PAS 38 Intangible Assets

Introduction Essential Elements Presentation and Recognition Initial Measurement

PAS 38 applies to all intangible 1. Identifiability – “an asset is identifiable Financial statement presentation Separate acquisition Acquisition as part of a business combination Internally generated intangible assets
assets except those that are if it either: Intangible assets accounted for The cost of a separately acquired The cost of an intangible asset acquired in a To determine whether an internally generated
specifically dealt under other a. Is separable, i.e., capable of under PAS 38 are presented intangible asset comprises: business combination is its fair value at the intangible asset meets the recognition criteria, its
standards. For example, PAS 38 being separated and divided separately from goodwill. Such a. “Its purchase price, including acquisition date. generation is classified into:
does not apply to goodwill acquired from the entity and sold, intangible assets are aggregated and import duties and non- The acquirer recognizes an intangible asset at the a. Research phase; and
in a business combination (PFRS 3), transferred, licensed, rented, or presented as one line item under refundable purchase taxes, acquisition date, separate from goodwill, whether or b. Development phase.
intangible assets held as inventory exchanged, either individually or the heading “Intangible assets” or after deducting trade not the intangible asset had been recognized by the
(PAS 2), and intangible assets together with a related “Other intangible assets” in the discounts and rebates; and acquiree before the business combination. The Research phase
classified as held for sale (PFRS 5). contract, identifiable asset or statement of financial position. The b. Any directly attributable acquirer can recognize the acquiree’s research and Research is “original and planned investigation
liability, regardless of whether breakdown of the line item is cost of preparing the asset development project as an intangible asset if the undertaken with the prospect of gaining new scientific
Intangible assets the entity intends to do so; or disclosed in the notes. Goodwill is for its intended use.” project meets the definition of an intangible asset or technical knowledge and understanding.”
Intangible assets are “an b. Arises from contractual or other presented separately under a line and is identifiable. Costs incurred during the research phase are expensed
identifiable non-monetary asset legal rights, regardless of item described as “Goodwill”. Examples of directly attributable because, during this phase, an entity cannot
without physical substance.” whether those rights are costs: Acquisition by way of government grant demonstrate the existence of an intangible asset that
Common examples include transferable or separable from Recognition a. Cost of employee benefits Intangible assets acquired by way of government will generate future economic benefits.
“computer software, patents, the entity or from other rights An intangible asset is recognized arising directly from bringing grant (e.g., airport landing rights, licenses to operate
copyrights, motion picture films, and obligations.” when it meets the definition of an the asset to its working radio or television stations, import licenses or Examples of research activities:
customer lists, mortgage servicing 2. Control – control means the entity has intangible asset as well as the asset condition quotas or rights to access other restricted resources) a. Activities aimed at obtaining new knowledge;
rights, fishing licenses, import the ability to benefit from the recognition criteria of “probable b. Professional fees arising may be initially measured either: b. The search for, evaluation and final selection
quotas, franchises, customer or intangible asset or prevent others from future economic benefit” and directly from bringing the a. At fair value; or of, applications of research findings or other
supplier relationships, customer benefitting from it. “reliable measurement of cost.” asset to its working condition b. Alternatively, at nominal amount plus direct knowledge;
loyalty, market share and marketing Control of an intangible asset normally c. Costs of testing whether the costs incurred in preparing the asset for its c. The search for alternatives for materials,
rights.” arises from legal rights that are asset is functioning properly intended use devices, products, processes, systems or
enforceable in a court of law. However, services; and
These items, however, are legal enforceability of a right is not a The following costs are not part of Exchanges of assets d. The formulation, design, evaluation and final
recognized as intangible assets only necessary condition for control because the cost of an intangible asset: An intangible asset may be acquired in exchange for selection of possible alternatives for new or
if they have the essential elements an entity may be able to control an a. Costs of introducing a new another non-monetary asset. The measurement of improved materials, devices, products,
of an intangible asset and meet the asset’s future economic benefits in product or service (including the intangible asset acquired depends on whether processes, systems or services.
