IAS 38, Intangible Assets

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IAS 38 deals with intangible assets. So rather than tangible assets

that have a physical substance, we’ll be looking at those assets that
cannot be seen or touched but still add value to the business —
assets such as copyrights, patents, licenses, brands, and even less
obvious assets, such as development costs.

This is one of the older standards, issued in 1998 with limited

amendments in the interim. However, in an age in which intangibles
are accounting for an increasingly large proportion of a company’s
valuation (think Facebook, Google, and so on), stakeholders are
starting to question the relevance of the standard in its current
format. More on that later.

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Learning objectives
• Identify an intangible asset.
• Identify which intangible assets may be recognized
on the SOFP.
• Distinguish between research and development
costs and apply the six criteria for capitalization of
development expenditures.
• Determine the appropriate measurement of an
intangible that we have recognized.
• Recall the rules for subsequent measurement of an
intangible asset.
• Recognize the disclosures required by IAS 38.

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Learning objectives

 Identify an intangible asset.

 Identify which intangible assets may be recognized on
the SOFP.
 Distinguish between research and development costs
and apply the six criteria for the capitalization of
development costs.
 Determine the appropriate measurement of an
intangible that we have recognized.
 Recall the rules for subsequent measurement of an
intangible asset.
 Recognize the disclosures required by IAS 38.

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Certain assets are not covered by IAS 38

Financial assets Exploration and Mineral rights

IAS 32 / IFRS 9 evaluation assets and reserves
IFRS 6

Intangibles arising Intangibles covered

from insurance costs by another standard

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What isn’t covered by IAS 38

The following assets are not covered by IAS 38:
 Financial assets — IAS 32/IFRS 9, Financial Instruments
 Exploration and evaluation assets — IFRS 6, Exploration
for and Evaluation of Mineral Resources
 Mineral rights, oil and gas exploration costs
 Specific intangibles in which the treatment is covered by
another standard (e.g., goodwill acquired in a business
combination — IFRS 3, Business Combinations;
intangibles held for sale — IAS 2; deferred tax assets—
IAS 12, Income Taxes)

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An intangible asset is defined
as an identifiable nonmonetary
asset without physical
substance.

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Defining intangible assets

When we think of intangible assets, we rightly think of things such as patents, licenses, and brands.

But not all intangibles will appear on a company’s SOFP. Only those that meet the definition of an
intangible asset per IAS 38 will be recognized (i.e., capitalized). So it is crucial that we start with this
definition.

An intangible asset is defined by IAS 38 as an

“identifiable nonmonetary asset without physical substance.”

The lack of physical substance is easy to understand (brands, for example, are not assets that can be
seen or touched in the same way as a tangible asset) but the terms identifiable and even asset need
further consideration.

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What does IAS 38 mean by identifiable asset?

Identifiable Asset

• Separable • Control
• Contractual or legal rights • Probable future economic benefits
• Cost measured reliably

Recognition criteria

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What does IAS 38 mean by identifiable asset?

Let’s start with “identifiable.”

Identifiable
When IAS 38 talks about an asset being identifiable, it means that an asset should either
 be separable (i.e., capable of being sold/disposed of separately without disposing of other parts of the business) or
 arise from contractual or other legal rights.

A patent would be identifiable because acquiring a patent gives a company the legal right to prevent others from using or selling its inventions. Internally generated goodwill, on the other hand, could not be
identifiable. It does not arise from legal or contractual rights and cannot be disposed of separately.

Before we go any further, you can now see why internal goodwill never appears on a company SOFP (this does not include goodwill arising during the course of consolidation, which is covered in IFRS 3).

Asset
IAS 38 defines an asset as a resource controlled by an entity as a result of past events, and from which future economic benefits are expected to flow to the entity.

This is different from the definition provided in the conceptual framework, which defines an asset as follows:

A present economic resource controlled by an entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.

Conceptual framework: Definition of an asset

Both definitions refer to control; they differ in that the conceptual framework definition has a lower threshold regarding economic benefits: It requires potential economic benefits, whereas IAS 38 requires
expected economic benefits.

