NIC 38 - Intangibles (IFRS) Study Notes

NIC 38 - Intangibles (IFRS)

  • Definition and nature

    • An intangible asset is an identifiable non-monetary asset with no physical substance. It can be held for any purpose, unlike fixed assets which must be used in production, to supply goods or services, to be leased, or for administrative purposes.
    • Examples mentioned: licenses, autonomous national concessions, software, rights arising from contracts, expertise/know-how, customer lists, exclusive contracts, etc.
    • Key phrase: identifiable, non-monetary, no physical form, and capable of providing future economic benefits.

  • Requisites of the definition (NIC 38)

    • Must lack physical appearance.
    • Must be identifiable.
    • Must be non-monetary.
    • Must be controlled by the entity and expected to provide future economic benefits.
    • These criteria align with the asset recognition concept under the standard.

  • Identifiability

    • Identifiability means the asset is separable: it can be separated or detached from the entity and sold, transferred, exploited, leased, or exchanged, either alone or with a related contract, asset, or liability.
    • Identifiability also includes contractual or legal rights that arise from other forms of rights, irrespective of whether those rights are transferable or separable from the entity.
    • Note: Separability is not a prerequisite for identifiability; a right may be identifiable by virtue of legal or contractual rights even if not separable.

  • Separability vs. contractual/legal rights

    • Identifiability can arise from legal rights (e.g., licenses, permits) that may not be separable from the asset (e.g., a license to operate a radio station).
    • The separability condition is not required for identifiability when rights arise from contracts or legal frameworks.

  • Control and future economic benefits

    • To recognise an intangible asset, the entity must have the power to obtain the future economic benefits flowing from the asset and to restrict others’ access to those benefits.
    • Control implies the ability to obtain benefits and to deny others access to those benefits.

  • Examples of identifiable intangibles (illustrative)

    • Administrative concession for running a radio station (identifiable due to legal rights, though not always separable from the station).
    • Other examples include licenses, software, customer lists, exclusive contracts, proprietary know-how, etc.
    • Important distinction: Just because an asset is valuable does not mean it is an intangible asset; it must meet identifiability, control, and expected future benefits criteria.

  • Non-monetary nature and inflation considerations

    • Intangibles are non-monetary and are not defined by monetary attributes such as monetary items subject to inflation or currency fluctuations.
    • Measurement and recognition are based on cost or fair value, not monetary value rules.

  • Initial recognition (recognition criteria)

    • It is probable that the expected future economic benefits attributable to the asset will flow to the entity.
    • The cost of the asset can be measured reliably.
    • These criteria govern whether an intangible asset is recognised on the balance sheet and at what amount.

  • Initial measurement (cost vs fair value)

    • Acquired intangibles: recognised at the cost to purchase, which is typically the fair value paid.
    • Internally generated intangibles: generally recognised at cost incurred during development, not the fair value of an internally generated asset.
    • The initial recognition may involve FV in certain cases, but the standard distinguishes between internally generated and acquired assets.

  • Internal generation vs acquired intangibles

    • Internally generated intangibles are not automatically capitalised; many costs are expensed as incurred unless they meet specific criteria.
    • Intangible assets acquired separately are recognised at their cost (often the fair value paid).

  • Probable future economic benefits and reliable measurement (postulate)

    • An intangible asset is recognised if it is probable that the expected future economic benefits will flow to the entity and the asset's cost can be measured reliably.
    • Mathematically, recognition hinges on: probability of future benefits and reliable cost measurement.
    • If either criterion fails, costs are expensed as incurred.

  • Intangible assets with goodwill in business combinations

    • Intangible assets arising from a business combination include purchased goodwill and other separately identifiable intangible assets.
    • Goodwill arising from a business combination is recognised as an asset; however, internally generated goodwill is not capitalised.

  • Costs that must not be capitalised (internally generated intangibles)

    • Costs relating to development of customer lists
    • Establishment costs
    • Reorganization or relocation costs
    • Internal research and development costs
    • Advertising and promotion costs
    • Internally generated brands
    • These costs are expensed as incurred and are not recognised as intangible assets.

  • Development costs: capitalization criteria

    • Development costs may be capitalised if the project meets the following criteria:
    • Technical feasibility of completing the intangible asset so that it will be available for use or sale.
    • Intention to complete the asset and use or sell it.
    • Ability to use or sell the asset.
    • Probable future economic benefits from the asset.
    • Availability of adequate technical, financial, and other resources to complete the development.
    • Ability to reliably measure the expenditure attributable to the asset during its development.
    • If these criteria are not met, development costs are expensed.

