IAS 38

Intangible Assets

This material is the property of Department of Accounting and Finance, CoBE, AAU.
Permission must be obtained from the Department prior to reproduction
 Learning Objectives

 At the completion of this training session, you will be able

to:
 define the criteria for the initial recognition and
measurement of intangible assets
 explain the subsequent accounting treatment of
intangible assets
 apply the requirements of IAS to internally generated
assets other than goodwill
 identify the disclosure requirements for intangible
assets
This material is the property of Department of Accounting and Finance, CoBE, AAU.
Permission must be obtained from the Department prior to reproduction
 IAS 38: Bird’s Eye View

Core • the initial measurement of intangible assets is at cost

principle • subsequent measurement of intangible assets: cost or
revaluation model

Key • intangible assets

definitions • research
• development
• useful life

This material is the property of Department of Accounting and Finance, CoBE, AAU.
Permission must be obtained from the Department prior to reproduction
 Definition of an intangible asset (IAS 38.8)

An intangible asset is identifiable when:

An intangible asset is an: • it is separable (capable of being
separated and sold, transferred,
1.identifiable licensed or exchanged either
individually or as part of a package) or
• it arises from contractual or other
legal rights.

2.non-monetary asset Monetary assets are money held and

assets to be received in fixed or
determinable amounts of money.

3.without physical substance.

 Examples Intangible resources

Entities frequently invest in intangible resources such as:

copyrights
computer software
patents customer lists
motion picture films
import quotas
fishing licenses
franchises customer loyalty
customer/supplier relationships

market share Management Skill

Some of these resources, but not all, meet the definition of intangible asset.
 Example: Intangible assets
A Pharmaceutical company has two key resources:
 the drug formulas
 the knowledge and expertise of its chemists.
The chemists are required to provide one month's notice if they choose to resign.
Which of these, if any, would be considered an intangible asset under IAS 38?

The drug formulas:

Probably an intangible asset if the entity has the power to obtain the future
economic benefits and it is able to restrict the access of others to those
benefits (e.g registered patent)

The chemists' knowledge and expertise: Not intangible asset since the entity
does not have control over their knowledge.
 CRITERIA FOR RECOGNITION
No

Not an 3. Capable of generating Defined

intangible future economic benefits?
asset
No Yes
2. 4. Probable that future
Controlled? economic benefits will be
generated?
No Yes
Yes No
1. 5. Cost reliably
Identifiable? measured?

Yes No
Intangible Yes
Not
resource Recognised recognised
 CRITERIA FOR RECOGNITION

Intangible Assets: Recognized

a. When it satisfies asset definition criteria(Control)

b. It is probable that the future economic benefits that are

attributable to the asset will flow to the entity.
c. The cost can be measured reliably.

This material is the property of Department of Accounting and Finance, CoBE, AAU.
Permission must be obtained from the Department prior to reproduction
 IAS 38 –Initial Measurement

Recognise at cost

Recognise if the fair value can

be reliably measured

What are the Do not recognise unless

various ways strict criteria are met
intangible asset can
be recognised by an
Recognise at fair value or
entity?
nominal amount plus any directly
attributable expenditures

Recognise at fair value, or the carrying

amount of the asset given up
 IAS 38 –Initial Measurement- Separately
Purchased

 Intangible Assets acquired through separate purchase are initially

measured at cost which equal to:
o purchase price (including import duties & non refundable
purchase taxes after deducting trade discounts and rebates) and
o any directly attributable costs of preparing the asset for its
intended use like:
 costs of employee benefits directly related to the acquisition of an
intangible asset
 professional fees
 costs of testing the asset
 IAS 38 – Recognition & Measurement
Acquired through a business combination
 Asset criterion is always considered to be satisfied
 cost can be measured reliably and it is deemed to be the fair value at
the acquisition date
 recognised once it:
o meets the definition of asset
o is identifiable  separable or arises from contractual or other
legal rights
…regardless of whether recognised before the business
combination or not.
 IAS 38 – Recognition & Measurement of
Acquisition of IA by way of government grant
• An entity may choose to recognize both the intangible asset by way
of government grant initially at fair value .

 if an entity chooses not to /not able to determine fair value to

recognise the asset initially at fair value, the entity recognises the
asset initially at a nominal amount plus any directly attributable
expenditures

 Examples of intangible assets acquired by way of government grant

include:
o airport landing rights
o licenses to operate radio or television stations
o import licenses .
o rights to access other restricted resources.
 IAS 38 – Recognition & Measurement
Internally generated assets
Internally generated goodwill: cannot be recognised as an asset since it is NOT an
identifiable resource that can be measured reliably at cost

Internally generated brands, mastheads, publishing titles, customer lists and

items similar in substance: cannot be recognised as intangible assets since they
cannot be distinguished from the cost of developing the business as a whole

Internally generated intangible assets:

to assess if an internally generated intangible asset meets the recognition
criteria, the generation of the asset is split into two phases:
IAS 38 – Recognition & Measurement
Internally generated intangible assets

Research
original and planned investigation undertaken with
the prospect of gaining new scientific or technical
knowledge and understanding

Development
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
 IAS 38 – Recognition & Measurement
Research phase

Examples include:
Activities aimed at obtaining new knowledge
Search for, evaluation and final selection of
applications of research findings or other
knowledge
Search for, formulation, design, evaluation,
and final selection for alternative materials,
devices, products, processes, systems or services

Intangible assets are NOT recognised during this phase 

Expense as incurred
IAS 38 – Recognition & Measurement
Development phase
Recognise an intangible asset at cost if and only if all
can be demonstrated:
1. Technical feasibility of completion of the asset