So control is an essential element of an intangible asset. This not only gives the company the right to access future economic benefits but it also gives the right to restrict others from access to those
benefits.

Intangibles such as patents and licenses meet the definition of control.

Employee costs such as sign-on fees, bonuses, and training costs cannot be recognized as intangible assets because employees are not controlled by an entity.

The IAS 38 definition of an asset also refers to future economic benefits. This is reinforced in the IAS 38 recognition criteria, which state that an intangible asset is only recognized if it is probable that
expected future economic benefits will flow to the entity and its cost can be measured reliably.

Again this differs from the recognition criteria provided in the conceptual framework, which states that an asset is recognized when recognition will provide users of the financial statements with useful
information, i.e.,
 Relevant information and
 A faithful representation.

Conceptual framework: Recognition criteria

Although the recognition criteria differ in their wording, they are closely linked and the principles are the same.

Remember that in all cases the requirements of an IFRS Standard outrank the requirements of the conceptual framework; therefore, we’ll concentrate on the IAS 38 criteria.

We will shortly see the application of these criteria to specific categories of intangibles but, in summary, an intangible is recognized when it is
 identifiable;
 controlled;
 has probable future economic benefits; and

85
 can be reliably measured.

Any costs that do not meet these criteria will not be

capitalized, but instead, expensed as incurred.

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Discussion exercise — Recognition of intangibles
1. A company makes sales under its well-known brand name. This brand has
been built up over many years, and the company believes it is very
valuable. Management wishes to capitalize the costs associated with the
brand.
2. A media company wishes to provide television services and has acquired
a license from the local regulator.

Which of these intangibles will be recognized in SOFP?

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Discussion exercise—Recognition of intangibles

Before moving on to the detailed application of the criteria to

certain categories of intangibles, it may be useful for participants to
apply the criteria to a couple of simple examples.

Discussion exercise: Ask participants to review the following two

examples and determine whether the intangibles should be
recognized on the SOFP.

1. A company makes sales under its well-known brand name. This

brand has been built up over many years, and the company
believes it is very valuable. Management wishes to capitalize
the costs associated with the brand.
2. A media company wishes to provide television services and has
acquired a license from the local regulator.

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Discussion exercise solution — Recognition of intangibles

• Not recognized on SOFP

Internally • Costs expensed as incurred
generated brand • Costs cannot be distinguished from
costs of general business development

• Recognize on SOFP at cost

Externally • Company has acquired control of the
acquired license future economic benefits associated with
license
• Cost reliably measured

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Discussion exercise solution

1. The internally generated brand will not be recognized,

as it does not have a reliable measurement and so
recognition could not result in a faithful representation.
The costs of generating an internal brand cannot be
distinguished from other business development costs.

2. The broadcast license will be recognized because the

asset arises from contractual rights, the company
controls the economic benefits arising from the license
(others will be restricted from broadcasting under these
license terms), and the measurement is the price paid.
As a result, recognition of the license provides useful
information.

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Here’s how IAS 38 applies the recognition criteria to the
intangibles

Acquired as part
Internally
Purchased of a business
generated
combination

e.g., purchased e.g., mastheads, e.g., aquiree’s trade name,

trademarks and licenses customer lists, internally formulas, recipes,
generated goodwill technological expertise

Recognized at cost Generally not recognized Recognized on

on consolidated
SOFP if fair value
SOFP can be measured
• Purchase price Expense to P/L reliably
plus directly
attributable costs
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Applying the recognition criteria to intangibles

Now that you have had a chance to consider the IAS 38 recognition criteria, we will see how they are applied to the various categories of intangibles, including the following:

 Purchased intangibles
 Internally generated intangibles
 Intangibles acquired as part of a business combination
 Research and development costs

Purchased
As we saw with the broadcast license example, if an intangible is purchased as a separate acquisition, it is recognized on the SOFP. Therefore, purchased patents, copyrights, and licenses are capitalized and
recognized at cost.

Costs include
 the purchase price (including import duties and nonrefundable purchase taxes less trade discounts and rebates) and
 any directly attributable cost of preparing the asset for its intended use (employee costs — as we saw with IAS 16, professional fees and testing costs).

