PAS 38 Intangible Assets
Measurement of cost of an intangible asset
Intangible asset
acquired separately
● An identifiable non monetary asset without
● The cost of a separately acquired intangible
physical substance. The intangible asset must
asset comprises:
be controlled by the entity as a result of past
1. its purchase price
events and from which future economic benefits
2. Import duties and non-refundable
are expected to flow to the entity.
purchase taxes
● There are three essential criteria in the definition
3. Directly attributable cost of preparing the
of an intangible asset, namely:
asset for its intended use such as
1. Identifiability
employee benefits for getting the asset
2. Control
ready, professional fees for related work,
3. Future economic benefits
costs of testing the asset to ensure it
works properly.
Identifiability
● Requires that an intangible asset must be
Costs not capitalizable
identifiable in order to distinguish it clearly from
1. Costs for launching a new product or service
goodwill.
(e.g., advertising)
● An asset is identifiable when:
2. Costs for setting up in a new location or training
a. It is separable from the business and
staff
sold, transferred, or exchanged on its
3. Administration and other general overhead cost
own or with other related assets.
4. Cost incurred while an asset capable of
b. It arises from contractual or other legal
operating in a manner intended by management
rights.
has yet to be brought into use
5. Initial operating loss
Control
● The intangible asset must be controlled by the
Cost of an internally generated intangible asset
entity, and an entity controls an intangible asset
● Comprises all directly attributable costs
if it has ability to obtain economic benefits
necessary to create, produce and prepare the
related to the asset and can restrict others from
asset to be capable of operating in the manner
such benefits.
intended by management.
● This control usually comes from legal rights, like
● Cost of materials and services used to create
those for trademarks, copyrights, or patents.
the asset, Employee benefits directly tied to
Without legal rights, proving control is harder.
creating the asset, Fees for registering legal
rights, Amortization of patents used in creating
Future economic benefit
the asset
● The benefits from an intangible asset can
● Not included are Selling, administrative, and
include:
general overhead costs, Costs due to
a. Revenue from selling products or
inefficiency or initial operating losses, Expenses
services.
for training staff to use the asset
b. Cost savings or other benefits from
using the asset.
Treatment of internally generated brand
● For instance, legal rights in using a new
● Some internally generated items, like brands,
technology might lower production costs even if
mastheads, or customer lists, cannot be treated
it doesn’t directly increase revenue.
as intangible assets because they can’t be
separated from the overall business
Conditions that must be presented for the
development cost. These are considered part of
recognition of an intangible asset
internally generated goodwill, which cannot be
1. It is probable that the expected future economic
recognized as an asset. These items should be
benefits that are attributable to the asset will flow
expensed as they occur.
to the entity
2. The cost of the asset can be measured reliably
Recognition as an expense
● If you spend money on something intangible and
Initial measurement of intangible asset
it doesn't qualify as an intangible asset, you
● Intangible assets are measured initially at cost.
should expense it when incurred.
● Examples of such expenses include: Start-up
Costs, Training Costs, Advertising and
Promotional Costs, Business Relocation or
Reorganization Costs
Subsequent Expenditure Factors affecting useful life
● Typically, any money spent on an intangible a. Technical, technological, commercial or other
asset after it’s been acquired should be type of obsolescence
expensed immediately. This is because these b. Expected action by competitors or potential
costs usually only maintain the asset’s current competitors
value. c. Expected usage of the asset by the entity
● However, you can add subsequent costs to the d. Typical product life cycle for the asset
asset’s value if: e. Stability of the industry in which the asset
- It’s likely that these costs will bring operates
additional future benefits. f. Level of maintenance expenditure required to
- You can measure these costs obtain the expected future economic benefits
accurately. from the asset
g. The useful life of the asset may be dependent
Identifiable Intangible Assets on the useful life of other assets of the entity
● Patents h. Period of control over the asset and legal or
● Copyrights similar limits on the use of the asset, such as
● Franchises expiry dates of related leases.
