IAS 38 Intangible Assets

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1 Login or Register Global (English) Home News Publications Meetings Standards Projects Jurisdictions Resources IAS 38 Intangible Assets Quick Article Links Overview IAS 38 In tan gi ble Assets outlines the accounting re quire ments for in tan gi ble assets, which are non-mon e tary assets which are without physical substance and iden ti fi able (either being separable or arising from con trac tual or other legal rights). In tan gi ble assets meeting the relevant recog ni tion criteria are initially measured at cost, sub se quently measured at cost or using the reval u a tion model, and amortised on a sys tem atic basis over their useful lives (unless the asset has an in def i nite useful life, in which case it is not amortised). IAS 38 was revised in March 2004 and applies to in tan gi ble assets acquired in business com bi na tions occurring on or after 31 March 2004, or otherwise to other in tan gi ble assets for annual periods beginning on or after 31 March History of IAS 38 Date De vel op ment Comments February 1977 July 1978 August 1991 Exposure Draft E9 Accounting for Research and De vel op ment Ac tiv i ties IAS 9 (1978) Accounting for Research and De vel op ment Ac tiv i ties issued Exposure Draft E37 Research and De vel op ment Costs Effective 1 January 1980

2 December 1993 June 1995 August 1997 September 1998 published IAS 9 (1993) Research and De vel op ment Costs issued Exposure Draft E50 In tan gi ble Assets published E50 was modified and reex posed as Exposure Draft E59 In tan gi ble Assets IAS 38 In tan gi ble Assets issued Operative for annual financial state ments covering periods beginning on or after 1 January 1995 Operative for annual financial state ments covering periods beginning on or after 1 July March 2004 IAS 38 In tan gi ble Assets issued 22 May 2008 Amended by Im prove ments to IFRSs (ad ver tis ing and pro mo tional ac tiv i ties, units of pro duc tion method of amor ti sa tion) 16 April 2009 Amended by Im prove ments to IFRSs (mea sure ment of in tan gi ble assets in business com bi na tions) 12 December 2013 Amended by Annual Im prove ments to IFRSs Cycle (pro por tion ate Applies to in tan gi ble assets acquired in business com bi na tions occurring on or after 31 March 2004, or otherwise to other in tan gi ble assets for annual periods beginning on or after 31 March 2004 Effective for annual periods beginning on or after 1 January 2009 Effective for annual periods beginning on or after 1 July 2009 Effective for annual periods beginning on or after 1 July 2014

3 re state ment of ac cu mu lated de pre ci a tion under the reval u a tion method) 12 May 2014 Amended by Clar i fi ca tion of Ac cept able Methods of De pre ci a tion and Amor ti sa tion (Amend ments to IAS 16 and IAS 38) Effective for annual periods beginning on or after 1 January 2016 Related In ter pre ta tions IFRIC 12 Service Con ces sion Arrange ments IFRIC 20 Stripping Costs in the Pro duc tion Phase of a Surface Mine IAS 16 su per sedes SIC-6 Costs of Modifying Existing Software SIC-32 In tan gi ble Assets Website Costs Amend ments under con sid er a tion by the IASB Research project Rate-reg u lated ac tiv i ties Research project In tan gi ble assets Summary of IAS 38 Objective The objective of IAS 38 is to prescribe the accounting treatment for in tan gi ble assets that are not dealt with specif i cally in another IFRS. The Standard requires an entity to recognise an in tan gi ble asset if, and only if, certain criteria are met. The Standard also specifies how to measure the carrying amount of in tan gi ble assets and requires certain dis clo sures regarding in tan gi ble assets. [IAS 38.1] Scope IAS 38 applies to all in tan gi ble assets other than: [IAS ] financial assets (see IAS 32 Financial In stru ments: Pre sen ta tion) ex plo ration and eval u a tion assets (see IFRS 6 Ex plo ration for and Eval u a tion of Mineral Resources) ex pen di ture on the de vel op ment and ex trac tion of minerals, oil, natural gas, and similar resources in tan gi ble assets arising from insurance contracts issued by insurance companies in tan gi ble assets covered by another IFRS, such as in tan gi bles held for sale (IFRS 5 Non-cur rent Assets Held for Sale and Dis con tin ued Op er a tions), deferred tax assets (IAS 12 Income Taxes), lease assets (IAS 17

