Study Notes on IAS 38 - Intangible Assets

INTRODUCTION TO INTANGIBLE ASSETS (IAS 38)

Overview of IAS 38

  • Date: 9 April 2025

  • Source: IAS 38 - Intangible Assets (IA)

  • Course: BAC 200

  • Institution: University of Pretoria

  • Purpose of Lecture: Explore the nature, recognition, and measurement of Intangible Assets.

Evaluation Criteria

  • Discussion Points:

    • Nature of Intangible Assets (IA).

    • Definition of Intangible Assets (IA).

    • Costing:

    • Purchased and Internally generated IAs.

    • Amortisation of IAs.

    • Residual value of IAs.

    • Carrying amount of IAs.

    • Detailed discussion on the accounting treatment of:

    • Internally generated IAs.

    • Research and Development costs.

    • Specific focus on IAs:

    • Finite useful life

    • Indefinite useful life.

    • Presentation and Disclosure of all IAs including related accounts.

Scope of IAS 38

  • Encompasses all intangible assets except those covered by other standards, such as:

    • Inventories (IAS 2)

    • Deferred tax assets (IAS 12)

    • Leases of IAs (IFRS 16)

    • Goodwill arising from business combinations (IFRS 3)

    • Employee benefits (IAS 19)

    • Assets arising from contracts with customers involving revenue recognition (IFRS 15)

Structure of the Lecture

  1. Introduction to IAS 38

    • Scope

    • Nature of Intangible Assets

  2. Recognition & Initial Measurement

  3. Internally Generated Intangible Assets

  4. Subsequent Measurement

  5. Impairment of Intangible Assets

  6. Derecognition

  7. Presentation & Disclosure

Nature of Intangible Assets

  • Definition (according to IAS 38):

    • Identifiable

    • Non-monetary asset

    • Without physical substance.

Asset Definition (Conceptual Framework)

  • An asset is characterized as:

    • A present economic resource controlled by the entity as a consequence of past events.

Identifiability of Intangible Assets

  • An asset is identifiable if:

    • It is separable: it can be separated from the entity and sold, transferred, licensed, rented, or exchanged.

    • It derives from contractual or other legal rights.

Goodwill

  • Definition: Goodwill arises from business combinations reflecting future economic benefits of identifiable assets that cannot be separately identified.

Recognition Criteria for Intangible Assets

  1. Identifiable.

  2. Non-monetary asset.

  3. Lacks physical substance.

  4. Current economic resource controlled by the entity.

  5. Involves probable inflow of future economic benefits.

  6. Cost must be reliably measured.

Recognition of Intangible Assets

  • Future economic benefits expected from the IA include:

    • Revenue from sales

    • Cost savings

    • Other benefits linked to IA usage.

Initial Measurement of Intangible Assets

  • Included Costs:

    • Purchase price

    • Non-refundable customs and import taxes

    • Non-refundable taxes

    • Directly attributable preparation costs (including employee benefits, professional fees, testing costs).

  • Excluded Costs:

    • Opening costs of a new facility

    • Introduction of new products or services (including advertising and promotional costs)

    • Business location costs and employee training costs

    • General overhead costs.

Financial Reporting and Subsequent Expenditure

  • If costs incurred do not meet definition/recognition criteria, they are recognized as an expense.

  • Subsequent costs that do not enhance the expected future economic benefits of the IA are recognized as expenses.

Measurement of Intangible Assets

  1. Initial Measurement:

    • At cost.

    • Various acquisition scenarios: separate purchase, exchange of assets, internally generated, part of business combination, through government grants.

  2. Subsequent Measurement:

    • Cost Model:

      • Cost less accumulated amortization, impairment losses.

    • Revaluation Model:

      • Revalued amount minus accumulated amortization, impairment losses (not covered in this course).

Exchange of Assets and Recognition

  • Recognition Criteria:

    • Must meet definition of IA.

    • Recognized if transaction has commercial substance.

  • Initial Measurement:

    • Cost determined by the fair value of either asset exchanged or acquired.

Internally Generated Intangible Assets

  1. General Recognition:

    • Internally generated goodwill and certain brands cannot be recognized as IA.

  2. Research Phase:

    • Generally expensed.

  3. Development Phase:

    • Can be capitalized if six additional criteria are met.

Six Criteria for Capitalization of Development Costs

  1. Technical feasibility of completing the IA for use or sale.

  2. Entity's intention to complete and utilize the IA.

  3. Entity's ability to use or sell the IA.

  4. Establish probability of the IA generating future economic benefits.

  5. Sufficient resources (technical and financial) to develop and utilize the IA.

  6. Ability to reliably measure the expenditure attributable to the IA.

Accounting Treatment of Costs

  • Costs incurred before the recognition criteria are met are expensed.

  • Amortization begins when the IA is ready for use as intended by management.

  • If development costs cannot be accurately measured, they will not be capitalized.

Examples for Further Study

  • Refer to "Intro to IFRS" for in-depth examples:

    • Example 15.1

    • Example 15.2

    • Example 15.3

    • Example 15.4

Conclusion

  • This framework allows for effective accounting and reporting of intangible assets, guiding entities in recognition, measurement, and presentation practices specific to the intangible asset realm as guided by IAS 38.