topic 6 - ias 38 intangible assets - studyonline.ie...

CPA P2 Advanced Corporate Reporting

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TOPIC 6 - IAS 38 INTANGIBLE ASSETS

Objective:

To set out the treatment of intangible assets that are not covered by other accounting

standards - e.g. Goodwill acquired in a business combination is covered by IFRS 3

BUSINESS COMBINATIONS

Most long term intangible assets are amortised over their expected useful life ( amortisation is

the equivalent of depreciation)

Definition:

An “intangible asset” is “an identifiable, non monetary asset without physical substance”

(e.g. Landing rights for an airline company)

An intangible asset should be recognised if all the following criteria are met

It is identifiable I

It is controlled by the entity C

Probable Inflow of future economic benefits P

Reliable Measurement of Cost can be made RM


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IAS 38 states that to be identifiable, an intangible asset

– Must be separable (capable of being separated or divided from the entity and

sold, transferred, rented) or

– Must arise from contractual or other legal rights

Control: An entity controls an intangible asset if it has the power to obtain the future

economic benefits (usually net cash inflow) flowing from the resource e.g. Legal rights that

are enforceable in court, copyrights

Staff training and customers list are not intangible assets because they fail the control test –

staff could leave the business at any time and the customers on a customer list have no

obligation to make future purchases

Assets acquired as a result of a government grant (i.e. granting of Govt Licence) may be

capitalised at fair value, along with a corresponding credit for the value of the grant. Asset

and grant will be amortised/released over useful life. Net effect on profits is nil

Internally Generated Intangibles:

General Rule: Internally generated intangibles are generally not recognised in the

financial statements due to failure of the identifiability test or its cost cannot be

measured reliably

Examples of Possible Intangible Assets include:

– Goodwill Acquired in a Business Combination

– Computer Software

– Patents

– Copyrights

– Motion Picture Films

A testing facility built during the Development Phase is capitalised and depreciated in

accordance with IAS 16


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– Import Quotas

– Franchises

– Customer and Supplier Relationships

In particular the following internally generated intangibles cannot be recognised

– Start Up, Pre Opening and Pre Operating Costs

– Training Costs

– Relocation Costs

– Advertising Costs

– Goodwill

– Brands

– Mastheads (e.g. Newspaper masthead)

– Publishing Titles

– Customer Lists

– Customer Relationships (whether contractual or non contractual)

If some of the listed items are purchased from another business entity they might be

recognised because

– Pass the “identifiability test”

– Cost capable of being reliably measured

The exception to the ban on capitalising internally generated intangibles is

“Development Expenditure”

Research and Development Expenditure:

Research: original and planned investigation undertaken to gain new scientific or

technical knowledge and understanding

Research Expenditure Examples

Activities aimed at obtaining new knowledge


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The search for, evaluation and final selection of, applications of

research findings or other knowledge

The search for alternatives for materials, devices, products, processes,

systems or services

The formulation, design, evaluation and final selection of possible

alternatives for new or improved materials, devices, products, systems

or services

Development: the application of research findings or other knowledge to a plan or

design for the production of new or substantially improved products, processes,

systems or services before the start of commercial production or use

Exam Note: Exam Note: If a question uses the word “research” then this is

obviously an indicator to expense the expenditure. The overriding feature of

expenditure during the research phase is that it tends to be exploratory and without a

clearly defined outcome. Note: Marketing research to determine the optimal selling

strategy is expensed.

Development Expenditure Examples:

Design, construction and testing of pre production prototypes

Construction and operation of a pilot plant that is not large enough for economic

commercial production

Design of tools, jigs, moulds, and dies involving new technology

Design, construction and testing of a chosen alternative for new or improved

materials, products, processes, systems or services

Accounting Treatment of Research Costs:

The cost of research should not be recognised as an asset

Such expenditure must be written off as an expense in the year in which incurred

Accounting Treatment of Development Costs:

Expenditure on development can only be capitalised as an intangible asset when all of

the 6 following conditions are met

1. P robable Future Economic Benefits

2. I ntention to Complete and use/sell


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3. R esources adequate to complete and use/sell

4. A bility to use/sell

5. T echnical Feasibility

6. E xpenditure can be reliably measured

Memory Aid: “PIRATE”

Failure to meet all 6 conditions means expenditure is treated as research costs –

Once such expenditure has been written off as an expense, it cannot subsequently be

reinstated as an intangible asset

N.B. Amortisation of capitalised development expenditure does not begin until the

commercial use of the product, service or process has started – matching concept -

matching incomes from the development expenditure with expenses of development –

Amortisation of the capitalised development expenditure should be in accordance

with the pattern in which the assets future economic benefits are consumed

Measurement of Intangibles:

Initial measurement is at cost. For internally generated intangible asset (like

development expenditure) cost is the expenditure incurred from the date when the

asset first meets the recognition criteria (Exclude selling,admin & general overheads;

training costs; advertising expenditure)

KEY POINT

With development expenditure, as opposed to research costs, the development

expenditure is incurred at a later stage in the project, and the probability of success

should be more apparent - i.e. hence greater chance of assessing the probability of

inflow of future economic benefits)

On the other hand, because research costs are incurred earlier in a project, there is

less likelihood of probable inflow of economic benefits at that stage, and part of the

recognition criteria for an asset is failed and hence research costs are expensed


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Subsequent Measurement

– Cost Model (Cost – Acc Amortisation - Any Imp. Losses) or

– Revaluation Model (Fair Value – Subsequent Acc Amortisation – Subsequent

Imp Losses)

