Intangible Asset – IAS 38

Phạm Hiếu
  Understanding the accounting
treatment for intangible assets
Learning  Certain criteria for recognizing an
Objectives intangible asset
 Measuring the carrying amount of
intangible assets
 Disclosures

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  IAS 38 applies to all intangible assets other
than
 Financial assets (IAS 32)

SCOPE  Exploration and evaluation assets (IFRS 6)

 Expenditure on the development and Extraction of minerals,
oil, natural gas, and similar resources
 Intangible assets arising from insurance contracts issued by
insurance companies
 Intangible assets covered by another IFRS

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 Definition of Intangible Asset

Recognition & Measurement

Contents Amortisation

Derecognition

Disclosure
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  Intangible Asset:
An identifiable non-monetary asset without physical
substance
Definition  Critical attributes of an intangible asset:
 Identifiability
 Control
 Future economic benefits

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Example Intangible
 patented technology, computer software, databases Asset
and trade secrets

ia
 trademarks, trade dress, newspaper mastheads,

er
r it
internet domains

tc
ee
 video and audiovisual material (e.g. motion pictures,

M
television programmes)
 customer lists

No
 mortgage servicing rights

tm
 licensing, royalty and standstill agreements

ee
tc
 import quotas

rit
er
 franchise agreements

ia
 marketing rights
An expense
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  An asset is identifiable if it either
• is separable, ie is capable of being
separated or divided from the entity and
sold, transferred, licensed, rented or
Identifiability exchanged
• arises from contractual or other legal rights
 Note: Goodwill recognized in a business
combination is an intangible asset, but it is not
individually identified

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 An entity controls an asset if the entity has
the power to obtain the future economic
benefits flowing from the underlying
Control resource and to restrict the access of
others to those benefits. Controlling future
economic benefits from an intangible asset
would normally stem from legal rights

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 Example
 Market and technical knowledge may
give rise to future economic benefits.
Protected by legal rights such as
copyrights, a restraint of trade agreement
 An entity has a team of skilled staff that may be
able to bring future economic benefits, but the
entity usually has insufficient control
If it is protected by legal rights and to obtain
the future economic benefits from use it
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Future economic benefits

◦ other
◦ revenue from
benefits
the sale of ◦ cost
resulting
products or savings
from the use
services
of the asset

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 Recognition and Measurement

An intangible asset shall be recognized if, and

only if
 The definition of an intangible asset

Recognition and  it is probable that the expected future

Measurement economic benefits

 the cost of the asset can be measured reliably

An intangible asset shall be measured initially at

cost

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 Acquision
of I.As

Acquired Internally
I.As generated I.As
Issues for Goodwill is
Business
Separately R&D and
combination other not an I.A

Regular purchase,
Government grant,
Asset exchange
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  The cost of a separately acquired
intangible asset comprises
= Purchase Price
Acquired + (Import duties + Non-refundable
Intangible Taxes)
Assets - (Trade discounts + Rebates)
+ directly attributable cost (IAS 38. 28)

E.g: Franchises, patents, customer lists

and trademarks
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Directly Costs of employee benefits
attributable Professional fees
cost Costs of testing

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  Not include:
 Costs of introducing a new product or
service (including costs of advertising and
Acquired promotional activities);
Intangible  Costs of conducting business in a new
Assets location or with a new class of customers
(including costs of staff training)
 Administration and other general
overhead costs

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Brilliant Inc. acquires copyrights to the original recordings of a famous
singer. The agreement with the singer allows the company to record
and rerecord the singer for a period of five years. During the initial six-
month period of the agreement, the singer is very sick and
consequently cannot record. The studio time that was blocked by the
company had to be paid even during the period the singer could not
sing. These costs were incurred by the company:

Legal cost of acquiring the copyrights $10 million

Operational loss (studio time lost, etc.) during start-up period $2 mil
Massive advertising campaign to launch the artist $1 million

Which of the above items is a cost that is eligible for capitalization as an

intangible asset?
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Acquired ◦ if an intangible asset is acquired in a
business combination, the cost of
Intangible that intangible asset is its fair value
Assets at the acquisition date

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 B agree to pay $61,000 for 100% of the
business but values the net assets at
Examples only $38,000, then the goodwill in B’s
books will be $61,000 - $38,000 =
$23,000

