Advanced Financial Accounting

AQ054-3-2

IAS 38 Intangible assets

 Learning outcomes

After you have studied this chapter, you

should be able to:
• define an intangible asset
• recognise and measure intangible assets
• apply the accounting treatment of
intangible assets

Module Code and Module Title Title of Slides

 Definition

An intangible asset is defined as an

identifiable non-monetary asset without
physical substance. The asset must be:
a) controlled by the entity as a result of
events in the past, and
b) something from which the entity
expects future economic benefits to
flow.

Module Code and Module Title Title of Slides

 Definition
Examples of intangible assets

1. Research and development

2. Computer software
3. Patents
4. Copyrights
5. Franchise
6. Brand names
7. Goodwill
8. Trademarks

Module Code and Module Title Title of Slides ‹#›

 Definition
Must be identifiable
Intangible assets must be identifiable in order to
distinguish it from goodwill.
i. If an intangible asset is acquired separately
through purchase, there may be a transfer of a
legal right that would help to make an asset
identifiable.
ii. An intangible asset may be identifiable if it is
separable ie if it could be rented and sold
separately.

Module Code and Module Title Title of Slides ‹#›

 Definition
Controlled by the entity
• The entity must be able to enjoy the future
economic benefits from the asset and
prevent the access of others to those
benefits.
• A legally enforceable right is evidence of
such control.

Module Code and Module Title Title of Slides ‹#›

 Definition

Expected future economic benefits

• An item can only be recognised as an
intangible asset if economic benefits are
expected to flow in the future from ownership
of the asset.
• Economic benefits may come from the sale of
products or services, or from a reduction in
expenditure (cost saving) or renting of the
assets.

Module Code and Module Title Title of Slides ‹#›

 Recognition
To be recognised in the financial statements, an
intangible asset must meet
1) the definition of an intangible asset, and
2) meet the recognition criteria of the framework
(IAS 38, para 18)
• 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 these criteria are met, the asset should be initially

recognised at cost
Module Code and Module Title Title of Slides ‹#›
 Illustration 1
Nexus entered into a contract to acquire the
franchise from Happy Yogurt Ice Cream.
Nexus has to pay RM1 million for the
franchise and recipe. Nexus is allowed to
manufacture and sell the yogurt ice cream
for five years. Additionally, Nexus has to
have premises to manufacture and sell the
ice cream.

Module Code and Module Title Title of Slides ‹#›

 Illustration 1
Nexus rented the premises, the equipment
and furniture were bought from the
franchiser for RM1.5 million, It has also
incurred RM300,000 in advertising and
recruiting staff.

Required:
Discuss the accounting treatment of the
various costs incurred.
Module Code and Module Title Title of Slides ‹#›
 Solution 1

• RM1 million for the franchise fee can be

capitalized as an intangible. It is identifiable
and separable from the business as a whole.
The company enjoys the future economic
benefits from the asset i.e. Nexus is allowed to
manufacture and sell the yogurt ice cream for
five years.
• RM1.5 million spent on equipment and furniture
can be recognized as PPE and depreciated
over five years.

Module Code and Module Title Title of Slides ‹#›

 Solution 1

• RM300,000 spent on advertising and

recruiting is to be recognised as an expense
when incurred. IAS 38 Para 69 states that
advertising and promotional costs should be
recognised as an expense when incurred. This
is because the expected future economic
benefits are uncertain and they are beyond the
control of the entity.

Module Code and Module Title Title of Slides ‹#›

 Measurement

Initial measurement
An intangible asset is measured initially at
cost.

Thinking allow
Some intangible assets may be acquired
free of charge, or for nomination
consideration by way of government grant.
Can the acquirer measure the intangible
assets in cost?

Module Code and Module Title Title of Slides ‹#›

 Measurement

Subsequent measurement after recognition

• All intangible assets that pass the recognition
criteria are measured initially at cost.
• For subsequent measurement, an entity can
either use:
(a) the cost model or
(b) the revaluation model

Module Code and Module Title Title of Slides ‹#›

 Measurement

The cost model

Cost of the intangible asset that has a finite
useful life will carried at:

Cost - Accumulated amortisation -

Accumulated impairment losses.

Module Code and Module Title Title of Slides ‹#›

 Measurement
The revaluation model
An intangible asset is shown at revalued amount which is:

Fair value at the date of revaluation - Any subsequent

accumulated amortisation - Any subsequent impairment
losses

 Revaluation model can only be used for a particular

intangible asset if there is an active market for that asset.