Rules on Revaluation gains/losses follow the guidance in IAS 16

Note, only intangible assets which can be traded in an active market

where the items are homogenous, can be accounted for under the

revaluation model. If an intangible asset cannot be traded in an active

market (like a Trademark which is a bespoke intangible asset), then the

cost model must be followed

An Intangible asset which could be revalued is a Taxi Licence

Amortisation & Impairment of Intangible Assets:

Useful life of an intangible asset is either

– Finite

– Or Indefinite

Finite Life:

– Intangible to be Amortised over its Useful Life

– Amortisation written off to profit or loss

– If indicators exist, then an impairment review should be carried out (As Per

IAS 36 IMPAIRMENT OF ASSETS)

Indefinite Life (N.B.)

– No Amortisation

– Impairment reviews to be carried out annually

– IAS 38 Intangible Assets


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IAS 38 & IFRS 3:

Deals with Purchased Goodwill created when one business acquires another

Will be covered when studying consolidated accounts

IAS 38 INTANGIBLE ASSETS

Disclosure General

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 amortisation rates used;

(b) the amortisation methods used for intangible assets with finite useful lives;

(c) the gross carrying amount and any accumulated amortisation (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

amortisation of intangible assets is included;

(e) a reconciliation of the carrying amount at the beginning and end of the

period showing:

(i) additions, indicating separately those from internal development,

those acquired separately, and those acquired through business

combinations;


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(ii) assets classified as held for sale or included in a disposal group

classified as held for sale in accordance with IFRS 5 and other

disposals;

(iii) increases or decreases during the period resulting from revaluations

under paragraphs 75, 85 and 86 and from impairment losses

recognised or reversed in other comprehensive income in accordance

with IAS 36 (if any);

(iv) impairment losses recognised in profit or loss during the period in

accordance with IAS 36 (if any);

(v) impairment losses reversed in profit or loss during the period in

accordance with IAS 36 (if any);

(vi) any amortisation recognised during the period;

(vii) net exchange differences arising on the translation of the financial

statements into the presentation currency, and on the translation of a

foreign operation into the presentation currency of the entity; and

(viii) other changes in the carrying amount during the period.

An entity shall also disclose:

(a) for an intangible asset assessed as having an indefinite useful life, the

carrying amount of that asset and the reasons supporting the assessment

of an indefinite useful life. In giving these reasons, the entity shall describe

the factor(s) that played a significant role in determining that the asset has

an indefinite useful life.

(b) a description, the carrying amount and remaining amortisation period of


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any individual intangible asset that is material to the entity’s financial

statements.

(c) for intangible assets acquired by way of a government grant and initially

recognised at fair value (see paragraph 44):

(i) the fair value initially recognised for these assets;

(ii) their carrying amount; and

(iii) whether they are measured after recognition under the cost model or

the revaluation model.

(d) the existence and carrying amounts of intangible assets whose title is

restricted and the carrying amounts of intangible assets pledged as

security for liabilities.

(e) the amount of contractual commitments for the acquisition of intangible

assets.

If intangible assets are accounted for at revalued amounts, an entity shall disclose the

following:

(a) by class of intangible assets:

(i) the effective date of the revaluation;

(ii) the carrying amount of revalued intangible assets; and

(iii) the carrying amount that would have been recognised had the

revalued class of intangible assets been measured after recognition

using the cost model in paragraph 74;

(b) the amount of the revaluation surplus that relates to intangible assets at


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the beginning and end of the period, indicating the changes during the period and any

restrictions on the distribution of the balance to

shareholders; and

(c) the methods and significant assumptions applied in estimating the assets’

fair values.

Intangible Assets (other than Goodwill) Acquired as Part of Business Combination

IFRS 3 Business Combinations and IAS 38 Intangible Assets addresses the recognition of

separable intangible assets. Once an intangible asset of a Subsidiary is “identifiable” and has

a reliable “fair value”, then it can be recognised as an Intangible Asset on the acquisition of a

Subsidiary.

So for example, €1m spent on a research project , and for which a reliable fair value of

€1.2m has been estimated by the purchasing company directors, can be recognised as an

intangible asset in the context of a business combination.

Likewise, if a subsidiary has a “customer list” which could be sold to other companies and

the fair value of this “customer list” can be reliably measured at €3m, then this too can be

recognised as an intangible asset , but again, only in the context of a business combination

So, in summary, items can be recognised as intangible assets in a business combination

scenario, once they are “identifiable” and have a “fair value which can be reliably measured”

Website Costs

SIC 32 – Intangible Assets – Web Site Costs, states that an entity’s own website that arises

from development and is for internal or external access is an internally developed intangible

asset that is subject to the requirements of IAS 38

All expenditure on developing a website solely for advertising an entity’s own products and

services should be recognised as an expense when incurred

However, if an entity is able to demonstrate that a website is capable of generating future

economic benefits (for example, orders can be placed through the website) , then the related

costs can be capitalised (i.e. PIRATE)


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PAST EXAM

QUESTIONS P1 –

IAS 38

PAST EXAM

QUESTIONS P2 –

IAS 38

Q3 (1) Aug 13 Q (A) April 15

Q1,Q2 April 2011

Q (A) April 14

Q3 August 2010

Q (A) (B) Aug 13

Q1,Q2,Q4 April

2010

Q (a) Apr 2013

Q (a) Aug 2012

Question to Practice


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