recognition critieria. some other way. costs of advertising and the exchange transaction has commercial substance
3. Future economic benefits – the future promotional activities) or not. Development phase
economic benefits from an intangible b. Costs of conducting business a. With commercial substance – an exchange Development is “the application of research findings or
asset may include revenue from the in a new location or with a has a commercial substance if the entity’s other knowledge to a plan or design for the production
sale of products or services, cost new class of customer subsequent cash flows are expected to of new or substantially improved materials, devices,
savings (e.g., reduction in production (including costs of staff change as a result of the exchange. The products, processes, systems or services before the
costs rather than increase in revenues), training) intangible asset received is measured using start of commercial production or use.”
or other benefits resulting from the c. Administration and other the following order of priority: Costs incurred during the development phase are
entity’s use of the asset. general overhead costs 1. Fair value of the asset given up; capitalized if the entity can demonstrate all of the
2. Fair value of the asset received; or following:
Assets with both intangible and tangible If the payment is deferred, this cost 3. Carrying amount of the asset given a. Technical feasibility of completing the
elements is the cash price equivalent. The up. intangible asset;
Some assets may have both intangible and difference between this amount and b. Intention to complete the intangible asset;
tangible elements. In determining whether the total payments is recognized as b. Lacks commercial substance – the intangible c. Ability to use or sell the intangible asset;
such an asset is to be accounted for as a PPE or interest expense over the period, asset received is measured at the carrying d. Probable future economic benefits;
an intangible asset, the entity uses judgment unless it qualifies for capitalization amount of the asset given up e. Availability of adequate resources needed to
to assess which element is more significant. If under PAS 23. complete the development; and
the intangible component is an integral part of No gain or loss arises if the asset received is f. Reliable measurement of the cost of the
the asset as whole, the intangible element is measured at the carrying amount of the asset given intangible asset.
treated as PPE. Otherwise, it is treated as a up.
separate intangible asset.
 Subsequent Measurement Amortization, Impairment, Derecognition
Initial Measurement

Examples of development activities: Organizational costs After initial recognition, an entity Factors considered in determining
Amortization is “the systematic allocation of the depreciable amount of
a. The design, construction and testing of pre- Organizational costs (start-up costs) chooses either the cost model or the an intangible asset’s useful life:
an intangible asset over its useful life.”
production or pre-use prototypes and models; are costs incurred in establishing a new revaluation model as its accounting a. Expected usage of the asset,
b. The design of tools, jigs, molds and dies involving business. These are expensed when policy and applies that policy to an and whether it can be
The depreciable amount of an intangible asset with a finite useful life is
new technology; incurred. entire class of intangible assets. managed efficiently by
amortized over the shorter of its useful life and legal life, if any.
c. The design, construction and operation of a pilot Examples: another management team;
plant that is not of a scale economically feasible for a. Legal and secretarial costs When revaluing an intangible asset, b. Product life cycles and public
Some intangible assets have legal life while some do not. For example,
commercial production; and incurred in establishing a legal an entity determines the fair value information on estimates of
patents have a legal life of 20 years. Therefore, a patent is amortized over
d. The design, construction and testing of a chosen entity (e.g., legal costs to create by reference to an active market. useful lives of similar assets
the shorter of its useful life and 20 years. Intangible assets with no legal
alternative for new or improved materials, devices, bylaws and articles of Accordingly, the revaluation model with similar use;
life, e.g., computer software, are amortized over their useful life.
products, processes, systems or services. incorporation and filing fees is used only if there is an active c. Technical, technological,
with regulatory bodies) market for the intangible asset, commercial or other types of
Amortization starts when the asset is available for use, in the manner
 If it is not clear whether expenditure is a research or b. Pre-opening costs (e.g., blessing which is rarely the case but it can obsolescence;
intended by management.
a development cost, it is treated as a research cost. of the new business) happen. Intangible assets with no d. Industry stability and
 Internally generated brands, mastheads, publishing c. Pre-operating costs (e.g., costs active market are measured under demand for the asset’s
Amortization stops when the asset is derecognized (i.e., sold or disposed
titles, customer lists and similar items similar are not of launching new products or the cost model. output;
of), classified as held for sale under PFRS 5, or becomes fully depreciated.