  • Software for third-party use and capitalization considerations

    • Software intended for use by third parties can be capitalised when there is technical feasibility, even if the software is later decommissioned; however, this treatment is not explicitly defined in all NIC 38 interpretations and may vary by jurisdiction.

  • Advertising and promotion costs

    • Advertising and promotional expenses are recognised as incurred.
    • Only prepaid or prepaid benefits (where benefits extend beyond the reporting period) may be recognised as an asset until the benefits are consumed; otherwise, they are expensed immediately.

  • Revaluation model

    • Revaluation of intangible assets is allowed as an accounting policy option, except for goodwill.
    • Revaluations are permitted for all intangibles only if there is an active market for the asset.
    • In practice, active markets for intangible assets are relatively uncommon, so revaluation is rarely applied.
    • Revaluation increases are usually recognised in other comprehensive income (OCI) or equity (depending on policy), with a revaluation surplus; decreases are recognised in profit or loss unless the asset has a previous surplus in equity.

  • Life of intangible assets: finite vs infinite (indefinite) life

    • Intangibles can have finite life (amortised) or indefinite life (not amortised but tested for impairment annually or when indicators exist).
    • Finite-life intangibles: amortisation over the asset’s useful life; impairment tests when indicators of impairment exist.
    • Indefinite-life intangibles: no amortisation; tested for impairment annually and more frequently if indicators exist.

  • Research and development (R&D) and related items

    • Research costs are expensed as incurred and are not capitalised as intangible assets.
    • Development costs may be capitalised if stringent criteria are met (see Development costs capitalization criteria).
    • Specific examples mentioned include web pages and other digital assets; the treatment depends on their nature and whether they meet identifiability, control, and future economic benefits criteria.

  • Miscellaneous notes on control and recognition

    • For recognition, the entity must have the ability to obtain the anticipated benefits and to restrict access to those benefits by others.
    • Rights arising from contractual arrangements or legal rights are considered identifiable even if not separable from the asset.
    • The presence of a legally enforceable right generally supports identifiability and control.

  • Quick reference summary of key phrases (NIC 38)

    • Identifiability: separable or arising from contractual/legal rights; not dependent on separability.
    • Control: power to obtain benefits and restrict others’ access.
    • Measurement at initial recognition: cost for internally generated assets (development costs meeting criteria) and fair value for purchased assets.
    • Subsequent measurement: cost model or revaluation model (where active market exists).
    • Impairment: impairment testing for indefinite-life assets annually; finite-life assets tested when indicators exist.
    • Amortisation: for finite-life intangibles, systematic amortisation over the asset’s useful life; none for indefinite-life assets.

  • Practical implications and real-world relevance

    • Properly distinguishing between internally generated and acquired intangibles avoids improper capitalisation of costs.
    • Identifying whether a contract or legal right gives rise to an identifiable asset affects recognition and measurement.
    • Development costs require careful assessment of feasibility, intentions, and resources to determine if capitalisation is appropriate.
    • Revaluation occurs only when there is an active market, which guides whether to apply the revaluation model.
    • The treatment of software and other digital assets requires consideration of feasibility and contractual considerations, especially when used for third-party benefit.

  • Quick scenario highlights (based on examples in slides)

    • A concession to operate a radio station is identifiable by legal rights, even if not separable from the station; control is demonstrated by the right to operate and obtain benefits.
    • A market share right (pure market share) does not automatically meet the definition of an intangible asset unless it arises from identifiable rights and control; thus, it may not be capitalised.
    • Internally developed customer lists, establishment costs, and internal advertising costs generally should not be capitalised as intangible assets; instead, they are expensed.

  • Equations and formulas (illustrative)

    • Amortisation expense for finite-life intangibles:
      extAmortisationextExpense=extCostofAssetextUsefulLifeext{Amortisation ext{ }Expense} = \frac{ ext{Cost of Asset}}{ ext{Useful Life}}
    • Impairment loss (when Carrying Amount > Recoverable Amount):
      extImpairmentextLoss=extCarryingAmount−extRecoverableAmountext{Impairment ext{ }Loss} = ext{Carrying Amount} - ext{Recoverable Amount}
    • Recognising development costs only if criteria are met; otherwise, expensed as incurred.

  • Takeaway

    • NIC 38 requires careful assessment of identifiability, control, and expected future benefits.
    • Distinguishing between acquired vs internally generated, and finite vs indefinite life, determines recognition, measurement, and subsequent accounting treatments.
    • The standard provides both cost-based and revaluation-based pathways (when active markets exist), with specific exclusions for internally generated costs.