Purchased intangibles meet the following criteria for recognition:

 They are identifiable (usually because legal or contractual rights are purchased — in addition, if you have separately acquired an asset, you can also dispose of it separately).
 They are controlled (the company purchases the right to the economic benefits and the right to exclude others).
 Future economic benefits are probable (IAS 38 recognizes that the price paid will reflect the expectation of the probability of economic benefits, so the entity expects there to be inflows even if
the timing of these is uncertain).
 The cost can be measured reliably by reference to the purchase price.

Internally generated intangibles

Internally generated intangibles are generally not recognized, but the costs are expensed to profit or loss as they are incurred. (An exception to this arises with certain development costs, which we will
address later).

Internally generated intangibles tend to fail one or more of the criteria for capitalization. Consider these examples:

 An internally generated brand, masthead, or customer list. Costs of developing these cannot be distinguished from costs of developing the business as a whole.

 Internally generated goodwill. This is neither identifiable nor capable of reliable measurement, for the same reasons listed previously.

Intangibles acquired as part of a business combination

When a parent acquires control of a subsidiary company, it will also acquire contractual or legal rights to the intangible assets of that subsidiary, whether or not the intangible is recognized on the subsidiary
SOFP. In accordance with IFRS 3, these intangibles are allocated a fair value at the acquisition date and the parent company will recognize the probability of future economic benefits. The recognition criteria
are therefore satisfied, and such intangibles are recognized on the consolidated SOFP.

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Discussion exercise — Intangibles from a business
combination
A parent acquires a subsidiary with a well-known internally generated
brand name. On the date of acquisition, the fair value of this brand is
estimated at £5 million. What is the effect of this acquisition on the
SOFP of the subsidiary and consolidated financial statements?

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Discussion exercise—Intangibles from a business combination

A parent acquires a subsidiary with a well-known internally generated brand name. On the date of acquisition, the
fair value of this brand is estimated at £5 million. What is the effect of this acquisition on the SOFP of the
subsidiary and consolidated financial statements?

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Discussion exercise solution — Intangibles from a business
combination
Subsidiary SOFP: The brand is not recognized, as it is internally
generated.

Consolidated SOFP: The brand is recognized separately from

goodwill at £5 million.

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Discussion exercise solution

Subsidiary SOFP: The brand is not recognized, as it is internally generated

Consolidated SOFP: The brand is recognized separately from goodwill at £5 million.

90
Many companies undertake significant internal research and
development programs

Investigation into Expense to P/L

Research new scientific or as incurred
technical knowledge

Capitalize if certain criteria met:

• Technical feasibility • Intention to
• Ability to use/sell use/sell
Application of
Development • Ability to generate • Adequate
research findings
future economic resources to
benefits complete
• Reliable measurement
of expenditure
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Many companies undertake significant internal research and development programs.

Many companies undertake significant internal research and development programs. For example, the pharmaceutical company, GlaxoSmithKline, recently reported on its website ( https://uk.gsk.com/en-
gb/careers/areas-of-opportunity/research-and-development)that it spent about £5.3 billion on R&D for new medicines and treatments. Research and development costs are addressed specifically within
IAS 38.

Research
IAS 38 specifically defines research as

“original and planned investigation undertaken with the prospect of gaining new technological knowledge and understanding.”

It is important to appreciate that at the research phase of a project, it is too early for a product to be in place.

For example, a pharmaceutical company investigating a treatment for a virus tests various compounds and their effect on the virus before developing a medicine to place in the market.

Research costs fail the recognition criteria with regard to future economic benefits and therefore must be expensed to profit or loss as incurred.

Development
At the development stage, the research findings will be applied to a plan or design for the production of a new or substantially improved item (e.g., product, device, process) which can be commercially
produced or used.

Going back to the example of the pharmaceutical company developing the virus treatment, the company will eventually develop one of the successful compounds into a medicine that can effectively treat
the virus.

Development costs should be recognized if, and only if, the entity can demonstrate all of the following:

 The technical feasibility of completing the intangible asset so that it will be available for use or sale.
 Its intention to complete the intangible asset and use or sell it.
 Its ability to use or sell the asset.
 How the asset will generate probable future economic benefit (e.g., demonstration of the existence of a market for the asset).
 The availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset.
 Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

It becomes clear that these criteria are aimed at proving the probable economic benefit of the asset.

