IAS 38 Intangeble

What is an intangible asset?

Well, according to IAS 38, it’s an identifiable non-monetary asset without physical substance, such as a
licence, patent or trademark.
There are critical attributes of intangible asset are:
1. Identifiability
2. Control (power to obtain benefits from the asset)
3. Future economic benefits
The three critical attributes of an intangible
assets are
1. Identifiability
2. Control (power to obtain benefits from the asset)
3. Future economic benefits
What is identifiable means?
Well it just means the asset is one of 2 things:
1. It is SEPARABLE, meaning it can be sold or rented to another party
on its own (rather than as part of a business) or
2. It arises from contractual or other legal rights.

It is the lack of identifiability which prevents internally generated

goodwill being recognised. It is not separable and does not arise from
contractual or other legal rights
Example
Employees can never be recognised as an asset; they are not under the
control of the employer, are not separable and do not arise from legal
rights• A taxi licence can be an intangible asset as they are controlled,
can be sold/ exchanged/transferred and arise from a legal right (The
intangible doesn’t have to be separable AND arise from a legal right,
just one or the other is enough).
When can you recoginise an IA and for how
much?
1. When it is probable that future economic benefits attributable to
the asset will flow to the entity
2. The cost of the asset can be measured reliably
Purchase price plus directly attributable costs
Remember that directly attributable means costs which otherwise
would not have been paid, so often staff costs are excluded.
IA acquire as part of a business combination
Well this time, the intangible asset (other than goodwill ) should
initially be recognised at its fair value.
If the FV cannot be ascertained then it is not reliably measurable and so
cannot be shown in the accounts.In this case by not showing it, this
means that goodwill becomes higher
Research and Development costs
Research costs are always expensed in the income statement
Development costs are capitalised only after technical and commercial
feasibility of the asset for sale or use have been established.
This means that the enterprise must intend and be able to complete
the intangible asset and either use it or sell it and be able to
demonstrate how the asset will generate future economic benefits.
If entity cannot distinguish between research and development - treat
as research and expense
Research and Development acquired in a
business combination
Recognised as an asset at cost, even if a component is
research.Subsequent expenditure on that project is accounted for as
any other research and development cost
Internally generated Brands, lists
Should not be recognised as assets - expense them as there is no reliable measure
If purchased: capitalise as an IA
Operating system for hardware: include in hardware cost
If internally developed: charge to expense until
technological feasibility,
probable future benefits,
intent and ability to use or sell the software,
resources to complete the software, and
ability to measure cost.
Always expense the following
1. Internally generated goodwill
2. Start-up, pre-opening, and pre-operating costs
3. Training cost
4. Advertising and promotional cost, including mail order catalogues
5. Relocation costs
Intangible Assets –Future measurement
We can use either historic cost or revaluation
historic cost (and amortize)
Generally intangible assets should be amortised over their useful economic life.
1. If has a useful economic life
Amortise over UEL
Residual values should be assumed to be nil, except in the rare circumstances when an active
market exists or there is a commitment by a third party to purchase the asset at the end of its
useful life.
2. If has an indefinite UEL
Check for impairment every year
There should also be an annual review to see if the indefinite life assessment is still
appropriate.
Revaluation (and amortise)
This model can only be adopted if an active market exists for that type
of asset.
Revaluing Intangibles is hard, because there is no physical substance,
and so a reliable measure is tricky.
1. There MUST be an active market
2. The item MUST be unique
Research & development
Research is expensed. Development is often an asset.
Research
Research is investigation to get new knowledge and understanding
So all the expenditure will go to I/S
Development
Under IAS 38, an intangible asset must demonstrate all of the following criteria:(use pirate as a memory jogger)
1. Pobable future economic benefits
2. Intention to complete and use or sell the asset
3. Resources (technical, financial and other resources) are adequate and available to complete and use the asset
4. Ability to use or sell the asset
5. Technical feasibility of completing the intangible asset (so that it will be available for use or sale)
6. Expenditure can be measured reliablyOnce capitalised they should be amortised.Amortisation begins when
commercial production has commenced.
Once capitalized they should be amortised
The cost of the development expenditure should be amortised over the useful life.
Therefore, the cost of the development expenditure is matched against the revenue it
produces.
Amortisation must only begin when the asset is available for use (hence matching the
income and expenditure to the period in which it relates).
It is an expense in the income statement:
Dr Amortisation expense (I/S)
Cr Accumulated amortisation (SFP)
It must be reviewed at the year-end to check it still is an asset and not an expense.
If the criteria are no longer met, then the previously capitalised costs must be written
off to the statement of profit or loss immediately.