IAS 38 Intangible Assets

Definition

An intangible asset is an identifiable non-monetary asset without physical substance.

• Key characteristics:

– It is identifiable

– It is an asset

Identifiability

Asset is identifiable when:

– It is separable

i.e. capable of being separated/ divided from the entity and sold/ transferred/ licensed either individually or together with a related contract/ asset/ liability

OR

– It arises from contractual or other legal rights

Asset

Must be an asset in terms of the Framework

• Resource controlled by an entity as a result of a past event and from which future economic benefits are expected to flow to the entity

How do we recognise them on initial recognition?

At cost!

Recognition and initial measurement

• Intangible assets are acquired as follows:

1. Separate acquisition

2. Government Grant

3. Exchange of Assets

4. Internally Generated

5. Business Combination

Separate acquisition

Purchased from 3rd Party

• Assumed benefits will flow as purchase price was paid for it

• Include into cost:

– Purchase price/import duties/non-refundable taxes

– Directly attributable costs

• Discount if deferred – discount purchase price

Government Grant

Entity may receive intangible asset from government either:

• Free of charge; or

• At nominal amount

• Account for intangible and grant at:– Fair value; OR

– Nominal amount + any directly attributable costs

Exchange of Assets

• Account for intangible at fair value unless:

– Exchange transaction lacks commercial substance

– Fair value of neither the asset received nor the asset given up can be reliably measured

• In such cases, measure at the Carrying Amount of the asset given up

Internally Generated Assets

• IAS 38 prohibits recognition of internally generated Goodwill

• Also prohibited from recognising assets that the standard deems not capable of being distinguished from development of the business as a whole such as:– Brands

– Customer lists

– Publishing titles

– Similar assets to above

Internally Generated Assets

• Permitted to recognise assets that meet the definition of development assets

• General principle:

– Research Expenditure – Expense

– Development Expenditure – Capitalise

Internally Generated Assets

BASICS: Research & Development

• Capitalise when all of the following are met:

– technical feasibility

– intention to complete the intangible asset and use or sell it

– ability to use or sell the intangible asset

– can demonstrate how the intangible asset will generate probable future economic benefits. (ie: existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset)

– availability of adequate technical, financial and other resources

– ability to measure reliably the expenditure attributable to the intangible asset during its development

Internally Generated Assets

• What development costs can be capitalised:

– Expenditure on materials and services used in generating the intangible asset;

– Salaries/wages of personnel engaged DIRECTLY in generating the asset;

– Borrowing costs, if definition of a qualifying asset is met under IAS 23;

– Any other directly attributable expenditure

Internally Generated Assets

• Excludes the following:

– Selling, administrative and other general overheads unless directly attributable to the preparing of the asset for use;

– Clearly identified inefficiencies and initial operating losses incurred

– Expenditure on staff training to operate the asset

Business Combinations

FV of Assets & Liabilities

Goodwill

Total consideration

FV of Assets & Liabilities

Goodwill

Business Combinations

FV of Assets & Liabilities

Goodwill

Total consideration

FV of Assets & Liabilities

Goodwill

Intangible Assets

Intangible Assets

Must meet the definition of an intangible asset (IAS 38):

• Resource controlled by entity from which future economic benefits are expected to flow to the acquirer

• Without physical substance

• Identifiable

• Separable OR

• When arises from contractual / other legal rights

• Probable that future economic benefits attributable to assets will flow to entity

• FV can be measured reliably

Intangible Assets

Must meet the definition of an intangible asset (IAS 38):

• Resource controlled by entity from which future economic benefits are expected to flow to the acquirer

• Without physical substance

• Identifiable

• Separable OR

• When arises from contractual / other legal rights

• Probable that future economic benefits attributable to assets will flow to entity (presumed!!)

• FV can be measured reliably

Types of intangibles

• Market-related intangibles

• Trademarks, trade names

• Internet domain names

• Trade dress (unique colour, shape, packaging)

• Newspaper mastheads

• Non-competition agreements

Types of intangibles

• Artistic-related intangibles

• Plays / music / books / pictures / video’s

• Contract-based intangibles:

• Licensing/ Royalty agreements

• Favorable lease agreements

• Franchise agreements

• Operating and broadcasting rights

• Air/Water/Mineral rights

Types of intangibles

• Customer-related intangibles

• Customer lists

• Order backlogs

• Customer contracts / customer relationships

• Non-contractual customer relationships

Types of intangibles

• Technology-based intangibles

• Patented technology

• Computer software and mast works

• Unpatented technology

• Databases

• Trade secrets (e.g.: formulae, processes)

NOTE: NOT AN EXHAUSTIVE LIST

SUBSEQUENT ACCOUNTING

Intangible Assets

2 types of intangibles:

Finite Life Indefinite Life

Finite Intangible Assets

• Accounting is easy!

• Amortise over useful life

– Start when ready for use

– Residual value assume to be zero unless

• Commitment from 3rd party to purchase at end of useful life

OR

• Active market exists

Finite Intangible Assets

• As per Property, Plant and Equipment, review the following annually:

– Residual value (only if active market or 3rd party commitment)

– Amortisation period

– Amortisation method

• Any changes -> treat as a change in estimate (IAS 8)

Indefinite Intangible Assets

• NOTE: Not INFINITE

• Test for impairment annually

• Review useful life annually

• If change in life to finite – begin amortisation