Conceptual framework: Recognition criteria

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Capitalize the development costs in accordance with these
provisions

• Prospectively from the date that development costs meet

recognition criteria

• All directly attributable costs (materials, services, employee

benefits, fees to register legal rights, amortization of patents and
licenses)

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Capitalizing the development costs

The amount of development cost to be capitalized is the sum of expenditures incurred from the date
when the asset meets the recognition criteria and includes all directly attributable costs such as the
following:
 Costs of materials and services,
 Costs of employee benefits,
 Fees to register legal right,
 Amortization of patents and licenses that are used to generate the intangible asset.

Research and development costs related to the project that were incurred prior to meeting the
recognition criteria cannot be capitalized retrospectively.

Comparison to U.S. GAAP: This area is where we see a significant difference with U.S. GAAP. As you
know, under U.S. GAAP, development costs are generally expensed (with the exception of some
software development costs).

This would be a good time to look at the IAS 38 case study.

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Let’s move on to initial measurement

Initial measurement
• Cost
• Purchase price (if acquired) plus all directly attributable costs

Subsequent measurement
• Cost or revaluation model

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Let’s move on to initial measurement

Now that we have covered recognition of intangible assets, let’s move on to
initial measurement.

Initial measurement
Initial measurement has been addressed in previous slides, but the following is
a recap:
 Initial measurement is at cost.
 For a purchased intangible, the cost is the purchase price plus directly
attributable costs.
 For development costs, we would consider all directly attributable costs.
 For an intangible acquired as part of a business combination, cost would
equal the fair value at the acquisition date.

Subsequent measurement
Subsequently, companies have a choice whether to hold the asset at cost or to
revalue to fair value.

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Companies choose to hold an asset at cost or to revalue to
fair value

Cost model Revaluation model

Cost less accumulated • Revalued amount less

amortization and impairment accumulated amortization
losses and impairment losses

• Only if active market exists

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Models for holding assets

Cost model
Under the cost model, an intangible is held at cost less any accumulated
amortization and impairment losses — more on amortization later.

Revaluation model
Alternatively, the company may choose the revaluation model, in which
the asset is held at a revalued amount (less amortization and
impairment, as revaluation does not negate the need to calculate this).

The reference to choice may be misleading, however, because it is very

rare for a company to be able to choose the revaluation model.

To do so, the asset must be part of what is described as an active market.

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Choosing the revaluation model means the asset is
part of an “active market”

Active market • Willing buyers and sellers ✔ Taxi licenses

• Prices available to public ✔ Fishing licenses
• Homogeneous population ✔ Production quotas

✗ Brands
✗ Newspaper mastheads
✗ Patents
✗ Music and film
publishing rights

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Revaluation model and active market

An active market is one in which all of the following conditions exist:

 There are willing buyers and sellers.

 Prices are readily available to the public.
 The asset in question is part of a homogeneous population (a population of items that are all
the same).

By their very nature, the vast majority of intangibles are unique (brands, patents, etc.) so cannot not
be part of a homogeneous population and, therefore, cannot be revalued.

An active market can exist in limited circumstances such as

 taxi licenses,
 fishing licenses, and
 production quotas (e.g., carbon dioxide emission quotas).

Under the European Union’s Emissions Trading System, companies are each allocated an allowance for
CO2 emissions and they hand in one allowance for each ton of CO2 released. A company that produces
a lot of CO2 may buy allowances from companies that do not need theirs and an active market exists.

One final point before moving on from revaluations: If the revaluation model is chosen, all assets in the
same class must be revalued.

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Another important aspect of measurement is that of amortization

• Limited period of benefit • Useful life ≤ period of

Finite life • Amortize over useful life
contractual or legal rights
• Impairment review when
circumstances indicate
• Amortize on systematic
basis reflecting pattern of
consumption of benefits
• Residual value assumed
• No foreseeable limit to
benefits
to be zero unless:
Indefinite life • Do not amortize • Third party committed
• Annual impairment review to buy
• Active market
• Market will exist at
end of useful life

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Amortization
Another important aspect of measurement is that of amortization. Upon recognition, the useful life of the intangible should be determined.
IAS 38 states that an intangible can have either
 a finite useful life (where there is a limited period of benefit) or
 an indefinite useful life (where there is no foreseeable limit to the benefits from the asset).

