Intangible Assets (IAS 38) P age |1

Intangible Assets- IAS 38

Overview

IFRS 3 – Measurement

Intangible Assets

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Recognition and measurement

1.1 Definition

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

1.2 Identifiable

In order to be identifiable the asset must either

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1.3 Recognition

An intangible asset must

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1.4 Measurement

Purchased intangibles are initially measured at cost. Subsequently there is a choice between:

 Cost model – cost less amortization

 Revaluation model – revalued amount less amortisation

The revaluation model is rare in practice as its use demands the existence of an active market.
Active markets require:

 Homogeneous (identical) products

 Willing buyers and sellers
 Prices available to the public

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Amortisation

Internally generated intangible assets

 Generally, internally generated intangible assets cannot be capitalised, as the cost of their
creation is not capable of reliable measurement

e.g.

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Goodwill

2.1 Calculation

Goodwill is the difference between the value of a business as a whole and the fair value of its
identifiable net assets.

2.2 Purchased v non-purchased

Purchased goodwill arises when an entity acquires a business and is discussed in more detail in
Chapter 18.

Non-purchased, or inherent, goodwill is not recognised within the financial statements because it is
not separable from the business.

2.3 Negative goodwill

Where an acquiring entity pays less for a business than the fair value of its separable net assets, the
negative goodwill created is immediately recognised as income in the statement of profit or loss.

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Research and development

3.1 Definitions

Research -

Development -

3.2 Accounting treatment

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

3.3 Recognition criteria

 Probable flow of economic benefit

 Intention to complete the project
 Reliable measurement of development cost
 Adequate resources available to complete the project
 Technically feasible
 Expected to be profitable

Amortisation

 Amortisation of development expenditure commences as soon as commercial production

begins, either on a straight-line basis or in relation to expected production levels.

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Test your understanding 1

An entity has incurred the following expenditure during the current year:

(a) $100,000 spent on the initial design work of a new product – it is anticipated that this design
will be taken forward over the next two year period to be developed and tested with a view to
production in three years' time.

(b) $500,000 spent on the testing of a new production system which has been designed internally
and which will be in operation during the following accounting year. This new system should reduce
the costs of production by 20%.

How should each of these costs be treated in the financial statements of the entity?

Test your understanding 2

An entity has incurred the following expenditure during the current year:

(i) A brand name relating to a specific range of chocolate bars, purchased for $200,000. By
the year end, a brand specialist had valued this at $250,000.
(ii) (ii) $500,000 spent on developing a new line of confectionery, including $150,000
spent on researching the product before management gave approval to fully fund the
project.
(iii) (iii) Training costs for staff to use a new manufacturing process. The total training
costs amounted to $100,000 and staff are expected to remain for an average of 5 years.

Explain the accounting treatment for the above issues.

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Test your understanding 3

1. Cowper plc has spent $20,000 researching new cleaning chemicals in the year ended 31
December 20X0. They have also spent $40,000 developing a new cleaning product which will
not go into commercial production until next year. The development project meets the
criteria laid down in IAS 38 Intangible Assets.

How should these costs be treated in the financial statements of Cowper plc for the year ended 31
December 20X0?

1. $60,000 should be capitalised as an intangible asset on the statement of financial position.

2. $40,000 should be capitalised as an intangible asset and should be amortised; $20,000
should be written off to the statement of profit or loss.
3. $40,000 should be capitalised as an intangible asset and should not be amortised; $20,000
should be written off to the statement of profit or loss.
4. $60,000 should be written off to the statement of profit or loss

2. Which TWO of the following items below could potentially be classified as intangible assets?
A purchased brand name B training of staff C internally generated brand D licences
and quotas

3. 3 Sam Co has provided the following information as at 31 December 20X6:

(i) Project A – $50,000 has been spent on the research phase of this project during the year.
(ii) Project B – $80,000 had been spent on this project in the previous year and $20,000
this year. The project was capitalised in the previous year however, it has been decided to
abandon this project at the end of the year.
(iii) Project C – $100,000 was spent on this project this year. The project meets the criteria
of IAS 38 and is to be capitalized

Which of the following adjustments will be made in the financial statements as at 31

December 20X6?
A Reduce profit by $70,000 and increase non-current assets by $100,000
B Reduce profit by $150,000 and increase non-current assets by $100,000
C Reduce profit by $130,000 and increase non-current assets by $180,000
D Reduce profit by $130,000 and increase non-current assets by $100,000

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4. Which of the following statements concerning the accounting treatment of research and
development expenditure are true, according to IAS 38 Intangible Assets?
(i) Research is original and planned investigation undertaken with the prospect of gaining
new knowledge and understanding.
(ii) Development is the application of research findings.
(iii) Depreciation of plant used specifically on developing a new product can be capitalised as
part of development costs.
(iv) Expenditure once treated as an expense cannot be reinstated as an asset.

A (i), (ii) and (iii)

B (i), (ii) and (iv)

C (ii), (iii) and (iv)

D All of the above

5. Which of the following should be included in a company’s statement of financial position as

an intangible asset under IAS 38 Intangible Assets?
A Internally developed brands
B Internally generated goodwill
C Expenditure on completed research
D Payments made on the successful registration of a patent

6. During the year to 31 December 20X8 X Co incurred $200,000 of development costs for a
new product. In addition, X Co spent $60,000 on 1 January 20X8 on machinery specifically
used to help develop the new product and $40,000 on building the brand identity.
Commercial production is expected to start during 20X9. The machinery is expected to last 4
years with no residual value.
What value should be included within Intangible Assets in respect of the above in X Co’s
Statement of Financial Position as at 31 December 20X8? $ __________

7. Which TWO of the following criteria must be met before development expenditure is
capitalized according to IAS 38 Intangible Assets?
A the technical feasibility of completing the intangible asset
B future revenue is expected
C the intention to complete and use or sell the intangible asset
D there is no need for reliable measurement of expenditure

8. For each issue, identify the correct accounting treatment in Madeira's financial statements:
Capitalize as intangible or Expense
1. $400,000 developing a new process which will bring in no revenue but is expected to bring
significant cost savings $400,000 developing a new product.
2. During development a competitor launched a rival product and now Madeira is hesitant to
commit further funds to the process $400,000 spent on marketing a new product which has
led to increased sales of $800,000
3. $400,000 spent on designing a new corporate logo for the business

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