Nguyễn Thị Thu Hiền 2016

IAS 38- Intangible Assets

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 Objective

The objective of IAS 38 is:

• prescribe the accounting treatment for intangible assets that are
not dealt with specifically in another Standard.
• recognise an intangible asset
• measure the carrying amount of intangible assets
• require specified disclosures about intangible assets.

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 Objective

In this Chapter your focus should be to Ascertain :

􀂙Difference between Intangible Assets (IA) & Goodwill
􀂙Difference between Research & Development Stage
􀂙Initial measurement of Cost , Measurement after recognition
􀂙The Treatment to Internally Generated Goodwill
􀂙IA with Definite & Indefinite Life.
􀂙Impairment of IA with Finite Life & Infinite Life.

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 Contents

1. Definition of intangible asset

2. Recognition & initially measurement
3. Measurement after initially measurement
4. Derecognition
5. Disclosure

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1. Definition of intangible asset

An intangible asset is an identifiable

nonmonetary asset without physical substance;
The essential characteristics:
i)Resources controlled by the entity from which
future economics benefits are expected to flow to
the entity;
ii)Lack physical substance;
iii)Identifiability

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1. Definition of intangible asset

Intangible
assets lack Bu
What is physical t
an are they
substance mo no
intangible ne t
asset? ass tary
et

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1. Definition of intangible asset

 Bank deposits Intangible

Accounts receivable monetary
Investment assets

IFRS 9
Financial instrument

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 Intangible Assets covered by other IFRS

• Deferred tax assets (IAS 12)

• Leases (IAS 17)
• Assets arising from employee benefits (IAS 19)
• Financial assets (IAS 32, 39, IFRS 7, IFRS9, IAS 28, IAS 31)
• Goodwill (IFRS 3)
• Assets in extractives industries (IFRS 6)
• Assets classified held for sale under IFRS 5

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1. Definition of intangible asset

Contro nt i f i a bl
l Id e
e
How recognize an
intangible asset?

Future
economic
benefit

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 More clarification on its meaning

•An asset is identifiable if it either:

 is separable that is separable -in other words,
Identifiability that is capable of being separated from the entity
and sold, transferred, licensed, rented, or exchanged,
either individually or together with a related
contract, asset, or liability; or
 that arises from contractual or other legal rights,
regardless of whether those rights are transferable or
separable from the entity or from other rights and
obligations.

The acquirer shall recognize, separately from goodwill, the identifiable

intangible assets acquired in a business combination (IFRS 3)

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 More clarification on its meaning

An entity controls an asset if the entity has

the power
 to obtain the future economic benefits
 restricts the access
 legal rights.

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 More clarification on its meaning

Future economic benefit

 Economic benefits may come
from the sale of products or
services, or from a reduction
in expenditures.

For example, the use of

intellectual property in a
production process

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IAS 38 Examples of Intangible Assets

A Corporation ill
Patents d w
o
Go
Intangible assets
are usually
classified as
subcategory of
o n -
rights
l e n long term asset
Co py
g ib s e t s ar
e
ta n y as sof
tw
In etar
n
mo
r
to me
s
Cu ists
l
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Trad R/D

13
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IAS 38 Trademark

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 Goodwill

-Goodwill is the most intangible

of the intangible assets
-Goodwill only occurs when a
company acquires the assets and
liabilities of another company and
pays more than they are worth.

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 Goodwill

 Goodwill is very different from other

intangibles because goodwill derives
from the acquisition of a company
 In such an acquisition, certain assets are
acquired and certain liabilities are
assumed. The acquired assets and
liabilities are recorded on the books of
the acquiring company at fair value.
 Normally, the acquiring company would
only pay a purchase price equal to the
fair value of the net asset acquired.