Let’s start with assets with a finite life.

Finite life
If the asset has a finite useful life, cost less residual value should be amortized on a systematic basis over the useful life of the asset.

The useful life may be restricted by the period for which the contractual or legal rights are held. For example, a nonrenewable drug patent may last only 10 years, after
which other companies are allowed to produce the same drug. In this case, the useful life should not exceed 10 years.

On the other hand, if the patent lasts for 10 years but the company only intends to use it for five, then the useful life will be five years.

Method of amortization
The amortization method should reflect the pattern of benefits. Acceptable methods include straight-line method, reducing balance, and units of production method.

Amortization begins when the asset is available for use. The method and useful life should be reviewed at least at each period end.

Indefinite life
An asset has an indefinite life when there is no foreseeable limit to the period over which the asset is expected to generate cash inflows for the company.

An example of indefinite life would be a purchased brand for which there is a long track record of stability and achievement and high barriers to market entry.

The useful life of an asset may extend beyond the original finite contractual or legal rights if the rights are renewable without significant cost and there is evidence to
support renewal.

Once again, the useful life of an intangible that is not being amortized should be reviewed at least each period end.

Finally, a quick mention of impairments. In accordance with IAS 36, an intangible with a finite useful life is reviewed for impairment when circumstances indicate that the
asset may be impaired (for example, a technological change that renders computer software obsolete).
An intangible with an indefinite life will be reviewed for impairment annually.

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Discussion exercise — Amortization of intangibles
Work out the annual amortization charge (if any) for the following:

• A legal copyright that has 50 years left to run was acquired for £50,000.
The company intends to make use of the copyright for the full 50 years.

• A broadcasting license that expires in seven years was acquired for £10
million. It can be renewed at little cost and the company intends, and is
able, to renew.

• A 10-year taxi license was acquired for £100,000. Company A intends to

use the license for five years and then sell it to Company B for 50% of its
original cost. Company B is committed to the purchase.

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Discussion exercise—Amortization of

Discussion exercise—Amortization of
intangibles

Review the following examples and calculate the annual amortization expense.

1. A legal copyright that has 50 years left to run was acquired for £50,000. The company intends to make use
of the copyright for the full 50 years.
2. A broadcasting license that expires in seven years was acquired for £10 million. It can be renewed at little
cost, and the company intends, and is able, to renew.
3. A 10-year taxi license was acquired for £100,000. Company A intends to use the license for five years and
then sell it to Company B for 50% of its original cost. Company B is committed to the purchase.

intangibles

Review the following examples and calculate the annual amortization expense.

1. A legal copyright that has 50 years left to run was acquired for £50,000. The company intends to make use
of the copyright for the full 50 years.
2. A broadcasting license that expires in seven years was acquired for £10 million. It can be renewed at little
cost, and the company intends, and is able, to renew.
3. A 10-year taxi license was acquired for £100,000. Company A intends to use the license for five years and
then sell it to Company B for 50% of its original cost. Company B is committed to the purchase.

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Discussion exercise solution — Amortization of intangibles

Legal copyright Broadcasting license Taxi license

£50,000 ÷ 50 years • Indefinite life • Cost less RV =

£1,000 per year • No amortization £50,000
• Annual impairment • Useful life = 5 years
review required • £10,000 per year

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Discussion exercise solution

1. The legal copyright has been granted for 50 years, and the company
intends to make use of the copyright for 50 years. The useful life to
the company is therefore 50 years, and the cost is allocated on a
systematic basis over 50 years — in this case, a straight-line basis. So
£50,000 ÷ 50 years = £1,000 of amortization per year.

2. The broadcasting license expires in seven years; however, it is

renewable at little cost, and the company intends to renew and is
able to do so. In this case, the useful life would be treated as
indefinite, and there is no amortization.

