INTANGIBLE ASSETS IAS 38

N R GOVINDARAJAN

CHARTERED ACCOUNTANT

FCA,AICWA,DISA,CISA

OVERVIEW

• Introduction

• Applicability

• Basic criterion

• Recognition and Measurement Government Grants

• Exchange of Assets

• When to expense off?

Overview

• Subsequent recognition• Amortisation• Determination of useful life• Residual value• Review of amortisation• Derecognition• Disclosures

Overview

• Internally generated IA

• Research phase

• Development phase

• Cost of internally generated IA

Introduction

• Intangible assets means an identifiable, non monetary asset without a physical substance

• It would include computer software, patents, copy rights, motion picture films

• Certain intangible assets like customer or supplier relationship, market share and marketing rights may not meet the definition of intangible assets

• It is separate and distinguished from goodwill

Applicability

• Applicable to all intangible assets other than:

• Those covered by other standards• Financial assets – IAS 32• The recognition and measurement of

exploration and evaluation assets – IFRS 6

• Expenditure on the development and extraction of minerals, oil and natural gas

Basic criterion

• Identifiability

• Control over the resource

• Existence of future economic benefits

Identifiability

• An asset can be said to be “identifiable” if it is either separable or arises from contractual or legal rights

• It is said to be separable, if it is capable of being separated or divided from the entity and sold transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability

Control

• Basis of control is nothing but the power of an entity to obtain future economic benefits flowing from the underlying resource

• It also means restriction of access of others to those benefits

• Power is obtained through enforceable legal right

• Eg: Economic benefits derived from market and technical knowledge – protected by legal rights like copy rights

Economic benefits

• Future economic benefits may be:

• Revenue from sale of products

• Cost savings

• Other benefits from the use of the assets

• Eg: use of intellectual property in a production process resulting in cost savings rather than increase in future revenues

Recognition and Measurement

• For the purposes of recognition and measurement an entity should:

• Meet the definition criteria

• Meet the recognition criteria

• Three additional conditions are to be met for the recognition of Intangible assets

Recognition

• An intangible asset shall be recognised if, and only if: (a) it is probable that the expected future economic benefits

that are attributable to the asset will flow to the entity; and• (b) the cost of the asset can be measured reliably.• An entity shall assess the probability of expected future

economic benefits using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset.

• ( c) An intangible asset shall be measured initially at cost.

Cost of intangible asset

• When acquired:• It consists of purchase price including

import duties and non refundable purchase taxes but excluding rebates and discounts

• It would also include any directly attributable cost of preparing an asset for its intended use. Eg: Professional fees and testing costs

Acquisition through Grants

• Airport landing rights

• Quotas

• Import licences

• Treated as deferred income or deducted from the cost of the asset

• It can also be accounted at net value which may be the nominal amount paid plus directly attributed expenses

Exchange of assets

• If an IA is acquired in exchange of a non monetary asset it is measured at FV

• It should be noted that:• The transaction should have commercial

substance• FV of asset given up or acquired is reliably

measureable• Commercial substance is evaluated on the basis

of expected change in future cash flows• Case study

Acquisition of IA in Business combinations

• They are recognised if:• Separable from other tangible or intangible

assets• Arise from contractual or legal rights• Recognised initially at FV• FV should be reliably measurable• When it is not possible to separate the asset

from another tangible or intangible asset then it is recognised as a single asset separately from goodwill eg: Publishing rights and subscriber data base

Fair value measurement

• Observable market price of the same asset

• Observable market price of the similar assets

• Accounting valuation approach – eg discounted cash flow

Recognition of expeses on IA

• If the expenditure fails the definiton and/ or recognition criteria then it is treated as expenditure and not as IA

• In case it is acquired in a business combination and cannot be recognised as IA then it is recognised as a part of GW

• Eg: research exp, development exp until certain conditions are fullfilled, cost of training, advertisement and promotional activities

• Write back off expenditure and treating as IA is prohibited

Subsequent recognition

• It can be done either under:

• Cost model

• Revaluation model

• Cost model:

• Carried at cost less accumulated amortisation and accumulated impairment losses

• Impairment charge writing back is allowed

Subsequent recognition

• Revaluation model:

• Carried at revalued amount (fv) less subsequent accumulated amortisation and subsequent accumulated impairment losses

