IAS 38 Intangible Assets - Vocabulary

Definition

• An intangible asset is defined as “an identifiable non-monetary asset without physical substance.”

• Three key characteristics:

  • It is a resource controlled by the entity from which the entity expects to derive future economic benefits;

  • It lacks physical substance;

  • It is identifiable (distinguishable from goodwill).

• An intangible asset can be recognized if:

  • It is probable that the expected future economic benefits attributable to the asset will flow to the entity; and

  • The cost of the asset can be measured reliably.

• Control definition:

  • Often results from a legally enforceable right (e.g., legal title or a licence) for intangible assets.

  • Demonstrating control over an intangible asset without a legal right is more complex.

Recognition

• Recognition criteria (from left to right):

  • Identifiable?

  • Controlled?

  • Capable of generating future economic benefits?

  • Probable that future economic benefits will be generated?

  • Cost reliably measured?

• Formal recognition condition:

  • Recognition occurs if the five criteria are satisfied; otherwise, the asset is not recognised.

• Example: Distinguishing between financial asset and intangible asset

  • Scenario 1: Entity buys rights to a proportion of revenue from ticket sales. If the entity has no discretion over pricing/selling tickets and is merely entitled to cash, this is a financial asset (contractual right to receive cash) per IAS 32 para 11.

  • Scenario 2: Entity buys the rights to sell tickets and is responsible for selling them to generate revenue. This would be an intangible asset.

• Example: Cloud computing arrangements

  • Buyer does not obtain a software license; software remains on seller’s infrastructure and is accessed via internet.

  • Typically, the arrangement provides a service, with no rights to control identified assets.

  • Consequence: amounts paid are an operating expense; advance payments may be capitalised as a prepayment.

• Items never considered intangible assets

  • Start-up costs (pre-opening costs);

  • Training costs;

  • Advertising and promotion costs (including mail-order catalogues);

  • Relocation expenses;

  • Re-organisation costs for all or part of an entity.

Measurement

• Overview: Intangible assets are measured initially and subsequently using cost or fair value (under specific conditions).

Initial measurement

• How intangible assets are generated (initial recognition at cost):

  • Generally, probable economic benefits are assumed if a price is paid.

  • Initial measurement is at cost.

• Separate acquired (not from a business combination):

  • Initial cost includes:

  • Purchase price;

  • Directly attributable costs (e.g., employee benefits, professional fees necessary to bring the asset to its working condition, testing costs);

  • Other directly attributable costs to prepare the asset for use.

  • General, administrative, and marketing costs are excluded.

  • If payments are deferred beyond normal credit terms, the amounts to be paid are discounted to present value.

  • If intangible assets are acquired in exchange for non-monetary assets (or shares), recognise initially at fair value.

• Internally generated:

  • Cost is the sum of directly attributable expenditures incurred to create, produce and prepare the asset for its intended use.

  • Directly attributable costs include:

  • Costs of materials and services used or consumed;

  • Cost of employee benefits arising directly from generating the asset;

  • Fees paid to register a legal right (e.g., patent registration);

  • Amortisation of patents and licenses used in generating the asset;

  • Borrowing costs to the extent eligible for capitalization under IAS 23.

• Business combinations:

  • Intangible assets acquired in a business combination must be measured at fair value at the acquisition date.

  • Fair value techniques may include methods such as the discounted cash flow (DFC) model, relief from royalty, replacement cost, etc.

  • In a business combination, an asset need only be separable or arise from contractual rights to be recognised and measured as an intangible asset.

• Internally generated development costs (vs. research):

  • Costs related to internally generated R&D must be split into two components:

  • Research phase costs (cannot be recognised as assets);

  • Development phase costs (can be recognised as assets if criteria are met).

  • Development costs are recognised as assets if the entity can demonstrate:

  • Technical feasibility of completing the asset;

  • Intention to complete the asset and use or sell it;

  • Ability to use or sell the asset;

  • How the asset will generate probable future economic benefits (e.g., existence of a market or usefulness if internal use);

  • Availability of adequate technical, financial and other resources to complete development and to use or sell the asset;

  • Ability to reliably measure the expenditure attributable to the asset during development.