3. The amount to be amortized for the taxi license is cost less residual
value, or £100,000 − £50,000 = £50,000. Usually RV is deemed to be
zero; however, an active market exists for this asset and the buyer is
committed. The useful life is five years (even though the license lasts
for 10 years, the company only intends to use it for five years) so the
annual amortization charge is £10,000 per year (£50,000 ÷ 5 years).

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IAS 38 requires a number of
disclosures

• For each class of intangible assets:

— Useful lives
— Amortization rates
— Gross carrying amounts and
accumulated amortization
— P/L line item where amortization
included
— Reconciliation
• Revaluations
• R&D

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IAS 38 required disclosures

IAS 38 requires a number of disclosures in the notes to the financial
statements.

For each class of intangibles, disclose the following:

 Whether useful life is indefinite or finite. If finite, disclose the useful life
and amortization rates used.
 The amortization methods used for intangibles with finite useful lives.
 The gross carrying amount and any accumulated amortization.
 The line item of profit or loss in which any amortization is included.
 A reconciliation of the carrying amount at the beginning and end of the
period.

In addition, disclose the following:

 Information about revaluations (date of revaluation, new carrying
amount, amount of revaluation surplus).
 The aggregate amount of research and development expenditure
recognized as an expense during the period.

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Disclosure example from Domino’s
i. Other intangible assets
Intangible assets acquired separately are measure on initial recognition at cost. The cost of intangible assets acquired in a business
combination is the fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any
accumulated amortisation and accumulated impairment losses. Internally, generated intangibles, excluding capitalised development
costs, are not capitalised and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred.

Master franchise fees

Master franchise fees are fees paid towards or recognised at fair value on acquisition of the master franchise for the markets in which
the Group operates. These are carried at cost less impairment and are treated as having indefinite useful lives.
Standard franchise fees
Standard franchise fees are recognised at fair value on acquisition of the standard franchise for the area in which corporate stores
operate. As reacquired rights the fees are amortised over the remaining contractual terms over a period of five to ten years and are
carried at amortised cost. Such franchise fees are recognised only on acquisition of businesses.
Computer software
Computer software is carried at cost less accumulated amortisation and any impairment loss. Externally acquired computer software
and software licenses are capitalised at the cost incurred to acquire and bring into use the specific software. Internally developed
computer software programs are capitalised to the extent that costs can be separately identified and attributed to particular software
programs, measured reliably, and that the asset developed can be shown to generate future economic benefits. In considering the
capitalization of any externally acquired or internally developed costs in relation to customisation and configuration costs, the control
of the underlying software asset is considered in order to ensure that an intangible asset can be generated, in particular in a software
– as – a – service (SaaS) agreement. These assets are considered to have finite useful lives and are amortised on a straight- line
basis over the estimated useful economic lives of each of the assets, considered to be between three and 10 years.

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Domino’s disclosure example

Domino’s discloses the following information on intangible assets in its 2021 annual report:

Software
 Domino’s recognizes software intangibles, including purchased licenses and internally developed computer software programs. Software
assets are deemed to have a finite life and are amortized on a straight-line basis between three and 10 years.
 Point of interest – the Domino’s note mentions treatment of configuration or customization costs in a software as a service
arrangement. The IFRS Interpretations Committee were received a received a request addressing how a customer should account for
costs of configuring or customizing a supplier’s application software in a Cloud Computing or Software as a Service (SaaS) arrangement.
They issued an agenda decision as diversity in practice had developed over the treatment of, what are often, substantial costs associated
with configuring or customizing software. They concluded that the standard did not require amendment but they provided some steps
that entities should consider in accounting for configuring costs (ie defining values/ parameters) or customization costs (ie writing
additional code). The guidance required them to consider if the costs meet the definition of an intangible asset in IAS 38.

Franchise fees
 Master franchise fees — When an established company wishes to expand into another territory, it often recruits a master franchisee in
that chosen territory. This master franchisee builds the business within that area. The costs of recruiting the master franchisee are
capitalized as an intangible asset. What is interesting is that Domino’s deems these assets to have an indefinite useful life as the
arrangement runs into perpetuity. Standard franchise fees are also recognized as an intangible asset on the acquisition of a business that
is a franchisee. They are amortized over the remaining contractual term.

