific knowledge and understanding.
• Development is the application of research findings or other
knowledge to a plan or design for the production of new or
substantially improved materials, devices, products, processes, systems
or services before the start of commercial production or use.
• Accounting treatment
• Research expenditure: write off as incurred to the income statement
• Development expenditure: recognise as an intangible asset if, and
only if, an entity can demonstrate all of the following:
• the technical feasibility of completing the intangible asset so that it
will be available for use or sale
• its intention to complete the intangible asset and use or sell it
• its ability to use or sell the intangible asset
• how the intangible asset will generate probable future economic
benefits. Among other things, the entity should demonstrate the
existence of a market for the output of the intangible asset or the
intangible asset itself or, if it is to be used internally, the usefulness
of the intangible asset
 • the availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset
• its ability to reliably measure the expenditure attributable to the
intangible asset during its development.
• Amortisation
• Development expenditure should be amortised over its useful life as soon as
commercial production begins.