4 Leases), assets arising from employee benefits (IAS 19 Employee Benefits (2011)), and goodwill (IFRS 3 Business Com bi na tions). Key de f i n i tions In tan gi ble asset: an iden ti fi able non-mon e tary asset without physical substance. An asset is a resource that is con trolled by the entity as a result of past events (for example, purchase or self-cre ation) and from which future economic benefits (inflows of cash or other assets) are expected. [IAS 38.8] Thus, the three critical at trib utes of an in tan gi ble asset are: iden ti fi a bil ity control (power to obtain benefits from the asset) future economic benefits (such as revenues or reduced future costs) Iden ti fi a bil ity: an in tan gi ble asset is iden ti fi able when it: [IAS 38.12] is separable (capable of being separated and sold, trans ferred, licensed, rented, or exchanged, either in di vid u ally or together with a related contract) or arises from con trac tual or other legal rights, re gard less of whether those rights are trans fer able or separable from the entity or from other rights and oblig a tions. Examples of in tan gi ble assets patented tech nol ogy, computer software, databases and trade secrets trade marks, trade dress, newspaper mastheads, internet domains video and au dio vi sual material (e.g. motion pictures, tele vi sion pro grammes) customer lists mortgage servicing rights licensing, royalty and stand still agree ments import quotas franchise agree ments customer and supplier re la tion ships (including customer lists) marketing rights In tan gi bles can be acquired: by separate purchase as part of a business com bi na tion by a gov ern ment grant by exchange of assets by self-cre ation (internal gen er a tion) Recog ni tion Recog ni tion criteria. IAS 38 requires an entity to recognise an in tan gi ble asset,

5 whether purchased or self-cre ated (at cost) if, and only if: [IAS 38.21] it is probable that the future economic benefits that are at trib ut able to the asset will flow to the entity; and the cost of the asset can be measured reliably. This re quire ment applies whether an in tan gi ble asset is acquired ex ter nally or generated in ter nally. IAS 38 includes ad di tional recog ni tion criteria for in ter nally generated in tan gi ble assets (see below). The prob a bil ity of future economic benefits must be based on rea son able and sup port able as sump tions about con di tions that will exist over the life of the asset. [IAS 38.22] The prob a bil ity recog ni tion criterion is always con sid ered to be satisfied for in tan gi ble assets that are acquired sep a rately or in a business com bi na tion. [IAS 38.33] If recog ni tion criteria not met. If an in tan gi ble item does not meet both the de f i n i tion of and the criteria for recog ni tion as an in tan gi ble asset, IAS 38 requires the ex pen di ture on this item to be recog nised as an expense when it is incurred. [IAS 38.68] Business com bi na tions. There is a pre sump tion that the fair value (and therefore the cost) of an in tan gi ble asset acquired in a business com bi na tion can be measured reliably. [IAS 38.35] An ex pen di ture (included in the cost of ac qui si tion) on an in tan gi ble item that does not meet both the de f i n i tion of and recog ni tion criteria for an in tan gi ble asset should form part of the amount at trib uted to the goodwill recog nised at the ac qui si tion date. Re in state ment. The Standard also prohibits an entity from sub se quently re in stat ing as an in tan gi ble asset, at a later date, an ex pen di ture that was orig i nally charged to expense. [IAS 38.71] Initial recog ni tion: research and de vel op ment costs Charge all research cost to expense. [IAS 38.54] De vel op ment costs are cap i talised only after technical and com mer cial fea si bil ity of the asset for sale or use have been es tab lished. This means that the entity must intend and be able to complete the in tan gi ble asset and either use it or sell it and be able to demon strate how the asset will generate future economic benefits. [IAS 38.57] If an entity cannot dis tin guish the research phase of an internal project to create an in tan gi ble asset from the de vel op ment phase, the entity treats the ex pen di ture for that project as if it were incurred in the research phase only. Initial recog ni tion: in-process research and de vel op ment acquired in a business com bi na tion A research and de vel op ment project acquired in a business com bi na tion is recog nised as an asset at cost, even if a component is research. Sub se quent

