IAS 38 | Intangible Assets

1

Objective

The objective is to prescribe the accounting treatment for intangible assets not dealt with in another Standard. The Standard requires recognising an asset only if specified criteria are met and specifies measurement and disclosure requirements.

2

Scope

This Standard applies to accounting for intangible assets, except: (a) those within the scope of another Standard; (b) financial assets (IAS 32); (c) exploration and evaluation assets (IFRS 6); and (d) expenditure on development/extraction of minerals, oil, natural gas, etc.

3

Other Standards

If another Standard prescribes accounting for a specific type of intangible asset, that Standard applies (e.g., intangible assets held for sale under IAS 2, deferred tax assets under IAS 12, leases under IFRS 16, employee benefits under IAS 19, goodwill under IFRS 3, insurance contracts under IFRS 17, assets from customer contracts under IFRS 15).

4

Tangible vs Intangible

Some assets incorporate both tangible and intangible elements (e.g., software on a CD). Judgement is used to assess which element is more significant. If software is integral to hardware (e.g., OS for a machine tool), it is property, plant and equipment (IAS 16). If not integral, it is an intangible asset.

5

Scope Application

The Standard applies to expenditure on advertising, training, start-up, and R&D activities. Although R&D may result in a physical prototype, the physical element is secondary to the intangible knowledge.

6

Rights under Leases

Rights held by a lessee under licensing agreements for items like films, video recordings, plays, manuscripts, patents, and copyrights are within the scope of this Standard (excluded from IFRS 16).

7

Exclusions

The Standard excludes expenditure on exploration/extraction in extractive industries and insurance contracts due to their specialised nature. However, it applies to other intangible assets (e.g., software) used in those industries.

8

Definitions

The following terms are used in this Standard with the meanings specified:

• Amortisation: The systematic allocation of the depreciable amount of an intangible asset over its useful life.
• Carrying amount: The amount at which an asset is recognised in the statement of financial position after deducting any accumulated amortisation and accumulated impairment losses thereon.
• Cost: The amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction, or, when applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based Payment.
• Development: 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.
• 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.
• Intangible asset: An identifiable non-monetary asset without physical substance.
• Research: Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

9

Examples

Common examples of intangible resources include computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer/supplier relationships, customer loyalty, market share, and marketing rights.

10

Definition Criteria

Not all items in paragraph 9 meet the definition (identifiability, control, future benefits). If an item does not meet the definition, expenditure is recognised as an expense. If acquired in a business combination, it forms part of goodwill.

11

Identifiability

An intangible asset must be identifiable to distinguish it from goodwill. Goodwill represents future benefits from other assets acquired in a business combination that are not individually identified.

12

Identifiable Criteria

An asset is identifiable if it: (a) is separable (capable of being separated/sold/licensed/rented/exchanged); or (b) arises from contractual or other legal rights, regardless of transferability.

13

Control

Control means the power to obtain future economic benefits and restrict others' access to them. Legal rights usually demonstrate control, but control can exist without them if benefits can be protected in other ways.

17

Future Benefits

Future economic benefits include revenue from sales, cost savings, or other benefits from using the asset.

18

Recognition

Recognition requires demonstrating the item meets: (a) the definition of an intangible asset; and (b) the recognition criteria (probable benefits and reliable cost measurement).

24

Initial Measurement

An intangible asset shall be measured initially at cost.

25

Separate Acquisition

For separately acquired assets, the probability criterion is always considered satisfied because the price reflects expectations of benefits.

33

Business Combination

If acquired in a business combination, cost is fair value at the acquisition date. The probability criterion is always considered satisfied. The reliable measurement criterion is also always considered satisfied if the asset is separable or arises from legal rights.

45

Exchanges of Assets

Assets acquired in exchange for non-monetary assets are measured at fair value unless the transaction lacks commercial substance or fair value is not reliably measurable. If not at fair value, cost is the carrying amount of the asset given up.

48

Internally Generated Goodwill

Internally generated goodwill shall not be recognised as an asset. It is not an identifiable resource controlled by the entity that can be measured reliably at cost.

54

Research Phase

No intangible asset is recognised from research (or the research phase). Expenditure on research shall be recognised as an expense when incurred.

57

Development Phase

An intangible asset arising from development shall be recognised if, and only if, an entity can demonstrate all of: (a) technical feasibility of completion; (b) intention to complete/use/sell; (c) ability to use/sell; (d) how it will generate probable future economic benefits (e.g., market existence); (e) availability of resources to complete; and (f) ability to measure expenditure reliably.

63

Internal Brands

Internally generated brands, mastheads, publishing titles, customer lists, and similar items shall not be recognised as intangible assets. Expenditure on them cannot be distinguished from the cost of developing the business as a whole.

74

Cost Model

After initial recognition, an intangible asset shall be carried at cost less any accumulated amortisation and any accumulated impairment losses.

75

Revaluation Model

After initial recognition, an asset shall be carried at a revalued amount (fair value at revaluation date less subsequent amortisation/impairment). Fair value shall be determined by reference to an active market.

78

Active Market Rarity

Active markets for intangible assets are uncommon (e.g., they exist for taxi licences but not for unique brands/patents). Prices are often not public.

88

Useful Life Assessment

An entity assesses whether useful life is finite or indefinite. Indefinite means there is no foreseeable limit to the period of cash inflows (not infinite).

97

Amortisation (Finite)

The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortisation begins when the asset is available for use.

107

Indefinite Life

An intangible asset with an indefinite useful life shall not be amortised.

108

Impairment (Indefinite)

An entity is required to test an indefinite life intangible asset for impairment annually and whenever there is an indication of impairment (IAS 36).

112

Derecognition

An intangible asset is derecognised on disposal or when no future economic benefits are expected.

118

Disclosures

Disclosures required for each class: useful lives (indefinite/finite), amortisation methods, gross carrying amount/accumulated amortisation at start/end, line item of amortisation, and a reconciliation of carrying amount (additions, disposals, revaluations, impairment, amortisation).

130

Effective Date

The Standard applies to assets acquired in business combinations from 31 March 2004 and all other assets from the first annual period beginning on or after 31 March 2004.