Initial measurement (continued): Development in practice

• On development costs, the criteria above determine whether capitalisation is allowed. If not met, costs are expensed as incurred.

Initial measurement – summary of components

• Separately acquired intangibles: Cost includes purchase price, directly attributable costs, and any necessary testing costs; discounting for deferred payments; fair value if exchanged for non-monetary assets.

• Internally generated intangibles: Cost includes directly attributable expenditures; development costs capitalised only if development criteria are met; research costs expensed.

• Business combinations: Recognise acquired intangible assets at fair value on the acquisition date, even if they are not separable, if they arise from contractual rights.

Subsequent measurement

• All types of intangibles can be measured using either the cost model or the revaluation model, with the following condition:

  • Revaluation model is permissible only if there is an active market for the asset (IFRS 13 definition).

• Active market (IFRS 13): A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

• Two models:

  • Cost model: Carry at cost less amortisation and impairment.

  • Revaluation model (only if active market exists): Carry at fair value, with changes recognised in Other Comprehensive Income (OCI) to the extent of any previous increases; decreases recognised in P&L unless they offset previous OCI increases. Revaluation increases go to OCI unless they offset decreases previously recognised in P&L; OCI is never recycled to P&L.

• Active market considerations by asset type (illustrative):

  • Brands: NO active market -> not suitable for revaluation

  • Newspapers: NO

  • Music/film rights: NO

  • Patents or trademarks: NO

  • Taxi licenses: YES (in some jurisdictions, e.g., freely transferable taxi licenses)

  • Fishing licenses: YES

  • Emission rights: YES

• Goodwill and other indefinite-life intangibles:

  • Goodwill has an indefinite useful life by definition and cannot be amortised.

  • Other intangibles with indefinite useful lives may exist (e.g., some brands/trademarks).

  • Annual impairment tests are required for goodwill and indefinite-lived intangibles, with impairment tests also required for other assets if impairment indicators exist.

• Useful life considerations for amortisation:

  • Amortisation is based on the asset’s expected useful life (finite) or indefinite life (if applicable).

  • Useful life should be based on:

  • The period over which the asset is expected to be available for use;

  • The number of production or similar units expected from the asset.

  • Factors to consider when determining useful life:

  • Expected usage by entity;

  • Product life cycle and published information on useful lives;

  • Obsolescence (technical, technological, commercial);

  • Industry stability and changes in market demand;

  • Expected actions by competitors;

  • Maintenance requirements;

  • The period for which the entity controls the asset and any legal limits;

  • Whether the asset’s useful life depends on other assets.

• Amortisation methods:

  • Straight-line, Unit of production, Diminishing balance, and other methods that reflect the consumption pattern.

  • A method based on revenues is generally not allowed, unless there is a direct correlation between revenues and usage for that asset (rebuttable presumption).

• Impairment:

  • Impairment is assessed under IAS 36; impairment indicators trigger impairment testing.

  • Goodwill, indefinite-life intangibles, and intangibles under construction are tested for impairment at least annually.

Revaluation specifics

• Revaluation timing and mechanics:

  • Revaluation occurs after amortisation and impairment are accounted for in the period.

  • Increases in value are recognised in OCI (to the extent of any previous decreases recognised in P&L); decreases are recognised in P&L unless they offset prior OCI increases.

  • OCI is never recycled to P&L.

Practical implications and connections

• Distinguishing between financial assets and intangible assets hinges on control and the nature of the rights; absence of discretion over pricing often indicates a financial asset.

• Cloud computing arrangements typically do not create an identifiable intangible asset; treatment as service expense or prepayment aligns with the nature of the arrangement.

• Development vs. research distinction drives whether costs can be capitalised; capitalisation requires meeting strict criteria which, if not met, keeps costs expensed.