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 ◦ In some cases, an intangible asset may be
acquired free of charge, or for nominal
Acquired consideration, by way of a government
Intangible grant, such as airport landing rights, import
licenses or quotas
Assets
Fair value
Cost of I.A
Nominal amount +
directly attributable
expenditures
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 Fair value’s A.I
acquired
Acquired Intangible
Assets
Fair value’s
A.I given up
◦ Exchanges of
assets

Carrying amount’s
A.I given up
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 Internally generated intangible assets
Original and planned investigation undertaken with
Research the prospect of gaining new scientific or technical
knowledge and understanding

Application of research findings or other

knowledge to a plan or design for the
Development production of new or substantially improved
materials, devices; products, processes,
systems or services before the start of
commercial production or use
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 Internally generated intangible assets
Research Phase Development Phase [IAS 38.57]

 No intangible asset An intangible asset arising from

development is recognized if, and only if
 Be recognised as an • Probable future economic benefits of
expense the asset under development
• Intention to complete and use/sell it
• Resources adequate and available to
complete and use/sell
• Ability to use or sell the asset
• Technical feasibility
• Expenditures reliably measurable
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 Examples
Project A: a new item A in the development phase with its expected cost total
of $200,000 is intended to complete . The company has enough technical
expertise and finance to complete this product. The expected total revenue
$2,000,000 once work is completed – probably next year. Customers already
placed advance orders for the product after seeing demonstrations of its
capabilities earlier in the year
Project B: New color-fast dye with its expected cost is $3,000,000 to
complete. The dye is being developed as a cheaper replacement for a
dye already used in the company, cost savings of over $10,000,000 are
expected from its use. Although the company has demonstrated that the
dye is a viable product, and has the intention to finish developing it, the
completion date is currently uncertain because external funding will have
to be obtained before the development work can be completed
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 Expense

 Examples of research activities include: [IAS38.56]

 activities aimed at obtaining new knowledge
Internally  the search for, evaluation and final selection of,
generated applications of research findings or other knowledge
intangible  the search for alternatives for materials, devices,
products, processes, systems or services
assets
 the formulation, design, evaluation and final selection
of possible alternatives for new or improved materials,
devices, products, processes, systems or services

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Intangible Asset
 Examples of development activities include:
 the design, construction and testing of pre-production
or pre-use prototypes and models
Internally
 the design of tools, jigs, moulds and dies involving new
generated technology
intangible  the design, construction and operation of a pilot plant
that is not of a scale economically feasible for
assets commercial production
 the design, construction and testing of a chosen
alternative for new or improved materials, devices,
products, processes, systems or services

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 Which of the following should be classified as
Examples development?

1. Company A has spent $200,000 investigating whether

a particular substance found in the Arctic Circle is
resistant to heat

2. Company B incurred $250,000 in expenses in the

course of making new material for ski- equipment
which will be more durable

3. Company C found that a chemical compound is

harmful to the human body

4. Company D has incurred a further $300,000 to create

prototypes of a new heat-resistant body-suit for
humans 26
 Note:[IAS 38. 63-65]
 An intangible asset internally, such as
salary and other expenditure incurred in
Internally securing copyrights or licences or
generated developing computer software
intangible
assets  Internally generated brands,
mastheads, publishing titles, customer
lists and items similar in substance shall
not be recognized as intangible assets.
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 Cost of an internally generated
intangible asset:
Internally
 The cost of an internally generated
generated intangible asset comprises all directly
intangible attributable costs necessary to create,
assets produce, and prepare the asset to be
capable of operating in the manner
intended by management

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 Examples of directly attributable costs
are:
• Costs of materials and services used or
Internally consumed in generating the intangible
generated asset
intangible • Costs of employee benefits (as defined
in IAS 19) arising from the generation of
assets the intangible asset
• Fees to register a legal right
• Amortisation of patents and licences that
are used to generate the intangible asset
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 Exclude:

 Selling, administrative and other general

overhead expenditure unless this
Internally expenditure can be directly attributed to
generated preparing the asset for use
intangible  Identified inefficiencies and initial operating
assets losses incurred before the asset achieves
planned performance

 Expenditure on training staff to operate the

asset
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 Cost model
Carrying amount = cost – accumulated
amortization – accumulated impairment
Measureme-nt losses
after recognition
Revaluation model
Carrying amount = Revalued Amount
(It means: Fair value of revaluation date