6 ex pen di ture on that project is accounted for as any other research and de vel op ment cost (expensed except to the extent that the ex pen di ture satisfies the criteria in IAS 38 for recog nis ing such ex pen di ture as an in tan gi ble asset). [IAS 38.34] Initial recog ni tion: in ter nally generated brands, mastheads, titles, lists Brands, mastheads, pub lish ing titles, customer lists and items similar in substance that are in ter nally generated should not be recog nised as assets. [IAS 38.63] Initial recog ni tion: computer software Purchased: cap i talise Operating system for hardware: include in hardware cost In ter nally developed (whether for use or sale): charge to expense until tech no log i cal fea si bil ity, probable future benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost. Amor ti sa tion: over useful life, based on pattern of benefits (straight-line is the default). Initial recog ni tion: certain other defined types of costs The following items must be charged to expense when incurred: in ter nally generated goodwill [IAS 38.48] start-up, pre-open ing, and pre-op er at ing costs [IAS 38.69] training cost [IAS 38.69] ad ver tis ing and pro mo tional cost, including mail order cat a logues [IAS 38.69] re lo ca tion costs [IAS 38.69] For this purpose, 'when incurred' means when the entity receives the related goods or services. If the entity has made a pre pay ment for the above items, that pre pay ment is recog nised as an asset until the entity receives the related goods or services. [IAS 38.70] Initial mea sure ment In tan gi ble assets are initially measured at cost. [IAS 38.24] Mea sure ment sub se quent to ac qui si tion: cost model and reval u a tion models allowed An entity must choose either the cost model or the reval u a tion model for each class of in tan gi ble asset. [IAS 38.72] Cost model. After initial recog ni tion in tan gi ble assets should be carried at cost less ac cu mu lated amor ti sa tion and im pair ment losses. [IAS 38.74] Reval u a tion model. In tan gi ble assets may be carried at a revalued amount (based on fair value) less any sub se quent amor ti sa tion and im pair ment

7 losses only if fair value can be de ter mined by reference to an active market. [IAS 38.75] Such active markets are expected to be uncommon for in tan gi ble assets. [IAS 38.78] Examples where they might exist: pro duc tion quotas fishing licences taxi licences Under the reval u a tion model, reval u a tion increases are recog nised in other com pre hen sive income and ac cu mu lated in the "reval u a tion surplus" within equity except to the extent that it reverses a reval u a tion decrease pre vi ously recog nised in profit and loss. If the revalued in tan gi ble has a finite life and is, therefore, being amortised (see below) the revalued amount is amortised. [IAS 38.85] Clas si fi ca tion of in tan gi ble assets based on useful life In tan gi ble assets are clas si fied as: [IAS 38.88] In def i nite life: no fore see able limit to the period over which the asset is expected to generate net cash inflows for the entity. Finite life: a limited period of benefit to the entity. Mea sure ment sub se quent to ac qui si tion: in tan gi ble assets with finite lives The cost less residual value of an in tan gi ble asset with a finite useful life should be amortised on a sys tem atic basis over that life: [IAS 38.97] The amor ti sa tion method should reflect the pattern of benefits. If the pattern cannot be de ter mined reliably, amortise by the straight line method. The amor ti sa tion charge is recog nised in profit or loss unless another IFRS requires that it be included in the cost of another asset. The amor ti sa tion period should be reviewed at least annually. [IAS ] Expected future re duc tions in selling prices could be in dica tive of a higher rate of con sump tion of the future economic benefits embodied in an asset. [IAS 18.92] The standard contains a re but table pre sump tion that a rev enue-based amor ti sa tion method for in tan gi ble assets is in ap pro pri ate. However, there are limited cir cum stances when the pre sump tion can be overcome: The in tan gi ble asset is expressed as a measure of revenue; and it can be demon strated that revenue and the con sump tion of economic benefits of the in tan gi ble asset are highly cor re lated. [IAS 38.98A] Note: The guidance on expected future re duc tions in selling prices and the clar i fi ca tion regarding the rev enue-based de pre ci a tion method were in tro duced by Clar i fi ca tion of Ac cept able Methods of De pre ci a tion and Amor ti sa tion, which applies to annual periods beginning on or after 1 January 2016.