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 Goodwill
A business acquires the following assets and liabilities of another
business for 85.000$:
-Cash: 10.000 $
-Building: 45.000 $
-Account receivable : 25.000$
-Account payable: 15.000$
Goodwill = 85.000 – ((10.000 + 45.000 + 25.000) – 15.000)
= 20.000 $

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2. Recognition & initially measurement

Recognition criteria:
a)it is probable that the expected future economic
benefits will flow to the entity; and
b) the cost of the asset can be measured reliably.

• An entity shall assess the probability using reasonable

and supportable assumptions

Initial measurement at cost

Rarely subsequent expenditure as a result of addition
or replacement is added to an Intangible Asset

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2. Recognition & initially measurement
• The key criteria for determining whether intangibles assets are
to be recognized are:
 Whether the intangible asset can be identified separately
from other aspects of the business entity;
 Whether the use of the intangible asset is controlled by
entity as a result of its past action and events;
 Whether future economic benefits can be expected to flow
to the entity; and
 Whether the cost of the asset can be measured reliably

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 Intangible assets may arise from:

• The measurement of cost depends on the acquirement

method of an intangible asset.
1 . Separate acquisition
2 . Acquisition as part of a business combination
3 . Acquisition by way of a government grant
4 . Exchange of assets
5. Self-creation (internal generation):
- Goodwill
- Another assets

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 1 . Separate acquisition

The cost comprises:

a) its purchase price,
b) any directly attributable cost of
preparing the Asset
for its intended use.

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 Example

Brilliant Inc. acquires copyrights to the original recordings of a

famous singer. The agreement with the singer allows the company
to record and rerecord the singer for a period of five years. During
the initial six-month period of the agreement, the singer is very sick
and consequently cannot record. The studio time that was blocked
by the company had to be paid even during the period the singer
could not sing. These costs were incurred by the company:
(a) Legal cost of acquiring the copyrights $10 million
(b) Operational loss (studio time lost, etc.) during start-up period $
2 million
(c) Massive advertising campaign to launch the artist $ 1 million
•Required Which of the above items is a cost that is eligible for
capitalization as an intangible asset?

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 Which cost can or cannot be included?
• Directly attributable costs are:
a) costs of employee benefits
b) professional fees
c) costs of testing
• Expenditures that are not part of the cost of an intangible asset
are:
a) costs of introducing a new product or service (including costs of
advertising and promotional activities);
b) costs of conducting business in a new location or with a new class
of customer (including costs of staff training); and
c) administration and other general overhead costs.

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 3 . Acquisition by way of a government grant
An intangible asset may be acquired free of charge, or for nominal
consideration, by way of a government grant.
• In accordance with IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance, an entity may choose to
(i) recognise both the intangible asset and the grant initially at fair
value (in accordance with IAS 20), or
(ii) recognises the asset initially at a nominal amount (the other
treatment permitted by IAS 20) plus any expenditure that is directly
attributable to preparing the asset for its intended use.

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 4 . Exchange of assets

Similar to the requirements

in IAS 16
• The fair value of asset given up;
Commercial Substance • The fair value of the asset
received, if this is more clearly
Fair Value of evident than the fair value of the
Exchanged Assets asset given up;
• The carrying amount of the asset
given up, when neither of the fair
value can be measured reliably

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 5. Self-creation (internal generation)

Goodwill
• Internally generated goodwill may not be
recognized as an asset because it fails to
meet recognition criteria including:
 Reliable measurement of cost,
 An identity separate from other
resources, and
 Control by the reporting entity

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 Internally generated goodwill

• Internally generated goodwill may not be

recognized as an asset because it fails to
meet recognition criteria including:
 Reliable measurement of cost,
 An identity separate from other
resources, and
 Control by the reporting entity

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 5. Self-creation (internal generation)

other assets • Research: The original and planned

investigation undertaken with the prospect
of gaining new scientific or technical
knowledge and understanding.
• Development: The application of
research findings or others knowledge to a
plan or design for the production of new or
substantially improved materials, devices,
products, processes, systems, or services
prior to commencement of commercial
production or use.

