Intangible assets (IAS 38, IFRS 3)
Objective
The standard prescribes the criteria for the recognition, measurement and disclosure requirements of an
intangible asset.
Scope
IAS 38 applies to all intangible assets other than intangible assets held for sale in IAS 2, deferred tax
assets in IAS 12, leased assets in IAS 17, financial assets defined in IAS 32, mineral rights, exploration
& extraction costs in IFRS 6, intangible assets arising from insurance contracts in IFRS 4, assets arising
from employee benefits in IAS 19, goodwill in IFRS 3 and intangibles held for sale in IFRS 5.
Definition
An intangible asset is an identifiable non-monetary asset without physical substance.
Note. For an asset to be identifiable, it must fall into one of two categories:
It is separable – the asset can be bought or sold separately from the rest of the business
It arises from legal/contractual rights – this will arise as part of purchasing an entire company.
It must also meet the normal definition of an asset:
Examples of items that may be recognized as intangible assets if they fulfill the recognition criteria below
include patents, copyrights, computer software, trademarks, newspaper mastheads, video films,
customer lists, licenses, import quotas, franchise agreements, airport landing rights and
customer lists.
Recognition
If it meets the definition of an intangible asset, and
If it meets the recognition criteria of the framework. Ie;
- It is probable that future economic benefits attributable to the asset will flow to the entity
- The cost of the asset can be measured reliably.
Purchased intangibles
If an intangible is purchased separately (such as a license, patent, brand name), it should be recognized
initially at cost.
Measurement after initial recognition
Note. IAS 38 gives choice between: the cost model & the revaluation model.
1. The cost model
The intangible asset should be carried at cost less amortization and any impairment losses.
This model is more commonly used in practice.
Note. Amortization works the same as depreciation. The intangible asset is amortized over the useful
economic life, with the annual expense being shown in the statement of profit or loss each year.
An intangible asset with a finite useful life must be amortized over that life, normally using the straight-
line method with a zero residual value.
An intangible asset with an indefinite useful life:
should not be amortized but rather tested for impairment annually, and more often if there is an actual
indication of possible impairment.
2. The revaluation model
The intangible asset may be revalued to a carrying amount of fair value less subsequent amortization and
impairment losses.
Fair value should be determined by reference to an active market.
Features of an active market are that:
- The items traded within the market are homogeneous (identical)
- Willing buyers and sellers can normally be found at any time
- prices are available to the public.
In practice such markets are rare.
Internally generated intangibles
Generally, internally generated intangibles cannot be capitalized, as the costs associated with these
cannot be separated from the costs associated with running the business as whole.
Note. The following internally generated items may never be recognized:
goodwill ("inherent goodwill"), brands, mastheads, publishing titles, customer lists.
Brands
IAS 38 Intangible Assets requires that internally generated brands and similar assets should not be
recognized. This is because the expenditure on internally generated brands cannot be distinguished
from the cost of developing the business as a whole, so should be written off as incurred.
Note. Where a brand name is separately acquired and can be measured reliably, then it should be
separately recognized as an intangible non-current asset, and accounted for in accordance with the general
rules of IAS 38.
Goodwill is the difference between the value of a business as a whole and the aggregate of the fair values
of its separable net assets.
Separable net assets are those assets (and liabilities) which can be identified and sold off separately without
necessarily disposing of the business as a whole. They include identifiable intangibles such as patents,
licenses and trademarks.
Fair value is defined in IFRS 13 as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (i.e. an exit price).
Goodwill may exist because of any combination of a number of possible factors:
Reputation for quality or service
Technical expertise
Possession of favorable contracts
Good management and staff.
Purchased and no purchased goodwill
Purchased goodwill: arises when one business acquires another as a going concern
includes goodwill arising on the consolidation of a subsidiary will be recognized in the financial statements
as its value at a particular point in time is certain.
No purchased goodwill: is also known as inherent goodwill
Note. It has no identifiable value & is not recognized in the financial statements.
.
Research and Development expenditure
Research is original and planned investigation undertaken with the prospect of gaining new scientific
knowledge and understanding.
Development is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or services
before the start of commercial production or use.
Accounting treatment
Researchexpenditure:
write off as incurred to the statement of profit or loss.
Development expenditure: recognize as an intangible asset if, and only if, an entity can demonstrate all of
the following:
Probable future economic benefits from the asset, whether through sale or internal cost savings.
Intention to complete the intangible asset and use or sell it.
Resources available to complete the development and to use or sell the intangible asset.
Ability to use or sell the intangible asset.
Technical feasibility of completing the intangible asset so that it will be available for use or sale.
Expenses attributable to the intangible asset during its development can be measured.
Note. It is only expenditure incurred after the recognition criteria have been met which should be
recognized as an asset. Development expenditure recognized as an expense in profit or loss cannot
subsequently be reinstated as an asset.
Amortization
Development expenditure should be amortized over its useful life as soon as commercial production
begins.
Example
PAT Ltd had Shs 200 million of capitalized development expenditure at cost brought forward at 1 January
2016 in respect of products currently in production and a new project began on the same date. The
research stage of the new project lasted until 31 March 2016 and incurred costs totaling Shs 14 million.
From that date the project incurred development costs of Shs 8 million per month. On 1 July 2016 the
directors became confident that the project would be successful and yield a profit well in excess of costs.