8 Examples where revenue based amor ti sa tion may be ap pro pri ate IAS 38 notes that in the cir cum stance in which the pre dom i nant limiting factor that is inherent in an in tan gi ble asset is the achieve ment of a revenue threshold, the revenue to be generated can be an ap pro pri ate basis for amor ti sa tion of the asset. The standard provides the following examples where revenue to be generated might be an ap pro pri ate basis for amor ti sa tion: [IAS 38.98C] A con ces sion to explore and extract gold from a gold mine which is limited to a fixed amount of revenue generated from the ex trac tion of gold A right to operate a toll road that is based on a fixed amount of revenue gen er a tion from cu mu la tive tolls charged. The asset should also be assessed for im pair ment in ac cor dance with IAS 36. [IAS ] Mea sure ment sub se quent to ac qui si tion: in tan gi ble assets with in def i nite useful lives An in tan gi ble asset with an in def i nite useful life should not be amortised. [IAS ] Its useful life should be reviewed each reporting period to determine whether events and cir cum stances continue to support an in def i nite useful life as sess ment for that asset. If they do not, the change in the useful life as sess ment from in def i nite to finite should be accounted for as a change in an accounting estimate. [IAS ] The asset should also be assessed for im pair ment in ac cor dance with IAS 36. [IAS ] Sub se quent ex pen di ture Due to the nature of in tan gi ble assets, sub se quent ex pen di ture will only rarely meet the criteria for being recog nised in the carrying amount of an asset. [IAS 38.20] Sub se quent ex pen di ture on brands, mastheads, pub lish ing titles, customer lists and similar items must always be recog nised in profit or loss as incurred. [IAS 38.63] Dis clo sure For each class of in tan gi ble asset, disclose: [IAS and ] useful life or amor ti sa tion rate amor ti sa tion method gross carrying amount ac cu mu lated amor ti sa tion and im pair ment losses line items in the income statement in which amor ti sa tion is included rec on cil i a tion of the carrying amount at the beginning and the end of the

9 period showing: additions (business com bi na tions sep a rately) assets held for sale re tire ments and other disposals reval u a tions im pair ments reversals of im pair ments amor ti sa tion foreign exchange dif fer ences other changes basis for de ter min ing that an in tan gi ble has an in def i nite life de scrip tion and carrying amount of in di vid u ally material in tan gi ble assets certain special dis clo sures about in tan gi ble assets acquired by way of gov ern ment grants in for ma tion about in tan gi ble assets whose title is re stricted con trac tual com mit ments to acquire in tan gi ble assets Ad di tional dis clo sures are required about: in tan gi ble assets carried at revalued amounts [IAS ] the amount of research and de vel op ment ex pen di ture recog nised as an expense in the current period [IAS ] Related news Related Publications EFRAG endorsement status report 20 July Jul 2015 EFRAG endorsement status report 9 January ESMA opinion on accounting for cash contributions to a DGS 29 Sep 2015 European Union formally adopts Annual Improvements to IFRS - Cycle and amendments to IAS Jan 2015 Agenda for December 2014 EEG meeting 08 Dec th ESMA enforcement decisions report released 18 Nov 2014 IASB publishes editorial corrections 19 Sep 2014 EFRAG issues two final endorsement advices and effects study reports on the amendments to IFRS 11 and IAS 16/IAS Jul 2014 All Related

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