● Trademarks or brand names
● Customer lists Amortization Method
● Computer software ● The method should match how the asset’s value
● Licenses like broadcasting, airline, or fishing is used up over time.
rights ● If you can’t determine this pattern reliably, use
● Unidentifiable Intangible Asset: the straight-line method, which spreads the cost
evenly over the asset’s life.
Unidentifiable intangible asset - can't be separated
from the business; it can't be sold, transferred, licensed, Residual Value
rented, or exchanged on its own. It’s tied to the business ● The residual value is usually assumed to be
as a whole and can’t be identified on its own. This is zero unless:
essentially what goodwill represents. a. A third party is committed to buying the
asset at the end of its life.
Measurement After Recognition: b. There’s an active market where you can
1. Cost Model reliably estimate the residual value and
2. Revaluation Model there’s a good chance you’ll be able to
sell the asset.
Amortization of Intangible Assets:
1. Finite Life: If the intangible asset has a limited Derecognition of an Intangible Asset
life, you must amortize it over its useful life. ● It is disposed
2. Indefinite Life: If the asset has an indefinite life, ● It no longer provides future economic benefits
you test it for impairment annually or whenever
there’s a sign it might be impaired. Research and development
● To assess whether an internally generated
Amortization intangible asset meets the criteria for
● Gradually expensing the cost of an intangible recognition, an entity classifies the generation of
asset over its useful life. the asset into a research phase and a
● The amount to be amortized is the asset’s cost development phase.
minus any residual value ● If an entity cannot distinguish the research
● To record amortization, you debit the phase from the development phase, the entity
amortization expense and credit the intangible treats the expenditure as if it were incurred in
asset account. the research phase only.
Amortization Period Research activities
● The cost of the intangible asset is spread out ● Undertaken to discover new knowledge that will
over its useful life. It starts when the asset is be useful in developing new product
ready for use and stops when the asset is ● Laboratory research aimed at obtaining or
derecognized discovering new knowledge; Searching for
application of research finding and other
Useful Life knowledge; Conceptual formulation and design
● Finite Life: The useful life can be measured in of possible product or process alternative;
years or by the number of units produced. Testing in search for product or process
● Indefinite Life: There’s no limit to how long the alternative
asset will generate value, and there are no legal
or competitive factors that limit its use.
Development activities Capitalizable Expenditures
● Application of research findings to develop a ● Expenditures for research and development
new product which have alternative future use, either in
● Design, construction, and testing of pre additional research project or for productive
production prototype and model; Design of tools, purposes, can be capitalized.
jigs, molds and dies involving new technology; ● The following should be charged to research
Design, construction and operation of a pilot and development expense:
plant that is not of a scale economically feasible a. Cost of materials used
to the entity for commercial production; Design, b. Depreciation of equipment used in
construction and testing of a chosen alternative research and development
for new or improved product or process. c. Amortization of intangible asset used in
research and development
Activities Not Considered Research and
Development:
● Any activities that happen after a product or
process has started commercial production and
distribution are not considered research and
development.
● Engineering follow through in an early phase of
commercial production; Quality control during
commercial production including routine testing;
Troubleshooting breakdown during production;
Routine on-going effort to refine, enrich or
improve quality of an existing product;
Adaptation of an existing capability to a
particular requirement or customer need;
Periodic design changes to existing products;
Routine design of tools, jigs, molds and dies;
Activity, including design and construction
engineering related to construction, relocation,
rearrangement or start-up of facilities and
equipment.
Accounting for research cost
● Expensed when incurred. This is because,
during the research phase, there's too much
uncertainty to guarantee that the project will
result in future economic benefits.
Accounting for development cost
● May be more likely to succeed. These costs
might be recognized as an intangible asset if
they meet specific criteria.
Criteria that must be demonstrated for the
recognition of development cost as an
intangible asset
1. The project must be technically feasible,
meaning a working prototype or model has been
produced and tested successfully
2. The intention to complete the intangible asset
and use or sell it
3. The ability to use or sell the intangible asset
4. There must be a plan for how the asset will
generate future economic benefits, such as
having a market for the product or the asset
itself.
5. Availability of resources or funding to complete
development and to use or sell the asset.
6. The ability to measure reliably the expenditure
attributable to the intangible asset during its
development.
