An intangible asset is defined as “an identifiable non-monetary asset without physical substance” in IAS 38. Some examples of the intangible asset given in the standard are rights held by a lessee under licensing agreements, computer software, customer lists, import quotas and others. Some of the intangible assets are recognised while some are not. Intangible assets prove to be relevant and important assets of any organisation, currently and in future years. This round, we bring you 10 key takeaways on the accounting requirements for an intangible asset under IAS 38.
#1: What are the intangible assets within the scope of IAS 38?
All intangible assets are within the scope of IAS 38, except for the following:
- Where other standards specifically govern the intangible assets such as IFRS 16 Leases for a lease of intangible assets, IAS 12 Income Taxes for deferred tax assets, goodwill acquired in business combination is governed under IFRS 3 Business Combinations and others.
- Financial assets as defined in IAS 32 Financial Instruments: Presentation.
- The recognition and measurement of exploration and evaluation assets under IFRS 6 Exploration for and Evaluation of Mineral Resources.
- Expenditure on the development and extraction of minerals, oil, natural gas and similar non-regenerative resources.
#2: Do we recognise all intangible assets in the financial statements?
For an item to be recognised as an intangible asset in the financial statements, that item must meet the definition of intangible asset as well as the recognition criteria.
Definition of an intangible asset requires an item to meet the following three key elements:
- It is identifiable;
- An entity has control over the resource; and
- Existence of future economic benefits.
The recognition criteria for an intangible asset is the same as other assets such as property, plant and equipment and investment property. Recognition criteria for an intangible asset, however, also emphasise the probability of expected future economic benefits and this relates back to the definition of intangible asset. The probability assessment of expected future economic benefits must be done 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 item that does not meet the definition of intangible asset and recognition criteria cannot be recognised as an intangible asset.
#3: How do we assess the three key elements in the definition of an intangible asset?
The first element is identifiability of the asset. An intangible asset needs to be identifiable to differentiate it from goodwill. An asset is identifiable if it is either:
- Separable – can be separated or divided from the entity and sold, transferred, licensed, rented or exchanged. This is regardless of whether the entity intends to do so.
- Arise from contractual or other legal rights.
The second element is the control the asset. For an asset to be recognised, it is important for an entity to be able to control the asset. An entity controls an asset when it has the power to obtain or enjoy the economic benefits embodied in the asset. An entity also controls an asset when it has the ability to restrict others from accessing the benefits from the asset. This normally arises from legal and enforceable rights although it is not necessarily applicable in all cases because entities may be able to control in some other way.
The third element – future economic benefits may arise either from the sale of products or services, cost savings (e.g. reduction in future production costs), or other benefits from the use of the asset.
#4: How do we measure an intangible asset?
IAS 38 requires entities to measure intangible asset at their costs. For separately acquired intangible assets, the cost comprises the purchase price and any directly attributable cost of preparing the asset for its intended use. Examples of directly attributable costs are costs of employee benefits arising directly from bringing the asset to its working condition, professional fees and costs of testing whether the asset is functioning properly. Capitalisation/recognition of costs in the carrying amount of an intangible asset stops when the asset is in the condition to be capable to operate in the manner intended by management.
IAS 38 also provides guidance on a situation where an intangible asset is acquired in exchange for a non-monetary asset or a combination of monetary and non-monetary assets. The accounting requirements on this arrangement is similar to the accounting requirements for property, plant and equipment and investment property. This is explained in IAS 16 Property, Plant and Equipment.
For intangible assets acquired in business combination, the cost is the fair value of the assets at the acquisition date, as per the requirements in IFRS 3 Business Combinations. The measurement for internally generated intangible assets is explained in Question #6.
#5: Do we recognise internally generated goodwill?
IAS 38 states that internally generated goodwill should not be recognised as an asset. This is because internally generated goodwill does not meet the definition of an intangible asset – it is not an identifiable resource controlled by the entity that can be measured reliably at cost.
#6: What is the accounting treatment for internally generated intangible assets?