• No revaluation of IA is allowed if it was recognised as an asset earlier

• Initial recognition is always at cost

Amortisation

• All intangibles have to catagorised into assets having indefinite or finite useful lives

• If it has finite useful life it is to be amortised over its useful life

• Intangible assets having indefinite useful lives shall not be amortised but tested for impairment every year

• Review of the lives of the assets should also be done in each period as circumstances could change and its effect may be on the useful lives

Amortisation

• The carrying amount of an IA is reduced by the impairment charge and the balance is then amortised over the useful life of the asset

• The impairment charge is to be routed through P&L account

• Amortisation of IA having a finite useful life does not cease if the asset is no longer used unless it is fully depreciated or it is NCAHS – IFRS 5

• Method of amortisation is determined by the pattern in which the asset’s future economic benefit is expected to be consumed

• If it is not reliably possible, then SLM is followed• Amortisation charge for each period is routed through P&L

Determination of useful life

• Useful determination is mandated and that decides whether the IA is to be amortised or not

• IAS 38 distinguishes ‘indefinite from infinite’• Indefinite does not mean infinite useful life to the

IA• Determination of useful life is based on various

factors as listed out in Para 90• It takes into account economic, legal and

contractual factors – Para 96

Residual value

• In general, the residual value of an IA with a finite useful life is assumed as NIL

• There are two exceptions• It can be positive if there is a commitment from a

third party to acquire the asset at the end of its useful life

• There exists an active market for such asset• The residual value is reviewed at the end of

each period• Change in the residual value is treated as

change in the accoungting estimate as per IAS 8

Review of amortisation

• Method and period of amortisation of IA with finite useful life is done at the end of each financial year

• In case of IA with infinite useful lives, review is done to determine whether circumstances and events support that it is so or otherwise

• If it becomes finite, it has to be amortised over its useful life

Derecognition

• Derecognition takes place if:

• The asset is disposed

• There are no future economic benefits expected from its use or disposal

• Depending upon the method of disposal – sale, donation, finance lease or sale and lease back the respective IFRS would apply

Derecognition

• Profit or loss arising from the disposal of IA should be determined as the difference between the carrying amounts and the net disposal proceeds

• It is carried through P&L account

• The consideration of disposal is recognised at FV

Internally generated IA

• To assess whether an internally generated IA meets the criteria for recognition it can be classified into two phases

• Reseach phase

• Development phase

• If an entity cannot distinguish between the two phases, then, it is deemed to be incurred in the research phase

Research phase

• No IA is recognised from an expenditure incurred in the research phase

• In this phase an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits

• Research expenditure is recognised in P&L as and when incurred

Research phase

• Examples of research activities:• (a) activities aimed at obtaining new knowledge;• (b) the search for, evaluation and final selection of,

applications of research findings or other knowledge;• (c) the search for alternatives for materials, devices,

products, processes, systems or services; and• (d) the formulation, design, evaluation and final selection

of possible alternatives for new or improved materials, devices, products, processes, systems or services

Development phase• An intangible asset arising from development (or from the

development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following:

• (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale.

• (b) its intention to complete the intangible asset and use or sell it. (c) its ability to use or sell the intangible asset.• (d) how the intangible asset will generate probable future economic

benefits. • (e) the availability of adequate technical, financial and other resources

to complete the development and to use or sell the intangible asset.• (f) its ability to measure reliably the expenditure attributable to the

intangible asset during its development • Para 57 gives further conditions for recognition of development phase

activities as Intangible Asset

Development phase

• Examples of development activities:• (a) the design, construction and testing of pre-production

or pre-use prototypes and models;• (b) the design of tools, jigs, moulds and dies involving

new technology;• (c) the design, construction and operation of a pilot plant

that is not of a scale economically feasible for commercial production; and

• (d) the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services

Disclosures

• Paras 118 to 128 would apply

• Accounting policy disclosures

• P&L disclosures

• Disclosures in notes

• Balance sheet disclosures

Particulars IGAAP IFRS

Revaluation Not allowed Allowed for IA with active markets

IA with indefinite life No such items – amortisation required

Only impairment test

Period of amortisation 10 years with rebuttable presumption

No presumption

NCAHS NO SUCH ITEMS STOP AMORTISATION

Revaluation model silent Allowed if active market exists

Impairment test IA > 10 years and not available for use

No need if there are no indications of impairment

To be done for IA with infinite life

Business combinations Recognised based on carrying amount

IA not in the acquirer’s books also to be recognised