10/5/2024

FINANICIAL REPORTING

IAS 38

Intangible
assets

Le Viet, PhD

Definition

[IAS 38.8] An intangible asset is an identifiable non-monetary asset without physical

substance.
Intangibles can be acquired:
• by separate purchase
• as part of a business combination
• by a government grant
• by exchange of assets
• by self-creation (internal generation, but rarely)

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Typical intangible assets

Patents: An exclusive right recognized by law and Copyrights: A form of protection given by law to authors
granted or a limited period (usually 20 years.) of literary, musical, artistic, and similar works.
• Holder has the right to use, manufacture, or sell • Copyright owners have exclusive rights to print,
the patented product or process without reprint, copy, sell or distribute, perform and record
interference or infringement by others. the work.
• Some R & D costs that lead to an internally • Generally, the legal life of a copyright is the life of the
developed patent are expensed in the period author plus 50-100 years (or a finite period for
incurred, while others are capitalized anonymous or corporate creations).

Trademarks: A symbol, design, or logo associated Franchise: A contractual arrangement where the
with a business. franchisor grants the franchisee exclusive rights to
• If purchased, a trademark can be recorded at cost. use the franchisor’s trademark within a certain area
(cannot If internally developed) for a specified period of time.
• Registered with relevant national authority and
renewable indefinitely in (usually) 10-year periods.

Is Goodwill an intangible asset?

Goodwill

This purchased
Only occurs when one
goodwill is an special
company acquires
intangible asset
another company.
(only in the consolidated FS)

The amount by which the

consideration exchanged exceeds
the fair value of net assets acquired.
Otherwise, gain on bargain purchase (profit from low-cost purchase)

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Goodwill
Eddy Company paid $1,000,000 to purchase all of James Company’s assets and
assumed James Company’s liabilities of $200,000. James Company’s assets were
appraised at a fair value of $900,000. What amount of goodwill should Eddy
company record as a result of the purchase?

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NOT intangible assets

The following items must be charged to expense when incurred:

• internally generated goodwill [IAS 38.48]
• start-up, pre-opening, and pre-operating costs [IAS 38.69]
• training cost [IAS 38.69]
• advertising and promotional cost, including mail order catalogues [IAS 38.69]
• relocation costs [IAS 38.69]

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Recognition Criteria

[IAS 38.21] An entity to recognise an intangible asset, whether purchased

or self-created (at cost) if, and only if:
1. it is probable that the future economic benefits that are attributable to
the asset will flow to the entity; and
2. the cost of the asset can be measured reliably.

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Measurement

• The cost of a separately acquired intangible asset includes:

1. Its purchase price, including legal and brokerage fees, import duties
and nonrefundable purchase taxes, after deducting trade discounts
and rebates; and
2. Any directly attributable costs incurred to prepare the asset for its
intended use (in bringing the asset to its working condition)

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Research and Development (R&D)

Research
• Research is original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding. . .
Development
• Development is the application of research findings or other knowledge into a
plan or design for the production of new or substantially improved materials,
devices, products, process, systems or services before the start of commercial
production or use . . .
R&D costs incurred under contract for other companies are capitalized as inventory and carried forward
into future years.
Costs of assets purchased for R&D purposes are expensed in the period unless they have alternative
future uses.
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Research and Development (R&D)

• Examples of research activities are:

a) activities aimed at obtaining new knowledge;
b) the search for, evaluation and final selection of, applications of research findings or
other knowledge;
c) the search for alternatives for materials, devices, products, processes, systems or
services; and
d) the formulation, design, evaluation and final selection of possible alternatives for
new or improved materials, devices, products, processes, systems or services.

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Research and Development (R&D)

• Examples of development activities are:

a) the design, construction and testing of pre-production or pre-use prototypes and
models;
b) the design of tools, jigs, moulds and dies involving new technology;
c) the design, construction and operation of a pilot plant that is not of a scale
economically feasible for commercial production; and
d) the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services.

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Research and Development (R&D)

Capitalization Criterion

PIRATE

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Illustration of development cost capitalization

Assume that Creative Incorporated incurs substantial research and development costs for the
invention of new products, many of which are brought to market successfully. In particular, Creative
has incurred costs during 20XX amounting to €750,000, relative to a new manufacturing process. Of
these costs, €600,000 was incurred prior to December 1, 20XX.
As of December 31, the viability of the new process was still not known, although testing had been
conducted on December 1. In fact, results were not conclusively known until February 15, 20XX+1,
after another €75,000 in costs was incurred post-January 1. Creative’s financial statements for 20XX
were issued February 10, 20XX+1, and the full €750,000 in research and development costs was
expensed, since it was not yet known whether a portion of these qualified as development costs
under IAS 38.
When it is learned that feasibility had, in fact, been shown as of December 1, Creative’s
management asks to restore the €150,000 of post-December 1 costs as a development asset. Under
IAS 38 this is prohibited. However, the 20XX+1 costs (€75,000 thus far) would qualify for
capitalization, in all likelihood, based on the facts known.