Internally generated intangible asset can only be capitalised if it meets the definition and recognition of the intangible asset. The challenge in recognising internally generated intangible assets arises from the difficulty to assess whether and when there is an identifiable asset that will generate expected future economic benefits to the entity and in determining the cost of the asset reliably.
Because of that, in order to assess whether an internally generated intangible asset meets the recognition criteria, IAS 38 requires entities to classify the generation of the asset into two phases – (i) the research phase and (ii) the development phase. The accounting treatment for expenditure incurred in the two phases is different. So, it is important for entities to be able to distinguish between the two phases. In a situation where entities not able distinguish them, entities treat the expenditure as if it were incurred in the research phase only.
IAS 38 clearly states that no intangible asset arising from the research phase should be recognised. This is because, at this phase, entities cannot or unable to demonstrate that an intangible asset exists that will generate probable future economic benefits. Accordingly, all expenditure in the research phase is recognised as an expense when it is incurred.
Expenditure incurred during the development phase can be capitalised and recognised as an intangible asset only if an entity can demonstrate all of the following six (6) conditions:
- The technical feasibility of completing the intangible asset so that it will be available for use or sale.
- Its intention to complete the intangible asset and use or sell it.
- Its ability to use or sell the intangible asset.
- How the intangible asset will generate probable future economic benefits.
- The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
- Its ability to measure reliably the expenditure attributable to the intangible asset during the development.
In this case, the cost of an internally generated intangible asset is the total expenditure incurred from the date when the intangible asset first meets the definition, recognition criteria and the 6 conditions above. The cost of an internally generated intangible asset consists of all directly attributable costs to create, produce and prepare the asset to be able to operate in the manner intended by management.
#7: Can entity capitalise expenditure incurred in the past once the 6 conditions above are met?
IAS 38 clearly prohibits reinstatement of expenditure previously recognised as an expense. Accordingly, expenditure on an intangible asset that was previously recognised as an expense should not be recognised as part of the cost of an intangible asset at a later date.
#8: How do we measure the intangible asset subsequent to its recognition and measurement?
IAS 38 provides entities the option to measure the intangible asset either using the cost model or the revaluation model. The accounting treatment for the cost model and the revaluation model is similar to property, plant and equipment. We have covered this in more detail in IAS 16 Property, Plant and Equipment. It is also important to note that revaluation of intangible asset must be performed regularly so that the carrying amount of the asset does not differ materially from its fair value at the end of the reporting period.
Entities are also required to assess whether the useful life of an intangible asset is finite or indefinite. An intangible asset is assumed to have an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows. This must be based on analysis of all the relevant factors such as the product life cycles, technical, technological, commercial or other types of obsolescence and period of control over the asset.
Under IAS 38, the residual value of an intangible asset with finite useful life must be assumed as zero except where:
- There is a commitment by a third party to purchase/buy the asset at the end of its useful life.
- There is an active market for the asset where the residual value can be determined by reference to that market and it is probable that such a market will exist at the end of the asset’s useful life.
The amortisation period and amortisation method for an intangible asset with finite useful life must be reviewed at least at each financial year-end.
#9: What is the requirement for intangible asset with indefinite useful lives?
Some intangible assets may have indefinite useful lives. IAS 38 states that an intangible asset with indefinite useful life should not be amortised. However, an intangible asset with indefinite useful life will need to be tested for impairment loss annually and whenever there is an indication that the asset may be impaired.
In addition to that, IAS 38 also requires entities to review at each period to determine whether events and circumstances continue to support the indefinite useful life for that asset. Whenever the useful life needs to be changed (from indefinite to finite useful life), entities should account for such change as a change in accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. At the same time, reassessing useful life of an intangible asset as finite is an indicator that the asset may impaired.
#10: When do we de-recognise an intangible asset?
An intangible asset is de-recognised when it is disposed or when no future economic benefits are expected from its use or disposal. Gain or loss on the de-recognition of an intangible asset should be recorded in profit or loss. Gains should not be classified as revenue.
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