Intangible Assets: IAS 38
Wiecek and Young
IFRS Primer
Chapter 15
Intangible Assets
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Related standards
IAS 38
Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice
Related Standards
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FAS 142 Goodwill and other intangible
assets
FAS 141 Business combinations
FAS 86 Accounting for the costs of computer
software to be sold, leased, or otherwise
marketed
Related Standards
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IFRS 3 Business combinations
IAS 36 Impairment of assets
IAS 17 Leases
IFRS 4 Insurance contracts
IFRS 5 Non-current assets held for sale and
discontinued operations
IFRS 6 Exploration for and evaluation of
mineral resources
IAS 38 - Overview
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Objective and scope
Recognition and measurement
Acquired intangible assets
Internally generated intangibles
Measurement after recognition
Retirements and disposals
Disclosures
IAS 38 – Objective and Scope
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6
Intangible asset:
“an identifiable non-monetary asset without
physical substance”
Conditions
Must be identifiable
Will provide future economic benefits
Benefits are controlled by the entity
IAS 38 – Recognition and
Measurement
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1.
2.
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Recognized as an intangible asset when:
It is likely that the expected future
economic benefits will be realized, and
The cost of the asset can be reliably
measured
Measured initially at cost
IAS 38 – Acquired Intangible
Assets
8
IAS 38 – Acquired Intangible
Assets
Acquired separately:
 Cost includes purchase price, duties, nonrefundable taxes, net of discounts and
rebates + direct costs of preparing the asset
and bringing it to an appropriate condition for
its intended use.
 Examples: franchises, patents, customer
lists, trademarks
9
IAS 38 – Acquired Intangible
Assets
Not included in cost:
 Advertising, promotion, training associated
with new products, locations, customers;
administrative and other general overhead;
early stage operating losses
10
IAS 38 – Acquired Intangible
Assets
Intangibles acquired in an asset exchange:
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Cost = fair value (FV) of what is given up,
UNLESS
(a) Transaction does not have commercial
substance, or
(b) The FV of neither the asset given up or the
asset acquired can be reliably measured
If (a) or (b), cost = carrying amount of asset(s)
given up
11
IAS 38 – Acquired Intangible
Assets
Commercial substance exists if:
(a) Future cash flows (amount, timing, risk) of
asset received differ from those of asset
given up; or
(b) Entity-specific value has changed; and
(c) The difference in (a) or (b) is significant
when compared to the FVs of the assets
exchanged.
12
IAS 38 – Acquired Intangible
Assets
Acquired in a business combination:
 Cost is its FV
 Identifiable intangibles are recognized
separately from goodwill
 Best FV is quoted market prices in an active
market – if not available, other methods are
used
13
IAS 38 Internally Generated
Intangibles
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Internally generated goodwill is not
recognized as an asset
Because no identifiable resource has been
created that is controlled by the entity and
that can be measured reliably at cost
IAS 38 Internally Generated
Intangibles
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(a)
(b)
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To recognize an internally generated
intangible, it must:
be an identifiable asset that will generate
expected future economic benefits, and
have a cost that can be differentiated from
ordinary operating costs and internally
generated goodwill, and that can be
measured reliably
IAS 38 Internally Generated
Intangibles
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(1)
(2)
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Two phases of costs to generate an
internally generated intangible:
Research phase – original and planned
investigation to gain new scientific or
technical knowledge: costs are expensed
as incurred
Development phase – application of
knowledge to a plan or design for the
production of new materials, devices,
products, processes, systems or services
before commercial production: costs are
expensed as incurred, UNLESS
IAS 38 Internally Generated
Intangibles
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6.
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Development costs are expensed as incurred
unless all of the following can be demonstrated. If
so, can capitalize as an intangible asset.
Technical feasibility of completing
Intention to complete, use or sell
Ability to use or sell
How it will generate future economic benefits
Availability of resources to complete and use or sell,
and
Expenditures during development can be reliably
measured, i.e., feasibility and economic viability of
the asset must be established to support
capitalization
IAS 38 Internally Generated
Intangibles
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18
The following cannot be internally developed
intangible assets because the costs of these
cannot be distinguished from those to
develop a business in general:
Internally generated brands
Mastheads
Publishing titles
Customer lists
Others, similar in nature to these
IAS 38 Internally Generated
Intangibles
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Cost of an internally generated intangible
asset:
Costs directly associated with making the
asset ready for use in the manner intended
by management. Examples: materials and
services consumed, payroll costs,
depreciation, amortization costs to generate
the asset, legal fees to register
**No costs can be retroactively capitalized
IAS 38 Internally Generated
Intangibles
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In the past, a number of costs were
recognized as prepaid or deferred and
treated as intangibles. IAS 38 indicates: if no
intangible asset is acquired that can be
recognized, then expense the cost
For services, recognize as an expense
when service is received
For goods, recognize when entity has the
right to access the goods supplied
IAS 38 – Internally Generated
Intangibles
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A prepaid asset is recognized instead of an
expense only when the payment for goods
and services is made before the goods are
available to the entity or services have been
performed
Apply in all situations, e.g., pre-opening and
pre-operating costs, training costs,
advertising and promotional costs, relocation
costs
IAS 38 – Internally Generated
Intangibles
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Example:
Ace Co. recognizes an account payable to a
supplier for producing and delivering a mailorder catalog to be used over the following
12 months. What do you debit?
Debit an expense. The catalog does not
meet the definition of an intangible asset,
inventory or a prepaid expense.