• Active-market requirement severely limits which assets can use the revaluation model; most intangible assets do not have active markets (hence cost model is more common).

• Impairment considerations ensure that the carrying amount does not exceed recoverable amount; annual impairment tests for goodwill and indefinite-life assets reflect their vulnerability to impairment.

Formulas and key notation

• Recognition condition (summary): Recognise ifI \,\land\, C \,\land\, CG \,\land\, P \,\land\, Rwhere

  • I = identifiable,

  • C = controlled,

  • CG = capable of generating future economic benefits,

  • P = probable that benefits will flow,

  • R = cost reliably measured.

• Initial cost (separately acquired):

  • Cost0 = PurchasePrice + Directly attributable costs + Costs of preparing for use + (Discounted payments if deferral)

• Initial cost (exchange for non-monetary assets):

  • Cost0 = FairValue of asset received

• Initial cost (internally generated – development):

  • DevelopmentCostCapitalised if criteria met; otherwise, expenses.

• Amortisation and impairment (relationship):

  • Carrying amount = Cost − Accumulated amortisation − Impairment losses;

  • Amortisation for finite-life assets follows a pattern that reflects consumption; residual value assumed typically to be 0.

• Useful life concepts:

  • UsefulLife = finite or indefinite; for finite: use in years or units of production.

• Active market definition (IFRS 13):

  • Active market: frequency and volume sufficient to provide pricing information on an ongoing basis.

Definition

• An intangible asset is an “identifiable non-monetary asset without physical substance.”

• Key characteristics: controlled, expected future economic benefits, and identifiable (distinguishable from goodwill).

• An asset is recognized if future economic benefits are probable and its cost can be reliably measured.

Recognition

• Formal recognition requires meeting five criteria: identifiable, controlled, capable of generating future economic benefits, probable future economic benefits, and reliably measurable cost.

• Examples: Rights providing discretion over asset usage are intangible; mere contractual rights to cash are financial assets. Cloud computing arrangements are typically service contracts, not intangible assets.

• Items never recognized as intangible assets include start-up costs, training costs, advertising, relocation, and re-organisation costs.

Measurement

Initial measurement

• Separately acquired: Initial cost includes purchase price, directly attributable costs, and directly attributable costs to prepare it for use. Discounting applies for deferred payments. If exchanged for non-monetary assets, it's recognized at fair value.

• Internally generated: Cost includes directly attributable expenditures. Development costs are capitalizable only if strict criteria are met (e.g., technical feasibility, intention to complete, ability to use/sell, reliable cost measurement). Research phase costs are expensed.

• Business combinations: Intangible assets are measured at fair value at the acquisition date.

Subsequent measurement

• Intangibles are measured using either the cost model (cost less amortisation and impairment) or the revaluation model if an active market exists.

• Active market: Defined by IFRS 13 as a market with sufficient frequency and volume of transactions to provide ongoing pricing information (e.g., some taxi licenses, but generally not brands or patents).

• Goodwill and indefinite-life intangibles: Not amortised, but tested for impairment at least annually.

• Finite-life intangibles: Amortised over their estimated useful lives using methods reflecting consumption patterns (e.g., straight-line). Revenue-based amortisation is generally not allowed unless directly correlated with usage.

• Impairment: Assessed under IAS 36, with annual tests for goodwill, indefinite-life intangibles, and intangibles under construction.

Revaluation specifics

• Revaluation changes are recognized in Other Comprehensive Income (OCI) for increases (or to reverse previous P&L decreases); decreases are recognized in Profit & Loss (P&L) (unless offsetting prior OCI increases). OCI is never recycled to P&L.

Formulas and key notation

• Recognition condition (summary): I \land C \land CG \land P \land R
  where I=identifiable, C=controlled, CG=capable of generating future economic benefits, P=probable that benefits will flow, R=cost reliably measured.

• Initial cost (separately acquired): Cost_0 = \text{Purchase Price} + \text{Directly attributable costs}