International Accounting

(IFRS)
Chapter 6
Intangible Assets (IAS 38)

© FH AACHEN UNIVERSITY OF APPLIED SCIENCES | Prof. Dr. Duc Hung Tran | Eupener Str. 70 | 52066 AACHEN | WWW.FH-AACHEN.DE
 Introduction

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 What will we learn about today?

 By the end of this session, you will be able to:

 define and explain how to account for:
1. legally enforceable intangibles and
internally generated intangibles;
2. research and development (R&D)

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Part 1

Accounting for legally enforceable

and internally generated
intangibles

© FH AACHEN UNIVERSITY OF APPLIED SCIENCES | Prof. Dr. Duc Hung Tran | Eupener Str. 70 | 52066 AACHEN | WWW.FH-AACHEN.DE
 Intangible Assets

IAS 38

Intangible assets are identifiable non-monetary

assets that cannot be seen, touched or physically
measured but are identifiable as a separate asset.

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 IAS 38: Criteria for recognition

IAS 38 Intangible Assets: asset is recognised if the asset

is characterised by the following properties:
 The asset is identifiable
 separable, i.e. is capable of being separated or
divided from the entity (sold, transferred, licensed,
rented or exchanged)
 arise from contractual or other legal rights (such
as a patent)

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 IAS 38: Criteria for recognition (cont’d)

The asset is controlled The asset gives future

by the entity economic benefits.
 entity has the power  Potential future
to obtain the future economic benefits
economic benefits
 identified with
flowing from the reasonable certainty
underlying resource
and
 to restrict the access
of others to those
benefits

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 IAS 38: Criteria for recognition (cont’d)

If the identifiability and control tests (+), IAS 38 allows

recognition of an intangible asset if:
 probable that the expected future economic benefits
that are attributable to the asset will flow to the entity;
and
 the cost of the asset can be measured reliably
Application of these criteria
 most internally generated intangible assets are
expensed to the statement of income
 Exception: development costs

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 Examples of Intangible Assets

Marketing-related Technology-related
intangible assets intangible assets
 used in marketing /  arise from contractual
promotion of products / rights to use technology
services (patented and
unpatented)
 Examples: trademarks,
newspaper mastheads,  Examples: databases,
Internet domain names designs, software, and
and non-compete recipes
agreements

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 Examples of Intangible Assets

Customer- or supplier- Artistic-related intangible

related intangible assets assets
 arise from relationships  arise from the right to
with customers or benefits
suppliers
 Examples: royalties from
 Examples: licensing, artistic works (plays,
and use rights (airport books, films and music)
landing slots and
customer lists)

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 Example: Kaiseki Ernst

Kaiseki Ernst Ltd decided to diversify into the production

of vegetarian organic sausages. The project team
produced a list of cost headings for the acquisition of:
 recipes from an international chef;
 a license to use a specialized computer-controlled
oven;
 registration of a trade name ‘The Umami One’; and
 training courses for management in sausage making

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 Example: Kaiseki Ernst

Required:
You are part of the auditing team of Kaiseki Ernst and
asked for advice on the possibility of capitalising all costs
arising in respect of the above.

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 Recognition and Initial Measurement

Intangibles may be acquired in the following ways:

 By separate acquisition
 They may be internally generated
 As part of a business combination
 By way of a government grant

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 Recognition and Initial Measurement:
Separate Acquisition

 Probability recognition criteria always considered to be

satisfied for separately acquired intangibles
 Cost can usually be measured reliably

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1
5

Choice of two measurement models following

the initial recognition

Initial Subsequent
Recognition Measurement

1. Cost
At Cost
Model

2.
Revaluation
* Active market Model*
required

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 Active Market

An active market is a market in which all the following

conditions exist:
 the items traded in the market are homogeneous;
 willing buyers and sellers can normally be found at any
time; and
 prices are available to the public

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 Accounting treatment: intangible assets
at year-ends
Recognising intangible assets with a finite life
 at cost less accumulated amortisation or
 when a parent acquires a subsidiary with intangible
assets  fair value less accumulated amortisation

Amortisation of intangible assets with a finite life

 amortised on a systematic basis
 over its estimated useful economic life
 Very similar to PPE under IAS 16

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 Accounting treatment: intangible assets
at year-ends
The following extract is from the Bayer Group 2015
Annual Report:

Intangible assets are recognised at the cost of acquisition

[…]. Those with a determinable useful life are amortised
accordingly on a straight-line basis over a period of up to
30 years, except where their actual depletion demands a
different amortisation pattern.

