FINANCIAL REPORTING

IAS 38: INTANGIBLE ASSETS |

Scope
1. Rights
2. Purchased Goodwill
3. Research and Development Costs

07/20/2023 Report for 2010 | 2

Rights
• Examples include:
1. License
2. Player’s right
3. Landing right
4. Broadcasting right
5. Copyrights/Trade mark/ Brand name
6. Franchise

07/20/2023 Report for 2010 | 3

 Purchased Goodwill
• Is measured under IFRS 3, and is the difference
between the consideration transferred by the
buying entity (Acquirer) and the fair value of net
assets measured under IFRS 13 of the selling entity
(Acquiree).
• Internally generated goodwill is not recognized as
an asset but rather is recognized as an expense;
examples include: Good location, high quality
products, strong brand names, advertisements and
promotion, dedicated and committed workforce,
customer list, favourable market conditions etc.
07/20/2023 Report for 2010 | 4
Research and Development Costs
• Research costs are the cost incurred by the
company to carry out the feasibility of
developing new products or getting markets
for the current products, such costs should be
expensed.
• Development costs are the costs incurred by
the company in developing the new products,
such costs should only be capitalized when
they meet the criteria for capitalization.

07/20/2023 Report for 2010 | 5

IAS 38: INTANGIBLE ASSETS

• The objective of this Standard is to

prescribe the accounting treatment for
intangible assets.
• The attributes of intangible assets
1. Identifiability
2. Control
3. Future economic benefits

|
Identifiability
• The definition of an intangible asset
requires an intangible asset to be
identifiable to distinguish it from
goodwill.

|
An asset is identifiable if it
either:
a) Is separable, i.e. is capable of being separated
or divided from the entity and sold,
transferred, licensed, rented or exchanged,
either individually or together with a related
contract, identifiable asset or liability,
regardless of whether the entity intends to do
so; or
b) Arises from contractual or other legal rights,
regardless of whether those rights are
transferable or separable from the entity or
from other rights and obligations.
|
Control
• An entity controls an asset if the entity
has the power to obtain the future
economic benefits flowing from the
underlying resource and to restrict the
access of others to those benefits.

|
Future economic benefits
• The future economic benefits flowing
from an intangible asset may include
revenue from the sale of products or
services, cost savings, or other benefits
resulting from the use of the asset by the
entity. For example, the use of
intellectual property in a production
process may reduce future production
costs rather than increase future
revenues.
|
Recognition
• An intangible asset shall be recognized if
it meets the definition of an asset and if:
a) It is probable that the expected future
economic benefits that are attributable
to the asset will flow to the entity; and
b) The cost of the asset can be measured
reliably.

|
Initial measurement
• For the purpose on initial measurement
intangible assets are classified into the
following classes:
a) Separate acquisition
b) Acquisition as part of a business combination
c) Acquisition by way of a government grant
d) Exchanges of assets
e) Internally generated goodwill
f) Internally generated intangible assets

|
Separate acquisition
• The cost of a separately acquired
intangible asset comprises:
a) Its purchase price, including import
duties and non-refundable purchase
taxes, after deducting trade discounts
and rebates; and
b) Any directly attributable cost of
preparing the asset for its intended use.

|
Acquisition as part of a
business combination
• In accordance with IFRS 3 Business
Combinations, if an intangible asset is acquired
in a business combination, the cost of that
intangible asset is its fair value at the
acquisition date.
• The fair value of an intangible asset will reflect
expectations about the probability that the
expected future economic benefits embodied in
the asset will flow to the entity.

|
Acquisition by way of a
government grant
• In accordance with IAS 20 Accounting for
Government Grants and Disclosure of
Government Assistance, an entity may choose
to recognize both the intangible asset and the
grant initially at fair value. If an entity chooses
not to recognize the asset initially at fair value,
the entity recognizes the asset initially at a
nominal amount (the other treatment
permitted by IAS 20) plus any expenditure that
is directly attributable to preparing the asset
for its intended use.
|
Exchanges of assets
• The cost of such an 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 is reliably
measurable.

|
Internally generated goodwill

• Internally generated goodwill shall not be

recognized as an asset. In some cases,
expenditure is incurred to generate
future economic benefits, but it does not
result in the creation of an intangible
asset that meets the recognition criteria
in this Standard. Such expenditure is
often described as contributing to
internally generated goodwill.
|
Internally generated goodwill

• Internally generated goodwill is not

recognized as an asset because
a) It is not an identifiable resource
b) It is not controlled by the entity
c) And cannot be measured reliably at cost

|
Internally generated
intangible assets
• To assess whether an internally
generated intangible asset meets the
criteria for recognition, an entity
classifies the generation of the asset into:
1. Research phase; and
2. Development phase

|
Research phase
• No intangible asset arising from research
(or from the research phase of an
internal project) shall be recognized.
Expenditure on research (or on the
research phase of an internal project)
shall be recognized as an expense when it
is incurred.

|
Development phase
• An intangible asset arising from development
(or from the development phase of an internal
project) shall be recognized if, and only if, an
entity can demonstrate all of the following:
1. The technical feasibility of completing the
intangible asset so that it will be available for
use or sale.
2. Its intention to complete the intangible asset
and use or sell it.
3. Its ability to use or sell the intangible asset.