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Subsequent expenditure

[IAS 38.20] Due to the nature of intangible assets, subsequent expenditure will only
rarely meet the criteria for being recognised in the carrying amount of an asset.

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Subsequent MEASUREMENT

[IAS 38.20] Due to the nature of intangible assets, subsequent expenditure will only
rarely meet the criteria for being recognised in the carrying amount of an asset.
Intangible assets may be reported at
Cost model (1) Cost model: cost less accumulated amortization and any accumulated
impairment losses. or
Revaluation
(2) Revaluation model: fair value less amortisation and impairment charges, if fair
model
value can be determined in an active market.
• If revaluation is chosen, all assets within the class of intangibles must be
revalued on a regular basis.
Goodwill cannot be revalued.
[IFRS 13.Appendix A] Active market: a market in which transactions for the asset or liability take place with sufficient
frequency and volume to provide pricing information on an ongoing basis.
Note: in reality, this is hard to meet under intangible assets. 15

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Amortization of Intangible Assets

The amortization process also uses the straight-line method, but

usually assumes residual value is zero.

Amortization period is the shorter of

the asset’s legal or contractual life.

The amortization entry is:

Amortization expense .................................. $$$

Intangible asset ………………........ $$$
To record amortization expense.

A contra-asset account is generally not used when

recording the amortization of intangible assets.
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Amortization of Intangible Assets

Torch, Inc. has developed a new device. Patent registration costs consisted of
$2,000 in attorney fees and $1,000 in federal registration fees. The device has
a contractual (useful) life of 5 years. The legal life is 20 years.
For year 1, what is Torch’s amortization expense?

Use the shorter of contractual life (5 years) or

legal life (20 years).
Amortization = Cost ÷ Contractual life
= $3,000 ÷ 5 years
= $ 600 per year

Amortization expense ................................... 600

Patent ………………........................ 600
To record amortization of patent.

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Illustration for Revaluation model

A patent right is acquired July 1, 20XX-1, for €250,000; while it has a

legal life of 15 years, due to rapidly changing technology,
management estimates a useful life of only five years. Straight-line
amortisation will be used.
1/7/X
Patent 250,000
Cash 250,000
31/12/X
Amortization Expense 25,000 CA
Patent (Patent) = 225,000
25,000

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At January 1, 20XX, management is uncertain that the process can actually be

made economically feasible, and decides to write down the patent to an
estimated market value of €75,000. Amortisation will be taken over three years
from that point

▪ Revaluation surplus OCI

▪ Revaluation deficit
Expense

CA
= 225,000 Loss on asset
(X-1) 1/1/X 150,000
impairment
Patent 150,000
CA
= 50,000
(X) 31/12/X Amortization 25,000
Expense
Patent 25,000

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On January 1, 20XX+2, having perfected the related production process, the

asset is now appraised at a depreciated replacement cost of €300,000.
Furthermore, the estimated useful life is now believed to be six more years.

▪ Revaluation surplus = 275,000 P/L OCI

▪ Revaluation deficit

CA 31/12/ Amortization 25,000

= 25,000 Expense
(X1)
X1
Patent 25,000

1/1/X2 Patent 275,000

Recovery impairment loss
(Gain on Asset value 100,000
recovery
OCI 175,000
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Specific Intangible Assets that

not Subject to Amortization

Goodwill and Trademarks

Subject to assessment
Not amortized. for impairment of value and
may be written down.

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Impairment

IAS 36

Intangible Intangible Goodwill

with finite with
useful lives indefinite
Test for impairment of
useful lives
value at least annually.

Test for impairment when events or changes in circumstances

indicate that book value may not be recoverable

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Derecognition of Intangible Assets

❖An intangible asset shall be derecognized:

(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 recognized in profit or loss when the asset is
derecognized (unless IFRS 16 requires otherwise on a sale and leaseback.)
❖Gains shall not be classified as revenue.

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Disclosure

An entity shall disclose the following for each class of intangible assets, distinguishing
between internally generated intangible assets and other intangible assets:
a) whether the useful lives are indefinite or finite and, if finite, the useful lives or the
amortization rates used;
b) the amortization methods used for intangible assets with finite useful lives;
c) the gross carrying amount and any accumulated amortization (aggregated with
accumulated impairment losses) at the beginning and end of the period;
d) the line item(s) of the statement of comprehensive income in which any
amortization of intangible assets is included;
e) a reconciliation of the carrying amount at the beginning and end of the period

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Disclosure

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