Intangible Assets: IAS 38 and ASPE 3064

Definition and Fundamental Characteristics of Intangible Assets (IAS 38)

  • Definition (IAS 38.8): An intangible asset is defined as an identifiable non-monetary asset without physical substance.

  • Representative Examples:

    • Copyrights.
    • Patents.
    • Franchise rights.
    • Trademarks.
    • Customer lists.
    • Licenses.
    • Fishing quotas.
    • Computer softwares.

  • Mandatory Criteria to Qualify as an Intangible Asset:

    1. Identifiability: The asset must be separable from the entity, meaning it can be sold, transferred, or rented. Alternatively, it must arise from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
    2. Control: Control is established when the entity possesses the power to obtain the future economic benefits flowing from the underlying resource and can simultaneously restrict the access of others to those same future economic benefits.
    3. Future Economic Benefits: These benefits may manifest as revenue derived from the sale of products or services, cost savings resulting from the asset's use, or other various benefits yielding from the entity's use of the asset.

Recognition and Initial Measurement Standards

  • Recognition Criteria (IAS 38.21): An intangible asset can only be recognized in the financial statements if it meets the following two conditions:

    1. It is probable that the expected future economic benefits that are attributable to the intangible asset will flow to the entity.
    2. The cost of the intangible asset can be measured reliably.

  • Non-Recognition: If an item fails to meet both the definition of an intangible asset and the specific recognition criteria, no intangible asset can be recorded on the balance sheet.

  • Initial Measurement (IAS 38.64): An intangible asset must be measured initially at its cost.

  • Costs in Separate Acquisition: When an intangible asset is purchased through separate acquisition, the cost components include:

    • The purchase price.
    • Legal costs.
    • Testing costs.
    • Preparation costs.

Internally Generated Intangible Assets

  • Development of Internal Assets: This category includes assets created or developed by the entity itself, such as new drugs or proprietary software.

  • The Two Phases of Internal Generation:

    1. Research Stage (IAS 38.54): All expenditures incurred during the research phase must always be expensed as they are incurred. No intangible asset arising from research shall be recognized.
    2. Development Stage (IAS 38.57): Costs incurred during this stage can be capitalized only when the entity can demonstrate all of the following six criteria:
      • Technical Feasibility: The technical ability to complete the intangible asset so that it will be available for use or sale.
      • Intention: The internal intention to complete the intangible asset and use or sell it.
      • Ability: The entity's ability to use or sell the intangible asset (is there a specific use for it?).
      • Generation of Benefits: Precise demonstration of how the intangible asset will generate probable future economic benefits. This includes demonstrating the existence of a market for the output of the asset or the asset itself, or its usefulness if it is to be used internally.
      • Resource Availability: The availability of adequate technical, financial, and other resources required to complete the development and to use or sell the asset.
      • Reliable Measurement: The entity’s ability to measure reliably the expenditure attributable to the intangible asset during its development.

  • Timeline of Capitalization: Development costs are always incurred after the Research phase has concluded. Capitalization can only begin once all six criteria listed above are met.

Mandatory Expenses and Operating Logistics

  • Items Always Expensed: In addition to all research costs, the following expenditures must always be charged to the income statement rather than capitalized:
    • Selling, General, and Administrative (SG&A) expenses.
    • Training costs for staff.
    • Initial operating losses incurred before the asset reaches its planned performance level.

Subsequent Measurement and Accounting Models

  • Accounting Policy Choice (IAS 38.72): An entity must choose either the Cost Model or the Revaluation Model as its accounting policy for a class of intangible assets. Once chosen, the policy must be applied to all other assets in that specific class.

  • Cost Model:

    • Carrying Amount=Cost−Accumulated Amortization−Any Accumulated Impairment Losses\text{Carrying Amount} = \text{Cost} - \text{Accumulated Amortization} - \text{Any Accumulated Impairment Losses}

  • Revaluation Model:

    • Carrying Amount=Revalued Amount (Fair Value)−Subsequent Accumulated Amortization−Subsequent Accumulated Impairment Losses\text{Carrying Amount} = \text{Revalued Amount (Fair Value)} - \text{Subsequent Accumulated Amortization} - \text{Subsequent Accumulated Impairment Losses}
    • This model is similar to the Property, Plant, and Equipment (IAS 16) standards.
    • Restriction: To employ the revaluation model, fair value must be determined by reference to an active market. Such active markets are considered rare for intangible assets.

Impairment, Derecognition, and Disclosure

  • Impairment: Intangible assets are considered impaired when their carrying amount cannot be recovered. The guidelines for this process are found in IAS 36, Impairment of Assets.

  • Derecognition: An intangible asset is derecognized (removed from the balance sheet) under two conditions:

    1. Upon disposal.
    2. When no further future economic benefits are expected from its use or disposal.

  • Gains and Losses: Any gain or loss arising from derecognition is recognized in the statement of profit or loss.

  • Presentation and Disclosure: Comprehensive requirements for presentation and disclosure are outlined in IAS 38.118.

Special Acquisition Scenarios

  • Business Combinations (IAS 38.33): Intangibles acquired in a business combination are recognized at their fair value as of the acquisition date. They are recognized separately from goodwill, regardless of whether the acquiree had recognized the asset prior to the acquisition.

  • Internally Generated Goodwill: Factors such as brand recognition or a strong reputation constitute internally generated goodwill. This is never recognized as an asset because it is not an identifiable resource controlled by the entity that can be measured reliably at cost.

  • Government Grants: For intangibles acquired via government grants, an entity has two choices:

    1. Record the intangible asset at its fair value.
    2. If fair value is not chosen, the asset must be recognized at a nominal value plus any expenditures that are directly attributable to preparing the asset for its intended use.

Comparison with ASPE 3064 Standards

  • Core Similarities: Under ASPE 3064 (Goodwill and Intangible Assets), the definition and recognition criteria remain largely identical to IFRS/IAS 38. The asset must meet the definitions of identifiability, control, and future economic benefits. Costs must be reliably measured and future economic benefits must be probable.

  • Initial Measurement: Like IFRS, ASPE 3064.24 requires initial measurement at cost.

  • Internally Generated Intangibles (ASPE 3064.41):

    • Research Phase: Expenditures must be expensed.
    • Development Phase: While the six criteria for capitalization are the same as IFRS, ASPE provides an accounting policy choice. An entity may choose to either capitalize development costs (if criteria are met) or expense them. This choice must be applied consistently across the entity, with consideration for what best represents the company's financial position.

  • Impairment Testing Differences:

    • ASPE: Impairment is only tested when indicators of impairment are present.
    • IFRS: Requires annual impairment testing for certain intangible assets (such as those with indefinite lives or those not yet available for use).