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Chapter 4

IAS 38 Intangible assets

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IFRS Chapter 4 - IAS 38 Intangible Assets

 IAS 38

• Prescribes accounting treatment for intangible assets

o Except for intangible assets that are within the scope of another standard
• Financial assets (IAS 32/IFRS9)
• Exploration for and evaluation of mineral resources (IFRS 6)
• Intangible assets held by an entity for sale in the ordinary course of business (IAS 2 Inventories and IAS 11 construction
contracts)
• Deferred tax assets (IAS 12 Income taxes)
• Leases within the scope of IFRS 16 Leases
• Assets arising from employee benefits (IAS 19)
• Goodwill acquired in a business combination (IFRS 3 Business combination)
• Etc…..

• If an intangible asset is contained in or on a physical asset, the entity must judge whether to register it in tangible or
intangible assets, depending on which element is more significant
o Case of a software
• If adapted to different machines => intangible asset
• If dedicated to a specific computer-controlled machine tool => considered as part of the hardware (PPE)

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 Intangible asset definition

• An intangible asset is an identifiable non monetary asset without physical substance
o Identifiable = either
• Is separable from the entity, different from goodwill
• Or
• Results from contractual or legal rights

 Intangible asset recognition

• If and only if
o Flow of economic benefits to the entity and
o Cost of the item can be measured reliably
• Both conditions must be fulfilled

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 Intangible asset recognition in case of an acquisition

• If separate acquisition
o Recognition cost = purchase price (including import duties and non refundable taxes, net of discounts and
rebates) + any directly attributable cost of preparing the asset to its use (Cf PPE chapter 3)

• If acquisition as part of a business combination

o IFRS 3 (business combination) applies
o Recognition cost = fair value

• Distinct recognition from the goodwill may apply even if the acquiree* had not recognized the asset separately before
the business combination

• “An intangible asset acquired in a business combination might be separable, but only together with a related contract,
identifiable asset or liability. In such cases, the acquirer** recognizes the intangible asset separately from goodwill, but
together with the related item.” (IAS 38 § 36)
Example
• A water spring brand with the water spring itself
• A magazine brand with a list of subscribers (customers)
* Entité acquise, cible ** Acquéreur

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 Internally generated intangible assets

• Case of the goodwill
o Not recognized as an asset!!!

• Other intangible assets

o Is it possible to identify whether and when the asset will generate future economic benefits?
o Is it possible to assess the cost reliably?
o Is the asset separable from the entity?
o Distinction between two phases
• A research phase
“Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical
knowledge and understanding.”

All incurred expenditure shall be recognized as expenses in the P&L

Do not capitalize!!!

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 A development phase

“Development is the application of research findings or other knowledge to a plan or design for the production of new or
substantially improved materials, devices, products, processes, systems or services before the start of commercial
production or use.”

• All incurred expenditure shall be recognized as an asset if and only if the entity can demonstrate all of the following
o Technical feasibility
o Intention to complete the intangible asset and use or sell it
o Ability to use or sell it
o How the asset will generate future economic benefit (existence of a market or an output, usefulness for the entity)
o The availability of adequate technical, financial and other resource to complete the development et use or sell it
o The ability to measure reliably the cost of the development

• Examples of development activities

o The design, construction and testing of pre-production or pre-use prototypes and models
o The design of tools, jigs, molds and dies involving new technology etc…
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Source “applying IFRS” Wiley

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The MIXEDUP Corporation launched a research project at the beginning of 2010. The aim is to be able to automatically control if students are present in class.
Until December 2010 the expensed amounts are:
 Personnel expenses: 25 000 €
 Equipment expenses: 12 500 €
 Consumable material expenses: 2 300 €
Despite these expenses amount, no convincing results are recorded.
In July 2011, the engineers are able to demonstrate the ability of the developed product to generate future benefits and to be marketable. From July 2011 to
December 2011, the expensed amounts are:
 project dedicated personnel expenses: 15 000 €
 Equipment expenses: 5 500 €
 Consumable material expenses: 1 500 €
 On site test expenses: 3 800 €
The product will be launched on the market on January 2012.
.
Work to do
Calculate the amount corresponding to the development costs

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 Not to forget!
• Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be
recognized as intangible asset (§63)

• 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 (§71)

• In France, internal development expenditures

o May be registered as an asset or an expense
o May be recognized as an asset after being recognized as an expense
o No choice when applying IAS 38 (asset)

• In France, set-up costs (frais d’établissement)

o May be registered as an asset or an expense
o No choice when applying IAS 38 (expense)

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Recognition of intangible assets

conditions

Future economic benefits

Income Cost reliably measurable
Risk

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COST AT RECOGNITION

Purchase price or Directly attributable costs

Development costs

Development costs
Professional fees
Tests costs Admin and general overhead costs
Training staff, introduction of a new product
or service

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 Measurement after recognition

• Choice between “cost model” and “revaluation model”(Cf. IAS 16)

• Cost model
Carrying amount = cost – accumulated amortization – accumulated impairment losses

• Revaluation model
Revaluated amount = fair value – subsequent accumulated amortization – subsequent accumulated
impairment losses

o Model permitted if and only if an active market exists for the asset
• A market where transactions take place with sufficient frequency and volume to provide pricing information
o Choice of this model is made for a whole class of asset (excepted for those without active market)

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• Amortization

o Only intangible asset with a finite useful life will be amortized

o If indefinite, it does not mean infinite
o Amortization begins when the asset is ready to be used
o Amortization should cease as soon as the asset is classified as held to be sold or is derecognised
o Residual value is assumed to be 0 unless
• Commitment to be acquired by a third party
• Existence of an active market that allows to assess the residual value and this market will exist at the end of the asset’s
useful life

o Intangible with indefinite useful lives

• shall not be amortized
• Shall be tested regarding the recoverability of the carrying amount
Impairment test (IAS 36)

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• Impairment

oImpairment test of any asset whenever there is an indication the asset may impaired

oMandatory annual impairment test for

• Intangible asset with indefinite useful life
• Intangible asset not yet available for use
• Goodwill acquired in business combination

oAssets to be reviewed
• Individual assets
• Cash-generating units
• A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets.

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 Derecognition

• Derecognition of a fixed asset occurs

o On disposal, or
o When future economic benefits are no longer expected

• Accounting effect of asset derecognition

o Net book value of asset is eliminated in the balance sheet
o A gain or loss on disposal is recognized in the income statement
o Gains are not considered as revenue (not an ordinary activity)

• Gain or loss on disposal = difference between the net disposal proceeds and the carrying amount of the
asset at disposal date

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