Intangible Assets

IAS 38

Chapter 3
 Intangible Asset- IAS 38

An identifiable non-monetary asset without physical substance

Licenses and quotas
Intellectual property, e.g. Patents and copyrights
Brand names
Trademarks

Controlled by
Separable entity
Asset
Identifiable
Legal/ Future
Contractual Economic
Rights Benefits
Recognition

To be recognized in the financial statements, an intangible asset must:

Meet the definition of intangible asset
Meet the recognition criteria framework:
• Future economic benefits
• Cost can be measured reliably

Initial recognition is at Cost

Measurement after Initial Recognition

The Cost Model

Carrying Value = Cost – Amortizatioin – Impairment losses
• Amortization is charged over the useful life, starting when it is available for use

Finite useful life: Amortization is as per straight-line method

Indefinite useful life: No amortization; Tested for impairment annually

The Revaluation Model

Carrying Value= Fair Value – Amortization – Impairment losses
Fair value should be determined by reference to an active market
• Homogeneous items are traded
• Prices are available to public, on ongoing basis
• Sufficient frequency and volume of transactions

IAS 38- Active markets for intangibles(except licenses) are rare

Internally-generated Intangibles

Can’t be capitalized- The associated cost cant be measured reliably

Their cost can’t be separated from the overall cost of developing
business
The following internally-generated items may never be recognized:
• Goodwill ('inherent goodwill')
• Brands
• Mastheads
• Publishing titles
• Customer lists
Examples

How should the following intangible assets be treated in the financial

statements?
a) A publishing title acquired as part of a subsidiary company.
b) A license purchased in order to market a new product.
c) Depreciation of the plant (being used in the development
process).
 What after the development phase is over
Goodwill- IFRS 3

 An asset representing the future economic benefits arising from assets acquired
in a business combination that are not individually identified and separately
recognized.
 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: Assets (and liabilities) which can be identified and sold off
separately; include identifiable intangibles
 Fair Value: The price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (i.e. an exit price).
 Factors contributing to goodwill: reputation, technical expertise, possession of
contracts, good management/staff
 Negative goodwill: A gain on a bargain purchase; An income recognized in SPL
Purchased vs non-purchased Goodwill
Purchased
Arises when one business
acquires another as a going
concern
Arises on the consolidation of
a subsidiary
Recognized (has a certain
value at a particular time)
Non-purchased
Inherent goodwill
No identifiable value
Not recognized in financial
statements (cost cant be
measured reliably)
Research & Development

Research is original and planned investigation undertaken with the

prospect of gaining new scientific knowledge and understanding.
• Pharmaceutical industry (development of an idea)

Immediately charged to the statement of profit or loss.

• No probable economic benefits

Development is the application of research findings/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.
Capitalised in SFP
Research & Development

Development expenditure is recognized as intangible asset, if it meets the following

criteria:
• Probable future economic benefits from the asset (sale/internal cost savings)
• Intention to complete the intangible asset and use or sell it
• Resources available to complete the development and to use or sell the intangible asset
• Ability to use or sell the intangible asset
• Technical feasibility of completing the intangible asset so that it will be available for use
or sale
• Expenses attributable to the intangible asset during its development can be measured.
Development expenditure should be amortized over its useful life, when the commercial
production begins.
Example
Example
 Example

R&D per month = 750,000 / 10 = $75,000

Number of months after approval = 4
R&D to be capitalized till 30 Apr = 4 × $75,000 = $ 300,000
Carrying amount = $ 295,000
Amortization after sale (June) = 300,000 / 5 / 12 = $ 5,000