Capitalized loan discounts

 Where Domino’s advances interest-free loans to franchisees, these are recognized as a financial asset at a discounted amount. The
difference between this amount and the cash advance is recognized as an intangible asset and amortized over 10 years.

Goodwill
 Recognized goodwill is the result of a past acquisition of subsidiaries, but the treatment is scoped out of IAS 38 and covered by IFRS 3.

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Disclosure example from Domino’s, continued

Capitalised loan discounts

The Group provides interest – free loans to assist franchises in the opening of new stores. The difference between the present value
of loans recognised and the cash advanced has been capitalised as an intangible asset in recognition of the future value that will be
generated via the royalty income and supply chain centre sales that will be generated. The assets are amortised over the life of a
new franchise agreement which is 10 years.
The carrying value of intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the
carrying value may not be recoverable. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment
annually, either individually or at the cash generating unit level. The assessment of indefinite life is reviewed annually to determine
whether the indefinite life continues to be supportable.

101 © 2023 Association of International Certified Professional Accountants. All rights reserved.

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Domino’s intangible assets

Computer Goodwill
software NBV £13.3
NBV £15.5 million at
million at end end 2021
2021

Franchise fees
NBV £2.9 million
at end 2021

102 © 2023 Association of International Certified Professional Accountants. All rights reserved.

102
Mind the gap

Market
Book value
capitalization

5.24
11.07

103 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Mind the gap

As mentioned right at the start, IAS 38 is one of the older standards and there have been limited amendments
since it was issued in 1998. Many stakeholders are starting to question its relevance.

In our advanced technological age, intangibles are starting to represent a greater proportion of the value of a
company, and, for some of the most famous companies, there is a growing discrepancy between the company’s
market capitalization and book value.

Take a look at the ratio of market cap to book value (as at October 2020) for the following:

Google (Alphabet) 5.24

Microsoft 13.8 11.07
(Reference: www.macrotrends.net, October 2022)

It is difficult to say how much of this gap is due to intangibles that aren’t being recognized and how much is due to
overexuberant optimism with regard to share prices of such companies. However, is there an argument that IAS
38 needs to bring more intangibles onto the SOFP so that financial statements are showing a more accurate view
of a company’s value?

[If there is time, you may wish to ask participants for their thoughts.]

Conceptual framework: Qualitative characteristics of financial statements

103
Comparison to U.S. GAAP
IFRS U.S. GAAP
Research costs always expensed; In general research and development costs
development costs capitalized if certain expensed.
criteria met.

Impairments of intangibles with indefinite Advertising costs expensed as incurred or

lives measured by comparing carrying deferred and expensed as advertising takes
value to recoverable amount. place.

Advertising costs expensed as incurred. Intangibles with an indefinite life (excluding

goodwill) are grouped together for purposes
of impairment testing.
Intangibles with indefinite life allocated to Impairments of intangibles with indefinite
cash-generating units for purposes of lives measured by comparing carrying value
impairment testing. to fair value.
104 © 2023 Association of International Certified Professional Accountants. All rights reserved.

IFRS versus U.S. GAAP

Perhaps the main difference between IFRS and U.S. GAAP is in regard to
the treatment of development costs as mentioned previously, but the
following is a summary of other differences:
 Under IFRS, development costs that meet specific criteria are
capitalized. Under U.S. GAAP, they are generally expenses (with the
exception of some specific areas such as development of software
for sale to third parties).
 Under IFRS, advertising costs (internally generated) are expensed as
incurred. Under U.S. GAAP, advertising costs can be deferred and
expensed the first time the advertising takes place.
 Under IFRS, intangibles with an indefinite useful life are reviewed for
impairment annually and allocated to cash-generating units (CGUs)
(we’ll see this again later) in order to do so. Under U.S. GAAP, such
assets are grouped together for impairment testing.
 Finally, under IFRS, impairments are assessed by comparing carrying
value to recoverable amount. Under U.S. GAAP, carrying value is
compared to fair value.

104