IAS 38 Intangible Assets
Background & Objective
IAS 38 prescribes accounting treatment guidelines for
recognition and measurement of Intangible assets and related disclosures. This
standard describes the criteria’s when the entity should recognize the
intangible and when not, along with the accounting methods for accurate measurement
and presentation in books of accounts.
It helps identifying and evaluating the true value of
intangible, which helps in comparison and analyzing the company net worth
across industry.
Scope
This Standard shall be applied in accounting for intangible
assets, except:
(a) intangible assets that are within the scope of another
Standard;
(b) financial assets, as defined in IAS 32 Financial
Instruments: Presentation;
(c) the recognition and measurement of exploration and
evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral
Resources); and
(d) expenditure on the development and extraction of
minerals, oil, natural gas and similar non‑regenerative
resources.
Key definitions
Amortisation
The systematic allocation of the depreciable amount of an intangible
asset over its useful life.
An asset is a resource:
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to
flow to the entity.
Development
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.
Entity‑specific
value
The present value of the cash flows an entity expects to arise
from the continuing use of an asset and from its disposal at the end of its
useful life or expects to incur when settling a liability.
Fair value
The price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants
at the measurement date. (See IFRS 13 Fair Value Measurement.)
Research
Original and planned investigation undertaken with the prospect
of gaining new scientific or technical knowledge and understanding.
What is Intangible Asset?
Any identifiable non-monetary asset without physical
substance is called Intangible asset. As entities frequently expend resources,
or incur liabilities, on the acquisition, development, maintenance or
enhancement of intangible resources such as scientific or technical knowledge,
design and implementation of new processes or systems, licenses, intellectual
property, market knowledge and trademarks (including brand names and publishing
titles). The value or asset the entity generates is generally called Intangible
assets, though all the above don’t meet the criteria of Intangibles.
An asset is identifiable if it either:
(a) is separable, 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.
Any revenue from the sale of products or services, cost
savings, or other benefits resulting from the use of the asset by the entity is
called future economic benefits flowing from an intangible asset.
Recognition and measurement
An intangible asset shall be recognised if, and only 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
An entity shall assess the probability of expected future
economic benefits using reasonable and supportable assumptions that represent management’s
best estimate of the set of economic conditions that will
exist over the useful life of the asset.
An intangible asset shall be measured initially at cost.
Few situations are covered below for more understanding:
-
- Ø Acquisition
as part of a business combination: if an intangible asset is acquired
in a business combination, the cost of that intangible asset is its fair value
at the acquisition date.
- Ø Acquisition
by way of a government grant: This may happen when a
government transfers or allocates to an entity intangible assets such as airport
landing rights, licences to operate radio or television stations, import licences
or quotas or rights to access other restricted resources. In such cases, per
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance,
entity may recognize that on fair value otherwise can consider 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.
- Ø Internally
generated goodwill: Internally generated goodwill shall not be
recognised as an asset.
- Ø 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:
(a) a research phase; and
(b) a development phase.
Internally generated brands,
mastheads, publishing titles, customer lists and items similar in substance
shall not be recognised as intangible assets.
Recognition of Expenses
Expenditure on an intangible item shall be recognised as an
expense when it is incurred unless:
(a) it forms part of the cost of an intangible asset that
meets the recognition criteria (see paragraphs 18–67); or
(b) the item is acquired in a business combination and
cannot be recognised as an intangible asset. If this is the case, it forms part
of the amount recognised as goodwill at the acquisition date.
Measurement post Recognition
An entity chooses one of following as its accounting policy:
- · Cost
Model : After initial recognition, an intangible asset shall be
carried at its cost less any accumulated amortisation and any accumulated
impairment losses.
- · Revaluation
Model : Under this model, intangible asset shall be carried at a
revalued amount, being its fair value at the date of the revaluation less any subsequent
accumulated amortisation and any subsequent accumulated impairment lossess. For
the purpose of revaluations under this Standard, fair value shall be measured
by reference to an active market.
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.
Life of Intangible: An
intangible asset with a finite useful life is amortized and is subject to
impairment testing. An intangible asset with an indefinite useful life is not
amortised, but is tested annually for impairment.
Retirement & Disposal
An intangible asset shall be derecognised:
(a) on disposal; or
(b) when no future economic benefits are expected from its
use or disposal.
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 recognised
in profit or loss when the asset is derecognised (unless IFRS 16 requires
otherwise on a sale and leaseback.) Gains shall not be classified as revenue.
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