|
Development phase
4. How the intangible asset will generate
probable future economic benefits.
Among other things, the entity can
demonstrate the existence of a market
for the output of the intangible asset or
the intangible asset itself or, if it is to
be used internally, the usefulness of the
intangible asset.

|
Development phase
5. The availability of adequate technical,
financial and other resources to
complete the development and to use or
sell the intangible asset.
6. Its ability to measure reliably the
expenditure attributable to the
intangible asset during its development.

|
Measurement after
recognition
• An entity shall choose either the cost
model or the revaluation model as its
accounting policy. If an intangible asset is
accounted for using the revaluation
model, all the other assets in its class
shall also be accounted for using the
same model, unless there is no active
market for those assets.

|
Cost model
• After initial recognition, an intangible
asset shall be carried at its cost less any
accumulated amortization and any
impairment loss.

|
Revaluation model
• After initial recognition, an intangible
asset shall be carried at a revalued
amount, being its fair value at the date
of the revaluation less any subsequent
accumulated amortization and any
subsequent impairment losses.

|
Revaluation model
• For the purpose of revaluations under this
Standard, fair value shall be determined by
reference to an active market. Revaluations
shall be made with such regularity that at the
end of the reporting period the carrying amount
of the asset does not differ materially from its
fair value.

|
Revaluation model
• The revaluation model does not allow:
a) The revaluation of intangible assets that
have not previously been recognized as
assets;
b) The initial recognition of intangible
assets at amounts other than cost.

|
Useful life
• An entity shall assess whether the useful life of
an intangible asset is finite or indefinite and, if
finite, the length of, or number of production
or similar units constituting, that useful life.
• An intangible asset shall be regarded by the
entity as having an indefinite useful life when,
based on an analysis of all of the relevant
factors, there is no foreseeable limit to the
period over which the asset is expected to
generate net cash inflows for the entity.

|
Intangible assets with
indefinite useful lives
• An intangible asset with an indefinite useful life
shall not be amortized. In accordance with IAS
36, an entity is required to test an intangible
asset with an indefinite useful life for
impairment by comparing its recoverable
amount with its carrying amount
• Annually, and
• Whenever there is an indication that the
intangible asset may be impaired.

|
Retirements and disposals
• An intangible asset shall be derecognized:
a) On disposal; or
b) When no future economic benefits are
expected +from its use or disposal.

|
Retirements and disposals
• The gain or loss arising from the
derecognition of an intangible asset shall
be determined as the difference between
the net disposal proceeds, if any, and the
carrying amount of the asset.
• It shall be recognized in profit or loss
when the asset is derecognized (unless
IAS 17 requires otherwise on a sale and
leaseback). Gains shall not be classified
as revenue.
|
Examples
• Required:
• Explain how the directors of Maryland
limited should treat the items below in
the financial statements for the year to
31 March 2012.
• Note: The values given by Joyland
limited can be taken as being reliable
measurements. You are not required to
consider depreciation aspects.
|
Example 1
• Maryland limited has developed and
patented a new drug which has been
approved for clinical use. The costs of
developing the drug were $12 million.
Based on early assessments of its sales
success, a firm of specialist advisors,
Joyland limited has estimated its
market value at $20 million.

|
Example 2
• Maryland limited’s manufacturing facilities
have recently received a favourable inspection
by government medical scientists. As a result of
this the company has been granted an exclusive
five-year licence to manufacture and distribute
a new vaccine. Although the licence had no
direct cost to Maryland limited , its directors
feel its granting is a reflection of the company’s
standing and have asked Joyland limited to
value the licence. Accordingly they have placed
a value of $10 million on it.

|
Example 3
• In the current accounting period, Maryland
limited has spent $3 million sending its staff on
specialist training courses. Whilst these courses
have been expensive, they have led to a marked
improvement in production quality and staff now
needs less supervision. This in turn has led to an
increase in revenue and cost reductions. The
directors of Maryland limited believe these
benefits will continue for at least three years and
wish to treat the training costs as an asset.

|
Example 4
• In December 2011, Maryland limited paid
$5 million for a television advertising
campaign for its products that will run for
6 months from 1 January 2012 to 30 June
2012. The directors believe that
increased sales as a result of the publicity
will continue for two years from the start
of the advertisements.

|
Example 5
• Jupiter Company limited has incurred the
following research and development costs over
the past 3 years.
Year Research Development
costs $’000’ costs $’000’
2008 200,000 300,000
2009 300,000 400,000
2010 240,000 360,000

|
CONT’ Example 5
• Commencing from the start of year 2011,
the firm was able to manufacture and sell
the products arising from this project,
still the directors are confident about the
project being profitable. Further analysis
indicates that the development costs
have met criteria for capitalization. The
project will last for five years with no
residual value.

|
CONT’ Example 5
Required:
• Prepare the financial statements extracts
for Jupiter company for each of the 8 years
commencing from year 2008, assuming no
further costs were incurred after the year
2010.

|
Ole Sangale Road, Madaraka Estate. PO Box 59857-00200, Nairobi, Kenya
Tel: (+254) (0)703 034000/200/300 Fax : +254 (0)20 607498
Email: info@strathmore.edu Website: www.strathmore.edu
|