 Note: An active market cannot exist for brands,

newspaper mastheads, music and film publishing rights,
patents or trademarks, because each such asset is
unique.
Module Code and Module Title Title of Slides ‹#›
 Measurement
The revaluation model (Revaluation increase)
• If an intangible asset’s carrying amount is
increased as a result of a revaluation, the
increase shall be recognised in other
comprehensive income and accumulated in
equity under the heading of revaluation surplus.
• However, the increase shall be recognised in
profit or loss to the extent that it reverses a
revaluation decrease of the same asset
previously recognised in profit or loss.

Module Code and Module Title Title of Slides ‹#›

 Measurement
The revaluation model (Revaluation decrease)
• If an intangible asset’s carrying amount is
decreased as a result of a revaluation, the
decrease shall be recognised in profit or loss.
• However, the decrease shall be recognised in
other comprehensive income to the extent of any
credit balance in the revaluation surplus in respect
of that asset. The decrease recognised in other
comprehensive income reduces the amount
accumulated in equity under the heading of
revaluation surplus.
Module Code and Module Title Title of Slides ‹#›
 Useful life
An entity should assess the useful life of an intangible asset,
which may be finite and indefinite.

Indefinite useful life

An intangible asset has an indefinite useful life when there is
no foreseeable limit to the period over which the asset is
expected to generate net cash inflows for the entity.

Finite useful life

The useful life of an intangible asset that arises from
contractual or other legal rights should not exceed the period
of the rights but may be shorter depending on the period over
which the entity expects to use the asset.
Module Code and Module Title Title of Slides ‹#›
 Intangible assets with finite
useful life
• An intangible asset with a finite useful life should be amortised over
its expected useful life.
• The amortisation period and the amortisation method used for an
intangible asset with a finite useful life should be reviewed at each
financial year-end.
• Factors that determine the useful life:
a) expected usage;
b) typical product life cycles;
c) technical, technological, commercial or types of obsolescence;
d) stability of the industry;
e) expected actions by competitors;
f) the level of maintenance expenditure required;
g) legal or similar limits on the use of the asset, such as the expiry
dates of related leases.
Module Code and Module Title Title of Slides ‹#›
 Intangible assets with
indefinite useful life
• An intangible asset with an indefinite
useful life should not be amortised but
should be tested for impairment annually.

Module Code and Module Title Title of Slides ‹#›

 Disposals or retirements of
intangible assets
• An intangible asset should be derecognised when:
a) it is disposed of;
b) no future economic benefits are expected from its
use.
• Gain or loss on derecognition is the difference between
the net disposal proceeds and the carrying amount
arising on the disposal of the asset should be taken to
the statement of profit or loss.

Gain or loss = Net disposal proceeds – Carrying amount

Module Code and Module Title Title of Slides ‹#›

 Internally generated intangible assets

• Generally, internally-generated intangibles cannot

be capitalised, as the costs associated with these
cannot be separated from the costs associated with
running the business.
• The following internally-generated items may never
be recognised:
a) goodwill ('inherent goodwill')
b) brands
c) mastheads
d) publishing titles
e) customer lists
Module Code and Module Title Title of Slides ‹#›
 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.
• Examples of research activities are:
a) Activities aimed at obtaining new knowledge;
b) The search for applications of research findings
or other knowledge;
c) The search for product or process alternatives;
d) The formulation and design of possible new or
improved product or process alternatives.
Module Code and Module Title Title of Slides ‹#›
 Research and Development
(R&D)
Development
• Development costs are incurred at a later stage in
a project, and the probability of success should
be more apparent.
• 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.

Module Code and Module Title Title of Slides ‹#›

 Research and Development
(R&D)
Development
• Examples of development activities are:
a) The design, construction and testing of pre-
production 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;
d) The design, construction and testing of a chosen
alternative for new/improved materials
Module Code and Module Title Title of Slides ‹#›
 Research and Development
(R&D)
• R & D costs will include all costs that are directly
attributable to research and development activities,
or that can be allocated on a reasonable basis.
• R&D costs exclude:
a) Selling, marketing, distribution or administration
costs
b) General overhead
c) Start up costs and business relocation costs
d) Inefficiencies and
e) Staff training costs

Module Code and Module Title Title of Slides ‹#›

 Illustration 2
Assume that Fahid Bhd incurred the following costs for
development activities:
RM
Materials 60,000
Wages and salaries 100,000
Allocation of overheads 30,000
Depreciation on property used for R&D 35,000
General administration costs 20,000

Required:
Calculate the costs of development activities.
Module Code and Module Title Title of Slides ‹#›
 Solution 2

Total costs of development activities:

Materials (RM60,000) + Wages and salaries
(RM100,000) + Allocation of overheads
(RM30,000) + Depreciation on property
(RM35,000) = RM225,000

Module Code and Module Title Title of Slides ‹#›

 Accounting treatment for R&D
costs
Research costs
• All research costs must be recognised as an
expense in the period in which they are incurred.
• They should not be recognised as an asset in a
later period. This is because the entity is
researching the unknown and too much
uncertainty is involved, and therefore, at this
early stage, no future economic benefit can be
expected to flow to the entity.