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 Research phase:

Examples:
 Activities aimed of obtaining new knowledge
The search for, evaluation and final selection of,
applications of research findings or other
knowledge
The search for alternative for materials, devices,
products, processes, systems or services; and
the formulation, design, evaluation and final
solution of possible alternatives for new or
improved materials, devices, products, processes,
systems or services
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 Development phase:

Examples:
 the design, construction and testing of pre-
production or pre-use prototypes and models;
The design, construction and operation of a pilot
plan that is not of a scale economically feasible for
commercial production; and
The design, construction and testing of a chosen
alternative for new or improved materials, devices,
products, processes, systems or services.

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 Internally generated other than goodwill

When can the cost be capitalised?

Expensed and cannot be restated Capitalised as intangible asset

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 Research and Development
An intangible asset arising from development shall be recognised if:

a) Completion of the technical feasibility.

b) Intention to complete and use or sell it.
c) Ability to use or sell
d) Will generate probable future economic benefits.
e) the availability of adequate technical, financial and other
resources to complete
f) Ability to measure reliably the expenditure attributable

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 Research and Development

To demonstrate how an intangible asset will

generate probable future economic benefits,
– an entity assesses the future economic benefits to
be received from the asset using the principles in
IAS 36 Impairment of Assets.
• If the asset will generate economic benefits only
in combination with other assets,
– the entity applies the concept of cash-generating
units in IAS 36.

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 Research and Development

Costs to be expensed
• Research
• Start-up
– establishment costs
– pre-opening costs
• Training
• Advertising and promotional activities
• Relocating and re-organising (restructuring)
• Customer lists, brands, mastheads, and
publishing titles that are internally generated

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 Research and Development

The cost of an internally generated

intangible asset
– is the sum of expenditure incurred from
the date when the intangible asset first
meets the recognition criteria.
– prohibits reinstatement of expenditure
previously recognised as an expense.

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 Example

An entity is developing a new production process:

• During 2007, expenditure incurred was $1,000, of which:
a) $900 was incurred before 1 Dec. 2007 and
b) $100 was incurred between 1 Dec. 2007 and 31Dec. 2007
• The entity is able to demonstrate that, at 1 Dec.2007, the production
process met the criteria for recognition as an intangible asset.
• The recoverable amount of the know-how embodied in the
process is estimated to be $500.
• During 2008, expenditure incurred is $2,000.
• At the end of 2008, the recoverable amount of the know-how
embodied in the process is estimated to be $1,900
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 Intangible Assets??

• Whether technical know-how is

under the control of the entity or not?

• What about market share and

customer loyalty?

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3. Subsequent measurement

• An entity shall choose either:

Cost model Revaluation model

• If an intangible asset is accounted for using the revaluation model,

– all the other assets in its class shall also be accounted for using
the same model unless there is no active market for those assets.
An active market is a market in which all the following conditions
exist:
a) the items traded in the market are homogeneous;
b) willing buyers and sellers can normally be found at any time; and
c) prices are available to the public.
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3. Subsequent measurement

Cost model

After initial recognition, an intangible asset shall be

carried at its cost less any accumulated depreciation
and any accumulated impairment losses

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3. Subsequent measurement

Revaluation model

• After initial recognition, an intangible asset shall be

carried at a revalued amount, being its fair value at
the date of the revaluation, less any subsequent
accumulated amortisation and any subsequent
accumulated impairment losses.
• For revaluations under IAS 38, fair value shall be
determined by reference to an active market.
• Revaluations shall be made with regularity

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3. Subsequent measurement
Same as IAS 16 PPE
Revaluation model
Recognition of revaluation surplus or deficit
• If carrying amount is increased as a result of a revaluation,
– the increase shall be credited directly to 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
• If carrying amount is decreased as a result of a revaluation,
– the decrease shall be recognised in profit or loss.
– However, the decrease shall be debited directly to equity under
the
heading of revaluation surplus to the extent of any credit balance in
the revaluation surplus in respect of that asset.
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 Intangible asset

