Intangible Assets
IAS 38
Chapter 3
Intangible Asset- IAS 38
An identifiable non-monetary asset without physical substance
vLicenses and quotas
vIntellectual property, e.g. Patents and copyrights
vBrand names
vTrademarks
Controlled by
Separable entity
Asset
Identifiable
Legal/ Future
Contractual Economic
Rights Benefits
Recognition
To be recognized in the financial statements, an intangible asset must:
vMeet the definition of intangible asset
vMeet the recognition criteria framework:
• Future economic benefits
• Cost can be measured reliably
vInitial recognition is at Cost
Measurement after Initial Recognition
The Cost Model
v Carrying Value = Cost – Amortizatioin – Impairment losses
• Amortization is charged over the useful life, starting when it is available for use
v Finite useful life: Amortization is as per straight-line method
v Indefinite useful life: No amortization; Tested for impairment annually
The Revaluation Model
v Carrying Value= Fair Value – Amortization – Impairment losses
v 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
v IAS 38- Active markets for intangibles(except licenses) are rare
Internally-generated Intangibles
vCan’t be capitalized- The associated cost cant be measured reliably
vTheir cost can’t be separated from the overall cost of developing
business
vThe 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).
ü What after the development phase is over
Goodwill- IFRS 3
v An asset representing the future economic benefits arising from assets acquired
in a business combination that are not individually identified and separately
recognized.
v The difference between the value of a business as a whole and the aggregate of
the fair values of its separable net assets
v Separable net assets: Assets (and liabilities) which can be identified and sold off
separately; include identifiable intangibles
v 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).
v Factors contributing to goodwill: reputation, technical expertise, possession of
contracts, good management/staff
v Negative goodwill: A gain on a bargain purchase; An income recognized in SPL
Purchased vs non-purchased Goodwill
Purchased Non-purchased
vArises when one business vInherent goodwill
acquires another as a going
concern
vArises on the consolidation of vNo identifiable value
a subsidiary
vRecognized (has a certain vNot recognized in financial
value at a particular time) statements (cost cant be
measured reliably)
Research & Development
vResearch is original and planned investigation undertaken with the
prospect of gaining new scientific knowledge and understanding.
• Pharmaceutical industry (development of an idea)
vImmediately charged to the statement of profit or loss.
• No probable economic benefits
vDevelopment 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.
vCapitalised 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
