IAS 38

Intangible Assets

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 IAS 38 - Overview

 Objective and Scope

 Recognition and Measurements
 Acquired Intangible Assets
 Internally Generated Intangibles (R & D)
 R & D Recognition and Measurement
 Goodwill and Impairments
 Retirements and Disposals
2  Disclosures
 Scope:

Its applies to all intangible assets other than those arising from below:

 IFRS 3 Business Combinations

 IFRS 4 Insurance Contracts
 IFRS 5 Non Current Assets Held for Sale and Discontinued
Operations
 IFRS 6 Exploration for and Evaluation of Min. Resources
 IAS 19 Employee Benefits
 IAS Deferred Tax Assets
 IAS 36 Impairments of Assets
 IAS 17 Leases
3  IAS 39 & IFRS 9 Financial Assets
 Objective of the standard

Intangible assets:
1. “an identifiable non-monetary asset without
physical substance”
Conditions:
 Must be identifiable
 Will provide future economic benefits
 Benefits are controlled by the entity

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 RECOGNITION AND MEASUREMENTS

Recognition criteria – when:

1. It meets the definition of intangible assets,
2. It is likely that the expected future economic benefits
will be realized, and
3. The cost of the asset can be reliably measured

Measurement:
 Measured initially at cost and subsequently carried
either at cost or revalued amount
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 Three (3) Conditions required

1. IDENTIFIABLE
 Is separable i.e. could be rented or sold separately.
 Arise from a contractual obligation or other legal rights

2. FUTURE ECONOMIC BENEFIT

 Revenue from sales of products and services, cost savings and
other benefits of usage

3. CONTROLLED BY THE ENTITY

 It must be under the control of the entity
6  Legally enforceable rights to restricts others from benefiting
 Example 1

1. The technical know-how which is protected by a

legal contract binding employees to work over
an specified number of years.
2. Skills which employees benefit from training.
3. Customer loyalty and company market shares.

Indicate which of these are likely to be recognized

as an intangible asset?
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 FORMS:

 Two broad categories;

1. Acquired Intangible Assets (either separately
eg. Government grants, patents rights, assets
exchange or through business combinations

2. Internally Generated Intangibles (through

research and development, others and goodwill)

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 Acquired Intangible Assets – Separately

Purchase price (including incidental costs of purchase

such as legal fees, duties, and any costs incurred in
getting the asset ready for use) however, excluding
advertisement, promotion, early operating stage
losses and general adm. Overheads

When an intangible asset is acquired as part of a

business combination (ie an acquisition or takeover),
the cost of the intangible asset is its fair value at the
date of the acquisition.
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 Example 2

UP Inc. acquires a copyrights to the original recordings

of a famous singer. The agreement with the singer
allows the company to record the singer for a period of
5yrs. During the initial six (6) month period of the
agreement, the singer is very sick and consequently
cannot record. The studio time that was blocked by the
company had to be paid even during the period the
singer could not sing.
The following cost were incurred by the company:-
a. Legal cost of acquiring the copyrights – GHS20m
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 b. Operational losses (studio time lost etc)
during start-up period – GHS4m
c. Massive advertising campaign to launch the
artist and the label – GHS0.5m

Required: Which of the above item is cost that

is eligible for capitalization as a intangible
asset?
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 Solution

a. Legal cost of acquiring the copyrights can

be capitalized.
b. Operation losses are not allowed to be
capitalized
c. Advertising campaign cost are not allowed
to be capitalized.

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 Exchanged intangible assets:

If one intangible asset is exchanged for another, the cost of

the intangible asset is MEASURED at fair value unless:
 The exchange transaction lacks commercial substance,
or
 The fair value of neither the asset received nor the asset
given up can be measured reliably.

Otherwise, its cost is measured at the carrying amount of

the asset given up.

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 Example 3

 An intangible asset is measured by a company at

fair value. The asset was revalued by $800 in
2016, and there is a revaluation surplus of $800
in the statement of financial position. At the end
of 2017, the asset is valued again, and a
downward valuation of $1000 is required.

Required: State the accounting treatment for the

downward revaluation.
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 Solution

 In this example, the downward valuation of

$1000 can first be set against the revaluation
surplus of $800. The revaluation surplus will
be reduced to 0 and a charge of $200 made
as an expense in 2017.

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 Others

 PROHIBITED INTERNALLY GENERATED

brands, mastheads, publishing titles and
customer lists and similar items as intangible
assets.