The project was still in the development phase at 31 December 2016. Capitalised development
expenditure is amortised at 20% per annum using the straight line method. Show how you would account
for the above in the financial statements of PAT Ltd for the year ended 2016 in accordance with IAS 38
Intangible assets.
Disposal
This is similar to PPE in IAS 16.
Disclosure
For each class of intangible asset, disclose:
Useful life or amortisation rate
Amortisation method
Additional ggodwill recognized during the period.
Line items in the SOPLOCI in which amortisation is included
Reconciliation of the carrying amount at the beginning and the end of the period showing movements
in cost, amortization and carrying amount for the year
Basis for determining that an intangible has an indefinite life
Description and carrying amount of individually material intangible assets
Certain special disclosures about intangible assets acquired by way of government grants
Information about intangible asset whose title is restricted
Contractual commitments to acquire intangible assets
For intangible asset carried at revalued amount – the date of revaluation, the historical cost carrying
amount, movement on the revaluation surplus, methods used in estimating the fair value
The amount of research and development expenditure recognised as an expense in the period
Impairment losses recognized during the period
IAS 20 Accounting for government grants and disclosure of government assistance
Introduction
Governments often provide money or incentives to companies to export their goods or to promote local
employment.
Government grants could be:
Revenue grants, e.g. money towards wages
Capital grants, e.g. money towards purchase of non-current assets.
General principles
IAS 20 follows two general principles when determining the treatment of grants:
Prudence: grants should not be recognized until the conditions for receipt have been complied with and
there is reasonable assurance the grant will be received.
Accruals: grants should be matched with the expenditure towards which they were intended to contribute.
IAS 20 definitions
Government refers to government, government agencies and similar bodies whether local, national or
international.
Government assistance is action by government designed to provide an economic benefit specific to an
entity or range of entities qualifying under certain criteria, e.g. the grant of a local operating license.
Governmentgrantsare assistance by government in the form of transfers of resources to an entity in return
for past or future compliance with certain conditions relating to the operating activities of the entity.
Grants related to assets are government grants whose primary condition is that an entity qualifying for them
should purchase, construct or otherwise acquire long-term assets.
Grants related to income are government grants other than those related to assets – known as revenue
grants.
Revenue grants
The recognition of the grant will depend upon the circumstances.
If the grant is paid when evidence is produced that certain expenditure has been incurred, the grant should
be matched with that expenditure.
If the grant is paid on a different basis, e.g. achievement of a non- financial objective, such as the
creation of a specified number of new jobs, the grant should be matched with the identifiable costs of
achieving that objective.
Presentation of revenue grants
IAS 20 allows such grants to either:
- Be presented as a credit in the statement of profit or loss, or
- Be deducted from the related expense.
Revenue grant presentation
Presentation as credit in the statement of profit or loss
Supporters of this method claim that it is inappropriate to net income and expense items, and that
separation of the grant from the expense facilitates comparison with other expenses not affected by a
grant.
Deduction from related expense
It is argued that with this method, the expenses might well not have been incurred by the entity if the grant
had not been available, and presentation of the expense without offsetting the grant may therefore be
misleading.
Example.
A company is given $300,000 on 1 January 20X1 to keep staff employed within a deprived area. The
company must not make redundancies for the next three years, or the grant will need to be repaid.
By 31 December, 20X1, no redundancies have taken place and none are planned. How should it be
accounted for in Financial statements.
The grant should be released over three years, meaning that $100,000 is taken to the statement of profit
or loss each year.
Note. This can be shown as a separate line in the statement of profit or loss or deducted from
administrative expenses (or wherever the staff costs are charged).
As $100,000 has been released to the statement of profit or loss, the remaining $200,000 will be held in
deferred income, to be recognized over the next two years.
Of this, $100,000 will be released within a year so will be held within current liabilities. The remaining
$100,000 will be held as a non-current liability.
Capitalgrants
IAS 20 permits two treatments:
Write off the grant against the cost of the non-current asset and depreciate the reduced cost.
Treat the grant as a deferred credit and transfer a portion to revenue each year, so offsetting the higher
depreciation charge on the original cost.
Treatmentofcapital grants
Grants for purchases of non-current assets should be recognised over the expected useful lives of the
related assets.
IAS 20 permits two treatments. Both treatments are equally acceptable and capable of giving a fair
presentation.
Method 1
On initial recognition, deduct the grant from the cost of the non-current asset and depreciate the
reduced cost.
Method 2
Recognise the grant initially as deferred income and transfer a portion to revenue each year, so offsetting
the higher depreciation charge based on the original cost.
Method 1 is obviously far simpler to operate. Method 2, however, has the advantage of ensuring that assets
acquired at different times and in different locations are recorded on a uniform basis, regardless of changes
in government policy.
Example1
XYZ Ltd opens a new factory and receives a government grant of
$15,000 in respect of capital equipment costing $100,000. It depreciates all plant and machinery at 20%
pa straight-line.
Required.
Show the statement of profit or loss and statement of financial position extracts in respect of the grant in the first year under
both methods.
Example2
ABC Ltd purchased a machine for Shs 100m on 1 January 2017 that is depreciated on a straight-line
basis over its useful life of five years, with a zero residual value. Also on 1 January 2017, the entity
received a government grant of Shs 10m to help finance this equipment. Account for the above under
the netting-off and deferred income methods allowed by IAS 20 in the financial statements of ABC Ltd
for the year ended 31.12.2017.