Module Code and Module Title Title of Slides ‹#›

 Accounting treatment for R&D
costs
Development costs
• Development costs must be recognised as an
expense if any one of the recognition criteria of
development costs as assets cannot be met.
• Development cost initially recognised as an
expense should not be recognised as an asset
in subsequent periods. Development costs are
incurred at a later stage in a project, and the
probability of success should be more apparent.

Module Code and Module Title Title of Slides ‹#›

 Accounting treatment for R&D
costs
Development costs
Development costs must be capitalised and recognised as an intangible
non-current asset if they meet ALL of the following criteria/conditions
(Recognition criteria of development costs as assets):
1. It is technically feasible to complete the intangible asset so that it is
available for use or sale.
2. The entity intends to complete the intangible asset and use or
market the asset.
3. The entity has the ability to use or sell the intangible asset.
4. The intangible asset will generate future economic benefits. There is
either an external market for the asset or an internal use for it.
5. The entity has the financial, technical and other resources needed to
complete the intangible asset.
6. The development costs can be measured reliably.

Module Code and Module Title Title of Slides ‹#›

 Illustration 3
An entity is carrying out a research and development activity
for a new computer software. The research activity started in
January 2015 and ended on 31 December 2015.
Expenditure incurred during 2015 was RM50,000. On 1
January 2016, the entity started to develop the new
computer software.
During year 2016, the expenditure incurred was RM120,000
of which RM100,000 was incurred before 1 October 2016
and the balance was incurred from October to December
2016.

Module Code and Module Title Title of Slides ‹#›

 Illustration 3
Only on 1 October 2016, the entity was able to demonstrate
that the project can meet all the criteria for recognition as an
intangible asset.
In year 2017, the cost incurred for the development was
RM60,000.
The entity started to market the software on 1 Jan 2018 and
it was expected that the software would be highly demanded
for the next three years.

Module Code and Module Title Title of Slides ‹#›

 Illustration 3
Required:
a) Discuss the accounting treatment for the above for the
year ended 31 December 2015, 2016, 2017 and 2018.
b) Prepare extract of SOPL for the year ended 31 December
2015, 2016, 2017 and 2018 and SOFP as at those dates.

Module Code and Module Title Title of Slides ‹#›

 Solution 3

50k 100k 20k RM60K

1/1/15 31/12/16 1/10/16 31/12/16

2015
The research cost of RM50,000 is recognised as an expense
in SOPL.

Module Code and Module Title Title of Slides

 Solution 3

2016
The development cost of RM100,000 incurred before
1/10/16 is written off as an expense in SOPL because it did
not met the recognition criteria for capitalisation prior to
1/10/16.
RM20,000 incurred after1 October 2016 is recognised as an
intangible non-current asset in SOFP.

Module Code and Module Title Title of Slides

 Solution 3

2017
RM60,000 is recognised as an asset and the carrying value of
the asset is RM80,000.

Module Code and Module Title Title of Slides

 Solution 3

2018
The amortisation will commence when the new product is
marketed. Therefore, the carrying amount of RM80.000 will
be amortised over three (3) years i.e. an amortisation of
RM26,667 will be recognised as an expense in SOPL.

Module Code and Module Title Title of Slides

 Solution 3

(b)
SOCI (extract) for the year ended 31 December
2015 2016 2017 2018
RM RM RM RM
Expenses
Research cost 50,000
Development cost written off 100,000
Amortisation of development cost (80,000/3) 26,667

SOFP (extract) as at 31.12 2015 2016 2017 2018

RM RM RM RM
NCA
Intangible asset - 20,000 80,000 53,333
Module Code and Module Title Title of Slides
 References

• Kaplan Publishing, 2018. Intangible

assets. In: ACCA Approved Paper F7
Financial Reporting. Berkshire: Kaplan
Publishing UK, p. 59 to 72.
• The Board, 2017. IAS 38 Intangible
assets. London: IFRS Foundation.

Module Code and Module Title Title of Slides