IAS 38 – Measurement after
Recognition
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Choice: cost model (CM) or revaluation
model (RM)
Decision is made for each class of intangible
assets so all in same class use the same
model
IAS 38 – Measurement after
Recognition
Cost model
- Most widely used
- Asset is carried at cost less accumulated
amortization and accumulated impairment
losses
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IAS 38 – Measurement after
Recognition
Revaluation model
- Asset is carried at its fair value at the date of
the revaluation less any subsequent
accumulated amortization and accumulated
impairment losses
- Cannot use retroactively to recognize
intangible assets not previously recognized
- Applied the same as for property, plant and
equipment assets
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IAS 38 – Measurement after
Recognition
RM – key aspects
- When revalued, carrying amount adjusted
either by adjusting asset and accumulated
amortization proportionately or eliminating
the accumulated amortization and bringing
the asset to its revalued amount
- Increase in carrying amount: credit to OCI
and into revaluation surplus account; unless
offset to previous loss charged to P&L when
the increase can offset a prior loss.
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IAS 38 – Measurement after
Recognition
RM – key aspects
- Decrease in carrying amount is applied first
to any revaluation surplus in equity (through
OCI); any excess to P&L
- When asset derecognized, transfer any
revaluation surplus directly to retained
earnings; or can transfer revaluation surplus
to R/E as asset is used.
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IAS 38 – Measurement after
Recognition
Useful life:
- Finite (like PP&E) or indefinite
- Indefinite means there is no foreseeable limit
to the period the asset is expected to
generate net cash inflows
- If finite – amortize. Usually no residual value.
Apply IAS 36 for impairments.
- If indefinite – do not amortize. Apply IAS 36
for impairments.
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IAS 38 – Retirement and
Disposals
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Gain or loss on derecognition
Difference between carrying amount and net
proceeds on disposal
Recognize in P&L
IAS 38 - Disclosures
General
 Separately between internally generated and
those purchased
 Accounting policies and methods used
 Reconciliations between opening and ending
balances
 Additional details about those judged to have
indefinite lives
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IAS 38 - Disclosures
Intangible assets using RM
 For each class, the date of the revaluation,
carrying amounts, carrying amounts if cost
method had been used, methods and
assumptions used to determine FV,
reconciliations of revaluation surplus
amounts, restrictions on distribution of
revaluation surplus amounts
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Current GAAP Comparisons
Pages 58 and 59 of 164 of
http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf
Pages 13 and 14 of 49 of
http://www.ey.com/Global/assets.nsf/International/IFRS_US_GAAP_vs_IF
RS/$file/US_GAAP_vs_IFRS.pdf
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IFRS Financial Statement
Disclosures
The Nestlé Group
 http://www.nestle.com/Resource.axd?Id=24E
5A5E2-93F8-43A3-956E-0F259448CB90
Valuation methods and definitions:
- pages 22 and 23 of 118
Intangible Assets note:
- pages 42 and 43 of 118
33
Looking Ahead
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Inconsistent treatment accorded intangible
assets generated internally and those
acquired is recognized
No project currently on the IASB agenda
Research continues in this area
No changes expected in the short to medium
term
End-of-Chapter Practice
15-1 The following is a list of expenditures made by Zorro Corp.
(ZC) during its year ended May 31, 2008.
1. December 2007: cost of annual update on payroll software.
2. November 2007: training costs incurred for new product line.
3. December 2007: rent prepayment (six months paid in advance).
4. June 2007: payment for exclusive rights for national sports figure
endorsement of ZC products for two years.
5. May 2008: payment for production of special advertisements to
be run on television during world championship games in July 2008.
Instructions
Indicate whether ZC should report a related intangible asset
on its May 31, 2008 balance sheet for each expenditure
described above. Explain your answer in each case.
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End-of-Chapter Practice
15-2
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Three intangibles acquired by Hamm Ltd. (HL) in the current year are described below.
HL, a progressive company with a variety of divisions and subsidiaries, has applied fair
value measures on its balance sheet wherever permitted.
Intangible #1 is a license granted by the federal government to HL that allows the
company to provide essential services to a key military installation overseas. The
license expires every five years, but is renewable indefinitely at little cost. Because of
the profitability associated with this license, HL fully expects to renew it continually. The
license is very marketable and will generate cash flows indefinitely.
Intangible 2 is a non-competition covenant acquired by HL when the company bought
out a major owner-managed competitor. The seller signed a contract in which she
agreed not to set up or work for another business that is in direct or indirect competition
with HL. The projected cash flows resulting from this agreement are expected to
continue for at least 25 years.
Intangible 3 are medical files. One of HL’s subsidiary companies owns several medical
clinics. A recent purchase of a retiring doctor’s practice required a significant payment
for the practice’s medical files and clients. HL considers that this base will benefit the
business for as long as it exists, providing cash flows indefinitely.
Instructions
(a)
Does each intangible as described above qualify to be recognized as an intangible
asset? Explain briefly.
(b)
Identify the appropriate method of accounting for each intangible described above after
acquisition, and explain the decisions you have made.
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End-of-Chapter Practice
15-3 The following research and development costs were incurred by Ordo Inc. (OI)
during its most recent fiscal year.
Equipment acquired for use in various R&D projects (six year life)$ 90
Depreciation on the equipment above
5
Quality control costs during production, including routine
product testing
30
Costs of efforts to refine, enrich, or otherwise improve the
qualities of an existing product
25
Evaluation of potential new products
13
Costs of operating a lab to improve an existing formula
34
Materials cost for use in pre-production pilot plant
9
Instructions
For each cost described above, indicate whether it should be capitalized as an
intangible asset or whether it should be expensed. Explain briefly.
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End-of-Chapter Practice
15-4 In this chapter, flag icons identify areas where there are GAAP
differences between IFRS requirements and national standards.
Instructions
Access the website(s) identified on the inside back cover of this book,
and prepare a concise summary of the differences that are flagged
throughout the chapter material.
38
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