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 Revaluation Model
 How ?
• An upward revaluation
recognized in OCI Dr Asset
Cr Revaluation Surplus
• A downward revaluation
recognized in P/L
Dr Revaluation Loss
Cr Intangible Asset
  How ?
If you are reversing a previous revaluation, you
Revaluation  Put an upwards revaluation through P/L
Model
 Put a downwards revaluation through OCI

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 Examples
Company R prepares financial statements to 31 May each year. On 31
May 2009, the company acquired an intangible asset for £50,000. This
asset was revalued at £60,000 on 31 May 2010 and at £35,000 on 31 May
2011.
Company S prepares financial statements to 31 March each year. On 31
March 2009, the company acquired an intangible asset for £70,000. The
asset was revalued at £55,000 on 31 March 2010 and at £75,000 on 31
March 2011.
Assuming that all two companies use the revaluation model, explain how each
of the above transactions should be dealt with in the financial statements.
Ignore amortisation.
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  An entity assesses whether the useful life of
an intangible asset is finite or indefinite
Useful life of
Intangible  Intangible asset with a Finite useful life is
amortized on a systematic basic over the best
Asset estimate of its useful life

 Intangible asset with an Infinite should be

tested for impairment annually, but not
amortized

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 Examples
Intangible Asset Legal life Amortization
Patent 20 years The shorter of useful or legal
life
Copyrights author's life +70 years The shorter of useful or legal
life
Franchises or Licenses Contractual agreements The shorter of contractual life
or useful life

Trade Names or Unlimited (renewed Impairment test only (at least

Trademark every 10 years) annually)
In-Process R&D Unlimited Impairment test only
Goodwill Unlimited Impairment test only
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  Over useful life

 Begin when the asset is available for use

 Amortisation shall cease at the earlier of the date

that the asset is classified as held for sale or
Amortization  Residual value: is presumed to be zero, unless a
third party to acquire

 Straight-line method
 The diminishing balance method
 The unit of production

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 Disposals
 An intangible asset shall be derecognized:
◦ (a) on disposal; or
◦ (b) when no future economic benefits are expected from its use
or disposal.

 The gain or loss arising from the derecognition of an intangible asset shall
be determined as the difference between the net disposal proceeds, if any,
and the carrying amount of the asset

 It shall be recognized in profit or loss when the asset is derecognized.

Gains shall not be classified as revenue.
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 Disclosure
 Disclosure section should be divided into disclosures for
 General aspects for all intangible assets
 Intangible assets measured after recognition using the revaluation model
 Research and development expenditure
 Other information

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• On September 30, 2021, Morgan, Inc., acquired all of the outstanding
common stock of Pathways, Inc., for $100 million. In addition to tangible
assets, Morgan recorded the following assets as a result of the acquisition:
• Patent $6 million
• Developed technology 3 million
• In-process research & development 2 million
• Goodwill 7 million
• Morgan's policy is to amortize intangible assets using the straight-line
method, no residual value and a six-year useful life.

Required:What is the total amount of amortization expenses that would

appear in Morgan's income statement for the year ended December
31,2021, related to the items?
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 Freitas Corporation was organized early in 2013. The following
expenditures were made during the first few months of the year:

Attorneys’ fees in connection with the organization of the

corporation $ 12,000

State filing fees and other incorporation costs $ 3,000

Purchase of a patent $ 20,000
Legal and other fees for transfer of the patent $ 2,000
Purchase of furniture $ 30,000
Pre-opening salaries $ 40,000
Total $ 107,000
Prepare a summary journal entry to record the $107,000 in cash
expenditures 42
On June 30, 2018, Saint John Corporation purchased a franchise for
$1,200,000. The franchise is expected to have a 10-year useful life with no
residual value. Saint John uses the straight-line amortization method for all
intangible assets. On December 31, 2018, the end of the company’s fiscal
year, Saint John chooses to revalue the franchise. There is an active market
for this particular franchise and its fair value on December 31, 2018, is
$1,180,000.

Required:

1. Calculate amortization for 2018. $60,000

2. Prepare the journal entry to record the revaluation of the patent.

3. Calculate amortization for 2019. $124,211

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