2. Management's intention to complete & use/sell the

asset

3. Ability to use or sell the intangible asset

4. How the intangible asset will generate probable future

economic benefit

5. Availability of adequate technical, financial and other

resources to complete the development of the asset

6. Ability to measure reliably the expenditures

attributable to the asset during the development phase.
IAS 38 – Recognition & Measurement
Development phase

Examples include:
Design, construction and testing of pre-
production or pre-use prototypes and models
Design of tools involving new technology
Design, construction and operation of a pilot
plant that is not of a scale economically feasible
for commercial production
Design, construction and testing of a chosen
alternative for new or improved materials,
devices, products, processes, systems or services
 IAS 38 – Recognition & Measurement
Development phase
Costs that might be capitalised
Costs of materials and services used or consumed

Costs of employee benefits

Fees to register a legal right

Borrowing costs in accordance with IAS 23 Borrowing Costs

Costs that can't be capitalised

Selling, administrative and other general overhead expenditure unless

directly attributed to preparing the asset for use

Inefficiencies and initial operating losses incurred before the asset achieves

planned performance
Staff training to operate the asset
 Example on the scope of IAS 38
 Case (a): Entity E acquired a computer-controlled machine for
production purposes together with software. Without the
software the machine would not be able to operate. The
tangible element (i.e. the machine) is more significant than the
intangible element (i.e. the software).
 Case (b): E has produced a new computer game. E sells this
game to its customers in the ordinary course of business.
 Case (c): E created a software program that is used by E’s
employees for handling E’s accounting.
 Required: Assess which standard has to be applied by E to the
items described above.
 Test your understanding
 In 20x1 entity E incurred the following expenses:
1. Implementation of an advertising campaign
2. Testing of a preproduction prototype
3. Internal generation of a brand
4. Search for alternatives for a production process
 Required: Assess if these expenses have to be capitalized.
 Subsequent measurement (IAS
38.72-87)

Measure at:
•cost
•less amortisation
•less impairment

Revaluation model
OR permitted only if there is
an active market to the
intangible asset

Measure at:
•fair value at the date of
revaluation
•less amortisation
•less impairment
Amortisation
Amortisation
 Useful Life (IAS 38.88)

An entity shall assess whether the useful life of an intangible asset is:

• finite or

• indefinite

Indefinite useful life  no foreseeable limit to the period the asset is

expected to generate net cash inflows (after analysis of all relevant
factors)
Indefinite ≠ Infinite
 Test your understanding
 Active Asset Inc. owns a freely transferable taxi operator’s
license, which it acquired on January 1, 20X1, at an initial
cost of Birr 10,000. The useful life of the license is five years
(based on the date it is valid for). The entity uses the
straight-line method to amortize the intangible.
 Such licenses are frequently traded either between existing
operators or with aspiring operators. At the balance sheet
date, on December 31, 20X2, due to a government-permitted
increase in fixed taxi fares, the traded values of such a
license was Birr 12,000.
 Test your understanding …ctd
 Required: What journal entries are required:
1. at December 31, 20x1 and 20X2, to recognize the amortization
of the intangible asset?
2. at December 31, 20X2, to reflect the increase/decrease in
carrying value (cost or revaluated amount less accumulated
depreciation) on the revaluation of the operating license based
on the traded values of similar license?
3. What would be the resultant carrying value of the intangible
asset after the revaluation?
 Test your understanding …ctd
 The company must recognize the intangible asset’s annual
amortization expenses at the end of each year. Hence, the
journal entries to be recorded in the books of account at
December 31 of the years 20x1 and 20x2 are:
 At December 31, 20X1 (Birr)
 Dr Intangible asset—amortization Expense 2,000
 Cr Intangible asset—Accumulated Amortization 2,000
 At December 31, 20X2
 Dr Intangible asset—amortization Expense 2,000
 Cr Intangible asset—Accumulated Amortization 2,000
 Test your understanding …ctd
 The journal entries to be recorded in the books of account in
20x2 to reflect the increase in carrying value are (Birr)
 Dr Accumulated amortization 4,000
 Dr Intangible asset—cost 2,000
 Cr Revaluation reserve 6,000
(Being uplift of net book value to revalued amount)
 The net result is that the asset has a revised carrying amount of
12,000 (10,000 – 4,000 + 6,000).
 Changing models

unless an active market ceases to exist (which may indicate impairment)

 MAJOR DISCLOSURES

Internally Disclose Acquired

generated separately

Useful lives Gross

Reconciliation
or opening & Re-valued
of movements
amortisation closing intangibles
in year
rates balances

Also, R&D costs expensed in the period

 (SIC 32 Intangible Assets – Web Site
Costs)
To be IA, the entity needs to demonstrate that the web site generate future benefits ( if the site
enables making orders online (generation of revenue)
 it is not IA if it is designed primarily for advertising products/services and hence all development
and running costs are expensed.
 If considered as IA, cost of development are capitalized and expenditures incurred during the
operating stage should be expensed to P&L.
Stages of website development costs:
1. Planning- feasibility studies, defining objectives and specifications, evaluating alternatives and
selecting preferences. Similar to the research phase, expensed to P&L when it is incurred
Development stages(capitalized)
2. Application and Infrastructure Development - obtaining a domain name, purchasing and
developing hardware and operating software, installing developed applications .
3. Graphical Design Development - designing the appearance of web pages
4. Content Development - creating, purchasing, preparing and uploading information on the web
site before the completion of the web site's development.
 THE END
Q&A
This material is the property of Department of Accounting and Finance, CoBE, AAU.
Permission must be obtained from the Department prior to reproduction