Identifiable Goodwill

Legal
Separable
contractual

Finite Infinite

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 Intangible asset

Finite Infinite Goodwill

Amortised Not Amortised But

over Useful Tested for Impairment At
Life Least Annually

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 Amortisation

Examples Amortization
Limited Customer list; Copyright Amortize
life Franchises; Licenses
intangibles Permits; Patents
Unlimited Trademark; Franchises Do not
life Licenses; Goodwill amortize
intangibles Internet domain name

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 Amortisation

Finite Useful Life

• The depreciable amount of an intangible asset with a finite

useful life shall be allocated on a systematic basis over its useful
life.
• Amortisation
– shall begin when the asset is available for use,
– shall cease at the earlier of
 the date that the asset is classified as held for sale (or included
in a disposal group held for sale) in accordance with IFRS 5 and
 the date that the asset is derecognised

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 Amortisation Method

Finite Useful Life

• The amortisation method used shall reflect the pattern in which the
asset’s future economic benefits are expected to be consumed by the
entity.
– If that pattern cannot be determined reliably, the straight-line
method shall be used.
• The amortisation charge for each period shall be recognised in
profit or loss unless this or another Standard permits or requires it to
be included in the carrying amount of another asset.

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 Amortisation Method
• Amortization period
• Residual value: is presumed to be zero, unless
– There is a commitment by a third party to acquire the asset at the end
of its useful life, or
– There is an active market for that type of intangible asset, and residual
value can be measured reliably by reference to that market and it is
probable that such a market will exist at the end of the useful life
• Periodic review of useful life assumptions and amortization methods
employed.

The journal entry to record amortization of an intangible asset:

(i)Direct reduction of the intangible asset; or
(ii)Indirect reduction of the carrying value of the intangible
asset using a contra-assets account
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 Indefinite Useful Life

• An intangible asset with an indefinite useful life shall not be

amortised.
• In accordance with IAS 36 Impairment of Assets
– an entity is required to test an intangible asset with an indefinite
life for impairment by comparing its recoverable amount with its
carrying amount
a) annually, and
b) whenever there is an indication that the intangible asset may be
impaired

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 Impairment Losses
• To determine whether an intangible asset is impaired, an entity
applies IAS 36 Impairment of Assets, that explains
– when and how an entity reviews the carrying amount of its assets,
– how it determines the recoverable amount of an asset and
– when it recognises or reverses an impairment loss.
• In IAS 36, under normal situation

• An entity shall assess at each reporting

date whether there is any indication that
an asset may be impaired.
• If any such indication exists, the entity
shall estimate the recoverable amount of
the asset.

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 Impairment Losses

• However, irrespective of whether there is any indication of impairment,

an entity shall also:
 test
• an intangible asset with an indefinite useful life, or
• an intangible asset not yet available for use
- for impairment annually by comparing its carrying amount with its
recoverable amount

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 Example
• A business has invested in a new process for extracting oil form
shale rock. Due to a change in oil prices, the process is under
review for impairment. The predicted future cash flows are
100.000 $. The carrying amount is 150.000$ and the fair value is
120.000 $.

This asset is impaired because the future cash

flows are less than the carrying amount

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4. Derecognition
• An intangible asset shall be derecognized:
a) on disposal; or
b) when no future economic benefits are expected from its use or
disposal.
• The gain or loss arising from the derecognition shall be determined as
the difference between the net disposal proceeds, if any, and the
carrying amount
• It shall be recognized in profit or loss when the asset is derecognized
(unless IAS 17 Leases requires otherwise on a sale and leaseback).
• Gains shall not be classified as revenue.

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5. Disclosure
• IAS 38 introduces some additional disclosure requirements
• Changes are mainly amendments for the changes on finite and
indefinite useful life
• Disclosures can be divided into disclosures for:
– General aspects for all intangible assets
– Intangible assets measured at revalued amount
– Research and development expenditure
– Other information

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