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 Accounting treatment: intangible assets
at year-ends
Impairment of intangible assets with a finite life
 Tested for impairment where there is a triggering event.
Borussia Dortmund 2018 Annual Report:

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 Accounting treatment: intangible assets
at year-ends
Is the expected pattern of revenues of
future economic benefits of asset an
acceptable basis for amortization?
 A clarification issued by the IASB in
2014:
 Not: revenue-based methods to
calculate the depreciation of an
asset
 Because: revenues ≠ consumption
of the economic benefits embodied
in asset

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 Accounting treatment of recognised
intangible assets at year-ends
Amortisation of intangible assets with indefinite life
 economic life is indefinite  no amortization
 subject to annual impairment reviews under IAS 36

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 Disclosure under IAS 38

IAS 38 requires the disclosure of the following:

 whether useful lives are indefinite or finite;
 amortisation methods for intangible assets with finite
useful lives;
 the gross carrying amount and accumulated
amortisation at the beginning & end of the period;
 increases / decreases from revaluations and from
impairment losses recognised or reversed directly in
equity (IAS 36);
 for R&D, disclosure of charge for research and
development in the period
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Part 2

Accounting for Research and

Development (R&D);

© FH AACHEN UNIVERSITY OF APPLIED SCIENCES | Prof. Dr. Duc Hung Tran | Eupener Str. 70 | 52066 AACHEN | WWW.FH-AACHEN.DE
 Accounting for Research and Development

Under IAS 38 Intangible Research activities

Assets  aimed at obtaining new
 research expenditure knowledge;
must be expensed  the search for,
 development evaluation and final
expenditure must be selection of, applications
capitalised provided a of research findings or
strict set of criteria is other knowledge;
met

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 Accounting for Research and Development

Examples of Research activities

(cont’d)
 the search for alternatives for
materials, devices, products,
processes, systems and
services; and
 Normally, research expenditure
is not related directly to any of
the company’s products or
processes

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 Accounting for Research and Development

Development activities
 design, construction and
testing of pre-production and
pre-use prototypes and
models;
 Not of a scale feasible for
commercial production
 design of tools, jigs etc.
involving new technology;

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 Research vs. Development: Honeycomb

 Development of a high-temperature material, could be

used in any aero engine  ‘research’
 development of a honeycomb for a particular engine
 ‘development’

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 Activity: Recognition of Intangibles

Otafuku Ltd is unsure of how to obtain computer

software. Three possibilities are:
 Purchase computer software externally, including
packages for payroll and general ledger.
 Buy computer software to incorporate into a product
that the company will develop (research phase)
 Employ its own programmers to write software that the
company will use.
Required
Discuss whether the accounting will differ depending on
which method is chosen.

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 Questions, Questions, Questions….

Why do the regulators not regard

research expenditure as an asset?

What is most likely the

management attitudes to
capitalising research expenditure?

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 Capitalising development costs

Development expenditure must be recognised if entity

can demonstrate all of the following (IAS 38.19):
 the technical feasibility of completing the intangible
asset;
 the intention to complete the intangible asset and use
or sell it;
 its ability to use or sell the intangible asset;
 how the intangible asset will generate probable future
economic benefits;

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 Capitalising development costs

Development expenditure must be recognised if entity

can demonstrate all of the following (IAS 38.19,
cont’d):
 availability of adequate technical, financial and other
resources to complete the development and to use or
sell the intangible asset;
 its ability to measure reliably the expenditure
attributable to the intangible asset during its
development

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 What costs can be included?

 Costs to be be included in
development expenditure
similar to those determining
the cost of inventory
 Only expenditure incurred
after the project satisfies the
IAS 38 criteria can be
capitalised
 All expenditure incurred prior
to this date expensed in I/S

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 Amortization Charge

 At the year-ends development costs are usually

amortised over the sales of product (with straight-line
as default)
 amortization charge (t): sales(t)/total estimated
sales × capitalised development expenditure
 Example:
 Estimated future sales per annum for 20X3 to
20X5: €100
 Capitalise development expenditure: €6,000
 Amortization Charge in 20x5: [100 / 300] * €6,000
= €2,000
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 Disclosure of R&D

Disclosure is required of the aggregate amount of

research and development expenditure recognised as
expense during period:
 research expenditure;
 development expenditure amortised;
 development expenditure not capitalised; and
 impairment of capitalised development expenditure.

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 Required Reading

Chapter 19, E&E textbook (18th edition)

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