recognized as intangible assets. Similarly, an processes) e. Expected actions by
internally generated goodwill is not recognized as an Useful life competitors or potential
Amortization does not cease when the asset is no longer used, unless one
asset. The costs to develop these items, including Subsequent expenditures An entity shall assess whether the competitors;
of the conditions above are met.
subsequent expenditures on them are expensed. Capitalization of costs ceases when the intangible asset has: f. Maintenance costs of the
 Research costs and development costs that do not intangible asset is in the condition a. Finite useful life; or asset;
Amortization is recognized as expense (in profit or loss) unless it is
qualify for capitalization are expensed and disclosed necessary for it to be capable of b. Indefinite useful life g. Legal and similar restrictions
included in the cost of producing another asset.
as “research and development expense” (‘R&D operating in the manner intended by on the use of the asset; and
expense’). management. This is because only intangible h. Dependence of the asset’s
Amortization Method
Accordingly, subsequent expenditures assets with finite useful life are useful life with the useful life
There are a variety of amortization methods. PAS 38 mentions three
Cost of an internally generated intangible asset on intangible assets are expensed, amortized. Intangible assets with of other assets of the entity.
examples, namely: straight-line method, diminishing balance method
The cost of an internally generated asset includes all directly unless it is very clear that the indefinite useful life are not
and units of production method. However, PAS 38 does not prescribe any
attributable costs necessary to create, produce and prepare subsequent expenditures meet the amortized but tested for
specific method. The choice of amortization method depends on
the asset for its intended purpose, as from the date the definition of an intangible asset and impairment at least annually using
management’s judgment
recognition criteria and the conditions for capitalization of the recognition criteria. PAS 36.
When making the judgment, PAS 38 requires management to choose the
development costs have been met. The following subsequent expenditures An intangible asset has finite useful
method that best reflects the expected pattern of consumption of the
Examples of directly attributable costs: are expensed when incurred: life if the entity can determine
future economic benefits embodied in the asset. If that pattern cannot be
a. Costs of materials consumed and services used in a. Costs of using or redeploying an reliably the length of, or number of
determined reliably, the entity shall use the straight-line method. PAS 38
generating the intangible asset intangible asset production or similar units
prohibits the use of an amortization method that is based on revenue.
b. Cost of employee benefits arising from the b. Costs incurred while an asset constituting, the intangible asset’s
An intangible asset’s residual value is assumed to be zero unless the
generation of the intangible asset capable of operating in the useful life.
entity can demonstrate its ability to sell the intangible asset before the
c. Registration fees for a legal right manner intended by An intangible asset has an indefinite
end of its economic life, as evidenced by the existence of:
d. Amortization of patents and licenses that are used to management has yet to be useful life if there is no foreseeable
a. A third party commitment to purchase the asset at the end of its
generate the intangible asset brought into use limit to the period over which the
useful life; or
e. Capitalizable borrowing costs for qualifying c. Initial operating losses asset is expected to provide future
b. An active market where the asset can be sold at the end of its
intangible assets d. Costs of relocating or economic benefits.
useful life.
reorganizing part or all of an An intangible asset’s useful life is
The following costs are expensed when incurred: entity indefinite if there are no legal,
Impairment
a. Selling, administrative and other general overhead e. Advertising and promotional contractual, competitive and other
Intangible assets are tested for impairment using PAS 36.
expenditure unless this expenditure can be directly costs restrictions that would limit the
attributed to preparing the asset for use; f. Litigation costs defending an period over which the asset is used.
Derecognition
b. Identified inefficiencies and initial operating losses intangible asset, whether the
An intangible asset is derecognized when it is disposed of or when no
incurred before the asset achieves planned defense is successful or not. If
future economic benefits are expected from it
performance; and the defense is unsuccessful, the
On derecognition, the difference between the carrying amount and the
c. Expenditure on training staff to operate the asset. intangible asset may be
net disposal proceeds, if any, is recognized as gain or loss in profit or loss
impaired and needs to be
(unless PFRS 16 Leases requires otherwise on a sale and leaseback).
PAS 38 prohibits the reinstatement of costs, meaning, if a written-off as loss.
cost had been expensed, it cannot anymore be capitalized as
an intangible asset at a later date.