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 Internally Generated Intangible Assets

RESEARCH ACTIVITIES
 Cannot be recognized under IAS 38.
 Should be written off as an expense

Examples
(a) Activities aimed at obtaining new knowledge
(b) The search for alternatives for materials, devices, products,
processes, systems or services
(c) The formulation, design evaluation and final selection of
possible alternatives for new or improved materials, devices,
products, systems or services
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 Internally Generated Intangible Assets

 DEVELOPMENT COST
Development costs are expensed as incurred unless all of
the following STRICT CRITERIA can be demonstrated. If
so, can capitalize as an intangible asset.
 Technical feasibility of completing
 Intention to complete, use or sell
 Ability to use or sell
 How it will generate future economic benefits
 Availability of resources to complete and use or sell, and
 Expenditures during development can be reliably
measured,
 i.e., feasibility and economic viability of the asset must
18 be established to support capitalization
 Cost of an Intangible Assets

 Intangible assets should be initially measured at cost, but

subsequently they can be carried at COST or at a REVALUED
amount.
 Applying the COST MODEL - carried at its cost, less any
accumulated amortization and accumulated impairment
losses.
 The REVALUATION MODEL- carried at a revalued amount,
less any subsequent accumulated amortisation and
accumulated impairment losses.
Note: This treatment is not available for the initial
recognition of intangible assets. This is because the cost of
19 the asset must be reliably measured.
 Useful Life – Finite Vs. Infinite

Finite Useful Life

It should be amortised over its expected useful life;
 Amortisation should start when the asset is available for
use.
 Amortisation should cease at the date it is classified as
held for sale
 The amortisation method reflect the pattern in which the
asset's future economic benefits are consumed. If not
the straight-line method should be used.

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 Finite Useful life

 The amortisation charge recognised in P/L.

 The residual value of a finite useful life is
assumed to be zero unless a third party is
committed to buying a the end of its useful
life or an active market available

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 Amortization of Intangibles (contd.)

 Journal Entry:
Amortization Expense xxx
Intangible Asset xxx
(or Accumulated Amortization)

22 Intangible Assets
 Example 4 – R & D

Nyatekyi Ltd incurred the following cash expenditures related to

the R&D in 2016 are as follows: GHS
R&D salaries and wages 100,000
R&D material &supplies used 50,000
Payments to others for service
performed related to R&D 30,000
Equipment purchased 120,000
Patent filing and legal fees
for completed project 25,000
Required: Show the accounting treatment for the above listed
23 transaction under IAS 38
 Solution

 R&D expenses include the followings:

 R&D salary: 100,000; R&D material:50,000; depre.
Expense and amortized charge; payments to
others: 30,000 .
 The following expenditures are capitalized:
 Equipment: 120,000 ; Patent: 25,000.

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 Infinite useful life

 an indefinite useful life should not be

amortised.
 (IAS 36 requires that such an asset is tested
for impairment at least annually.)

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 Example 5

 Love Ltd develops and manufactures exotic

products and has the following projects on
hand;
Proj 1 Proj 2 Proj. 3 Proj 4
Defered Dev. Exp. b/f 1.1.x2 2800 4500 - -
During the Year the following incurred;
Salaries, wages and so on 350 - 600 200
Overhead Costs 20 - - 30
Materials and Services 30 - 110 40
Patents and Licences 10 - - -

26 Market Research - - 20 -
 Cont’
 Project 1: Was originally expected to be profitable but this
is now in doubt, since scientist in charge of the project is
behind schedule and competitors gaining grounds.
 Project 2: Commercial production started during the year,
sales were 20k units, 30k units, 60k units, 40k units and
30k units for the next 5yrs respectively.
 Project 3: These cost related to a new project which
meets the criteria for deferral of expenditure and
expected to last for 3yrs
 Project 4: Is another new project, involving the devpt of a
27 loss leader, expected to raise the level of future sales.
 Cont’

 The company’s policy is to defer devpt cost,

where permitted by IAS 38. Expenditure C/F
is written off evenly over the expected sales
life of projects starting in the first year of sale.
 Required: Show the accounting
treatments for the above projects for the
year ended 31 Dec 20x2

