Module 14

PAS 38 – Intangible Assets

Introduction

Philippine Accounting Standards 38 applies to all intangible assets except those that are
specifically dealt with under other standards.

For example, PAS 38 does not apply to goodwill acquired in a business combination (PFRS 3),
intangible assets held as inventory (PAS 2) and intangible assets classified as held for sale.

Learning outcomes:
1. Define an intangible asset.
2. State the initial measurement of intangible assets that are
(a) Externally acquired and
(b) Internally generated.
3. State the subsequent measurement of intangible assets

Objective of PAS 38

The objective of PAS 38 is to prescribe the accounting treatment for intangible assets that are not
dealt with specifically in another IFRS. The Standard requires an entity to recognize an intangible
asset if, and only if, certain criteria are met. The Standard also specifies how to measure the
carrying amount of intangible assets and requires certain disclosures regarding intangible assets.

Scope
PAS 38 applies to all intangible assets other than:

• financial assets (see IAS 32 Financial Instruments: Presentation)

• exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral
Resources)
• 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, such as intangibles held for sale (PFRS 5 Non-
current Assets Held for Sale and Discontinued Operations), deferred tax assets (PAS 12
Income Taxes), lease assets (PAS 17 Leases), assets arising from employee benefits (PAS
19 Employee Benefits (2011)), and goodwill (PFRS 3 Business Combinations).

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
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 Intangible assets
An intangible asset is an identifiable non-monetary asset without physical substance.

Goodwill acquired in a business combination is outside the scope of PAS 38 because it is

unidentifiable. Goodwill is accounted for under PFRS 3 Business Combinations and PAS 36
Impairment of Assets.

Essential criteria in the definition of intangible assets

1. Identifiability – separable or arises from contractual rights
2. Control – power to obtain (or restrict others from obtaining) the economic benefits from
an asset.
3. Future economic benefits – may include revenue from the sale of products or services, cost
savings, or other benefits resulting from the use of the asset by the entity.

Recognition
An intangible asset shall be recognized if management can demonstrate that:
1. The item meets the definition of intangible asset;
2. It is probable that the expected future economic benefits will flow to the entity; and
3. The cost of the asset can be measured reliably.

Initial measurement
An intangible asset shall be measured initially at cost. Measurement of cost depends on how the
intangible asset is acquired. Intangible assets may be acquired through:
1. Separate acquisition
2. Acquisition as part of a business combination
3. Acquisition by way of a government grant
4. Exchanges of assets
5. Internal generation

Separate acquisition
The cost of a separately acquired intangible asset comprises:

1. Its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates; and
2. Any directly attributable cost of preparing the asset for its intended use.

Acquisition as part of a business combination

The cost of intangible asset acquired in a business combination is its fair value at the acquisition
date.

Acquisition by way of a government grant

Intangible assets acquired by way of government grant may be recorded at either:
1. fair value

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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 2. alternatively, at nominal amount or zero, plus direct costs incurred in preparing the asset
for its intended use

Exchanges of assets
If the exchange has commercial substance, the intangible asset is initially recognized using the
following order of priority:

a. Fair value of the asset Given up (Plus cash Paid or minus cash received)
b. Fair value of the asset Received
c. Carrying amount of the asset Given up (Plus cash Paid or minus cash received)

If the exchange has lacks commercial substance, the intangible asset is initially recognized using
(c) above.

An exchange transaction has a commercial substance if the expected future cash flows from the
asset received significantly differ from those of the asset given up.

Internally generated intangible assets

The costs of self-creating an intangible asset are classified into:
a. Research costs – include costs of searching new knowledge and identifying and selecting
possible alternatives.
b. Development costs – include costs of designing from selected alternative and using
knowledge gained from research.

If an entity cannot identify in which phase a cost is incurred, the cost is regarded as incurred in
research phase.

Research & Development Costs

1. Costs incurred in research phase are expensed immediately.
2. Costs incurred in development phase are expensed immediately, unless they meet all of the
following conditions for capitalization:
a. Technical feasibility,
b. Intention to complete,
c. Ability to use or sell,
d. Probable economic benefits,
e. Availability of adequate resources, and
f. Measured reliably.

The following are not R&D expenses but rather regular expenses.
1. Costs incurred during commercial production:
a. Trouble-shooting during commercial production
b. Periodic or routine design changes to existing products
c. Modification of design for a specific customer
d. Design, construction and operation of plant that is feasible for commercial production

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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 e. Engineering follow through in an early phase of commercial production
f. Quality control during commercial production
2. Advertising and other marketing expenses
3. Training costs

HINT: R&D expense relates to something that is still in the process of being invented. It does not
relate to periodic changes to an existing product. The following terms generally indicate that a cost
is not an R&D expense: ‘commercial,’ ‘customer,’ ‘advertising’ and ‘market’.

Items of PPE used in R&D activities

If the item of PPE can be used in various R&D activities or other purposes, the cost of the PPE is
capitalized and depreciated. The amount of depreciation is included as R&D expense.

If the item of PPE is can only be used on one specific R&D project, the cost of the PPE is expensed
immediately in its entirety as R&D expense.

Items not recognized as intangible assets

The cost of internally generated brands, mastheads, publishing titles, customer lists, goodwill and
items similar in substance are expensed when incurred.

Subsequent expenditure
Subsequent expenditures on an intangible asset are generally recognized as expense.

Reinstatement of costs in subsequent period

Expenditure on an intangible item that was initially recognized as an expense shall not be
recognized as part of the cost of an intangible asset at a later date.

Measurement after recognition

After initial recognition, an entity shall choose as its accounting policy either the
a. Cost model, or
b. Revaluation model – applicable only if the intangible
asset has an active market.

Amortization
Intangible assets with finite useful life are amortized over the shorter of the asset’s useful life and
legal life.

Intangible assets with indefinite useful life are not amortized but tested for impairment at least
annually.

The default method of amortization is the straight line method.

Disclosure
For each class of intangible asset, disclose: [IAS 38.118 and 38.122]

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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 • useful life or amortization rate
• amortization method
• gross carrying amount
• accumulated amortization and impairment losses
• line items in the income statement in which amortization is included
• reconciliation of the carrying amount at the beginning and the end of the period showing:
➢ additions (business combinations separately)
➢ assets held for sale retirements and other disposals
➢ revaluations impairments
➢ reversals of impairments
➢ amortization
➢ foreign exchange differences
➢ other changes
• basis for determining that an intangible has an indefinite life
• description and carrying amount of individually material intangible assets
• certain special disclosures about intangible assets acquired by way of government grants
• information about intangible assets whose title is restricted
• contractual commitments to acquire intangible assets

Additional disclosures are required about:

• intangible assets carried at revalued amounts
• the amount of research and development expenditure recognized as an expense in the
current period

References:

Millan, Z. V. (2018). PAS 38 Intangible Assets: In Conceptual Framework and Accounting

Standards (2018 Edition, pp. 404-420). Bandolin Enterprise.

IAS 38- Intangible Assets

2020).http://www.iasplus.com/.https://www.iasplus.com.en/standards/oas/ais38

Activity:
Answer Problem 1, PAS 38 Intangible Assets (pp. 421) in your textbook.

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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