Example 7 – IAS 38 Intangible Assets
Task A – Recognition of Intangible assets (IAS 38)
Please assess the following events to determine whether they qualify as intangible assets under IAS
38. If recognition as an intangible asset is required, calculate the cost of initial recognition and determine
the appropriate depreciation for Year X1 (year-end: 31/12/X1). If depreciation is not applicable, specify
the necessary actions to be taken as of the reporting date (31/12/X1). A cost accounting system is
available and the projects are expected to lead to a future economic benefit. Winter Inc. applies the cost
model for intangible assets.
The following events occurred at Winter Inc. in association with potential intangible assets:
a) On February 15th, X1, Winter Inc. conducted research and development activities for a
new product line. The total cost incurred was EUR 200.000, but it is not possible to
reliably distinguish between research and development phases.
R&D for new product line (€200,000)
Winter Inc. spent €200,000 on research and development for a new product line. The
company cannot
clearly separate which part is research and which part is development.
According to IAS 38, if you can’t tell the difference between research and development,
the whole
amount must be treated as research and expensed immediately. This means no intangible
asset is
recognized.
Asset recognized: €0
Amortization: Not applicable
Year-end (31/12/X1): Record the €200,000 as an expense in the income statement.
Journal entry:
debit R&D Expense €200,000
credit Cash / Payables €200,000
b) On April 1st, X1, Winter Inc. purchased patented technology for EUR 30.000. The
contract grants exclusive rights to use the technology for 3 years, with an option to
extend the usage for another 3 years for a nominal fee of EUR 3.000. The company
considers the renewal almost certain. The technology has an expected useful life of 6
years.
Purchased patented technology (€30,000)
On 1 April X1, Winter Inc. bought a patented technology for €30,000. The contract gives
the company
rights for 3 years, with an option to renew for another 3 years for €3,000. The company
is almost certain it
will renew, so the total useful life is 6 years.
Since the patent is identifiable, controlled by the company, and expected to bring future
benefits, it
qualifies as an intangible asset.
Initial cost: €30,000 + €3,000 = €33,000
Useful life: 6 years
Annual amortization: €33,000 ÷ 6 = €5,500
For 2021 (9 months from April–Dec): €5,500 × 9/12 = €4,125
Carrying amount at 31/12/X1: €33,000 – €4,125 = €28,875
Journal entries:
Recognition (1 April X1)
Dr Intangible Asset – Patent €33,000
Cr Cash / Payables €33,000
Amortization (31 Dec X1)
debit Amortization Expense €4,125
credit Accumulated Amortization €4,125
c) As part of a merger with Frost Inc. in X0, Winter Inc. recognized goodwill of EUR
700.000 in its financial statements. At December 31st, X1, the company reviewed the
recoverable amount of goodwill and determined it to be EUR 720.000.
Winter Inc.’s goodwill is fully covered by the IAS 38 as an intangible asset, since it is
not internally generated. Not only because it can be measured (EUR 720,000), but also
because it is certain that the customer list will be useful in the future. The cost of initial
recognition is EUR 720,000.
d) In June X1, Winter Inc. created its own customer list at a cost of EUR 80.000. These
costs were incurred to compile, organize, and segment customer data for targeted
marketing campaigns expected to benefit future sales.
Customer list is an intangible asset, but the IAS 38 does not cover it, since it is internally
generated. This means that Winter Inc. cannot write customer list as a monetary value.
e) Between July and September X1, Winter Inc. developed internal software to manage
production scheduling. The associated costs were EUR 50.000 for development team
salaries, EUR 10.000 for software licensing required during development, and EUR
15.000 for staff training on using the software. The criteria for capitalization under IAS
38.57 were fulfilled on September 25th, X1. The software became operational on
October 1st, X1 and is expected to have a useful life of 5 years.
Development of internal software (July–Sept X1). Criteria met on 25 Sep X1. Useful
life 5 years, operational 1 Oct X1.
Costs: - Development team salaries: €50,000 - Software licensing: €10,000 - Staff
training: €15,000 (expensed)
Only costs after 25 Sep are capitalized (approx. 6/92 days).
Capitalized amounts: Salaries €3,260.87 Licenses €652.17 Total €3,913.04
Amortization: €3,913.04 / 5 = €782.61 per year X1 (3 months) = €195.65
Journal Entries: Dr Intangible Asset – Software €3,913.04 Cr Development Expense
€3,913.04
Dr Amortization Expense €195.65 Cr Accumulated Amortization €195.65
Dr Training Expense €15,000 Cr Bank / Payables €15,000
Carrying amount 31/12/X1: €3,717.39
Task B – Internally generated intangible assets (IAS 38)
Determine the cost of initial recognition for the software according to IAS 38 and its book
value at the year’s end. State all missing bookkeeping entries for the business year X1. All
costs were recognized as expenses so far. It is assumed that the company has a proper cost
accounting system and that a future economic benefit can arise from its use. The company uses
the cost model for intangible assets.
Tech Focus Inc. is a software company that develops a software for its own use. The following
costs are incurred for the portal development:
Market research
EUR 12.000
Concept development
EUR 8.000
Staff costs for design
EUR 30.000
External web development
EUR 14.000
Maintenance of existing servers
EUR 6.000
The portal is ready for use at the beginning of July X1 and is expected to generate economic
benefits for 4 years.
The software will be ready for use at the beginning of October X1 and is expected to be used
for 10 years.