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 Solution
 Project 1: Should be written off entirely in 20x2 as there is
a considerable doubt of its profitability.
 Project 2: Has a commercial value and even operations
has started. It should be amortized over useful life of
project.
 Project 3: The development cost may be deferred.
 Project 4: It is not expected to be profitable and should
not be deferred.
SOFP Extract as at 31 Dec 20x2
 Non Current Assets
29  Intangible Assets – Dev. Cost (Note 5) 4310
 Solution Cont’

 Workings:
Proj 1 Proj 2 Proj. 3 Proj 4
1.
B/F 2800 4500 - -
Salaries, etc 350 - 600 200
Overhead Costs 20 - - 30
Materials and Services 30 - 110 40
Patents and Licenses 10 - - -
Mkt Research (Not permitted for - - - -
deferral under IAS 38)
C/F (3600) (710)
Written Off Dev. Cost 3210 900 - 270
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 Solution Cont’

2. Amortization of Project 2 is 4500/5yrs = 900

3. Accounting Plicy – R & D
IAS 38 permit R&D expenditure to be written off as incurred,
except that dev cost incurred on individual project are
carried forward when their future recoverability can be
foreseen with reasonable evidence. Any expense carried
forward is amortized over the sales period.
4. IAS 38 does not permit the inclusion of mkt research in
deferred dev. Cost. However it can be carried forward
separately under an accrual principle
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 Solution Cont’

5. Development Cost
B/f 1/1/x2 (2800 + 4500) 7300
Add Dev. Exp. During the year 1390
8690
Dev. Cost amortized during
The year (3210 + 900 + 270) (4380)
Balance carried forward 31/Dec/20x2 4310

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 Goodwill (IFRS 3)

 Purchased goodwill arising on consolidation

is retained in the statement of financial
position as an intangible asset under IFRS 3.
It must then be reviewed annually for
impairment.
 Goodwill: Future economic benefits arising
from assets that are not capable of being
individually identified and separately
recognized Hence do not qualify as IA under
33 IAS 38
 Factors Contribute to Goodwill
 Superior management team.
 Outstanding sales organization.
 Favorable tax condition.
 Effective advertising.
 Good labor relations.
 Outstanding credit rating.

34 Intangible Assets
 Goodwill (IFRS 3)
 How is the GOODWILL of a sale transaction
decided? Two methods of valuation are worth
mentioning here.
 The seller and buyer agree on a price for the
business without specifically quantifying the goodwill.
The purchased goodwill will then be the difference
between the price agreed and the value of the
identifiable net assets in the books of the new
business.

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  (b) However, the calculation of goodwill often
precedes the fixing of the purchase price and
becomes a central element of negotiation. No
matter how goodwill is calculated within the total
agreed purchase price, the goodwill shown by
the purchaser in his accounts will be the
difference between the purchase consideration
and his own valuation of the net assets acquired.

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 Example 6

If A values his net assets at $40,000,

goodwill is agreed at $21,000 and B agrees
to pay $61,000 for the business but values
the net assets at only $38,000.
What will be the goodwill in B's books?

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 Solution

That will be;

$61,000 – $38,000 = $23,000.

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 Impairment of Assets (IAS 36)
 Principles (IAS36) apply to impairments of tangible and
financial assets also apply to intangible assets.

 Thus, when changes in circumstances indicate that the

book value of the intangibles may not be reconcilable
(i.e., fair value of intangible < carrying amount), a write-
down should be performed to recognize the loss.

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 Impairment of Intangible Assets (contd.)

Example:
Carrying amount of a copyright 1,200,000
Fair value 500,000
Loss on Impairment 700,000

The journal entry to record the loss:

Loss on Impairment 700,000
Copyright 700,000
40 Intangible Assets
 Disposals/Retirements of Intangible Assets

 An intangible asset should be eliminated from the

statement of financial position when it is disposed
of or when there is no further expected economic
benefit from its future use.
 On disposal the gain or loss arising from the
difference between the net disposal proceeds and
the carrying amount of the asset should be taken
to profit or loss as a gain or loss on disposal (ie
treated as income or expense).
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 Disclosure

General
 Separately between internally generated and
those purchased
 Accounting policies and methods used
 Reconciliations between opening and ending
balances
 Additional details about those judged to have
indefinite lives.
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 Disclosure

Intangible assets using RM

 For each class, the date of the revaluation,
carrying amounts, carrying amounts if cost
method had been used, methods and
assumptions used to determine FV,
reconciliations of revaluation surplus
amounts, restrictions on distribution of
revaluation surplus amounts.

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