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11.1
IAS 38 intangible assets
Non-Current
Intangible Assets
Chapter
11
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Intangible assets are non monetary non current assets that do not have physical substance but are
identifiable and controlled by the entity through custody or legal rights (i.e. purchase or self-
creation) and are able to provide future economic benefits.
An intangible asset is identifiable when it:
§ is separable (capable of being separated and sold, transferred, licensed, rented, or
exchanged, either individually or as part of a package) or
§ Arises from contractual or other legal rights.
Examples of intangible non current assets
§ Patents, copyrights & licenses
§ Computer software
§ Films
§ Customer and supplier relationships / databases
§ Import quotas
§ Franchises
§ Marketing rights
Intangible non current assets are initially recognised at cost in the statement of financial position.
To recognise the asset in the statement of financial position it must meet the definitions and criteria
set out by IAS 38 (i.e. identifiable, control and future economic benefits). If an intangible item does
not meet the criteria for recognition as an intangible asset, IAS 38 requires the expenditure to be
recognised as an expense when it is incurred.
Acquisition of intangibles
§ Purchased separately
§ Created by the organisation
§ Acquired by a government grant
§ Acquired by exchange of assets
§ Part of business combination
Purchased intangible assets
These are assets that the organisation has paid for. The cost of the asset is the purchase price plus
any directly attributable costs incurred to bring the asset to its current position and intended use.
Initial measurement at cost for purchased intangible non current assets
§ Purchase price less trade discounts (but not early settlement discounts)
§ Import duty and any other non-refundable purchase taxes
§ Transport and handling costs
§ Professional fees
§ Any other directly attributable costs of preparing the asset for its intended use
IAS 38 does not allow the subsequent reinstatement as an intangible asset, at a later date, an
expenditure that was originally charged to expense in the income statement.
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Intangible assets are classified as:
§ Indefinite life (benefit generated from the asset will continue forever).
§ Finite life (a limited period of benefit to the entity).
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Finite life
All intangible assets that have been capitalised and that have a finite life must be amortised
(except for purchased goodwill). Amortisation works in exactly the same way as depreciation and
is an expense to the income statement and reduces the carrying value of the asset. The cost less
residual value of an intangible asset with a finite useful life should be amortised over that life.
Intangible non current assets must either be carried using the cost model or the revaluation model
(same as tangible non current assets). Under the revaluation model a revaluation surplus is shown
under other comprehensive income (forms part of the revaluation reserve account under equity)
except to the extent that it reverses a revaluation decrease previously recognised in the income
statement. If the revalued intangible has a finite life, the revalued amount is amortised.
The intangible asset must also be reviewed for impairment in accordance with IAS 36.
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Indefinite life
An intangible asset with an indefinite useful life must not be amortised. It must be:
§ Reviewed each year to determine whether its indefinite life still continues.
§ If indefinite life no longer applies, the status of the intangible asset must be changed to
finite life asset and amortisation begins. The change is accounted for as an accounting
estimate.
§ The asset should also be assessed for impairment in accordance with IAS 36.
Subsequent expenditure
Subsequent expenditure on an intangible asset should be recognised as an expense when it is
incurred, unless this expenditure will enable the asset to generate future economic benefits in
excess of its originally assessed standard of performance and the expenditure can be measured and
attributed to the asset reliably.
11.2
Purchased goodwill – IFRS 3 business combinations
A very important purchased intangible asset is purchased goodwill, which is covered by IFRS 3
business combinations. When an organisation acquires another organisation on a going concern
basis, they usually pay a higher price than the value of the net assets being acquired from the
organisation.
This premium reflects the goodwill of the acquired business. The calculation of purchased
goodwill is:
Price paid for business
X
Less fair value of identifiable assets and liabilities acquired (net assets)
(X)
Purchased goodwill
X
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Usually the purchased goodwill is a positive figure (i.e. more has been paid to acquire the business)
and is capitalised under intangible non current assets.
Purchased goodwill is never amortised. It must however be reviewed for impairment each year
in accordance with IAS 36 impairment of assets. Any impairment losses are taken to the income
statement.
Note that the purchased goodwill will be shown in the “consolidated financial statements” of the
parent company (i.e. the company that acquired the other business).
The carrying value of the purchased goodwill in consolidated statement of financial position is
initial valuation (under IFRS 3) less accumulated impairment losses.
Worked example
Big plc acquired all the share capital of Small Ltd on 1
st
January 20X6 for £50 million. The fair
value of Small’s net assets was £40 million at that date.
The purchased goodwill (calculated on the net assets basis – partial method) to be capitalised will
be:
Purchase consideration
£50 million
Less fair value of net assets
(£40) million
Purchased goodwill
£10 million
£10 million will be shown as an intangible non current asset in the consolidated financial
statements of Big.
On 31
st
December 20X6, there year end of Big plc, an impairment review of the purchased
goodwill and established the value to be £8 million.
This represents an impairment loss and at the year end, the intangible asset will be written down by
£2 million (£10m - £8m)
The impairment loss will be taken to the income statement.
There will be no amortisation.
Negative purchased goodwill
When the price paid for a acquiring another business is less than the fair value of the net assets
acquired, it will result in negative goodwill. This simply means that it was bought at a bargain
price.
The treatment of negative purchased goodwill is to recognise it immediately in the income
statement as a credit.
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Negative purchased goodwill may have occurred due to other reasons like errors in establishing the
fair values of the net assets acquired. IFRS 3 requires investigation into this before the amount can
be taken to the income statement.
Internally generated goodwill
Internally generated goodwill (also referred to as inherent goodwill) is never capitalised. This is
goodwill that the business has created due to the way it conducts it business, for example the way it
treats its customers, the quality of its customer services etc.
IFRS 3 states that internally generated goodwill is never capitalised as it is hard to measure with
reasonable certainty.
Other internally generated items that are not capitalised under IAS 38 include:
§ Brands
§ Mastheads (a listing printed in all issues of a newspaper or magazine - usually on the
editorial page - that gives the name of the publication and the names of the editorial staff,
etc).
§ Publishing titles
§ Customer lists and items similar in substance
§ Start-up, pre-opening, and pre-operating costs
§ Training cost
§ Advertising cost
§ Relocation costs
All the above must be taken to the income statement in the period the costs are incurred.
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11.3
Research and development costs
Business may incur large expenses on their research and development projects. Some of these
expenses will be incurred developing a product or service with which future economic benefits will
flow to the business.
IAS 38 deals with how to account for research and development costs. Explanations and
accounting treatment of research and development is given below:
Research
Development
Original and planned investigation carried out in
order to gain new scientific or technical knowledge
Once the research has been successful,
development begins on a product or service
that will generate economic benefits in the
future.
Examples include:
Search for new products
Search for new processes
Search for improvements to existing products
Search for improvements to existing processes
Examples include:
The design, construction and testing of new
models, new processes, new materials etc.
Accounting treatment:
All expenditure on research costs must be expensed
in the income statement
Debit Expenses in income statement
Credit Bank
Accounting treatment:
An intangible asset should only be created
when the development phase meets the
strict criteria set out by IAS 38. If the
criterion
is
not
met,
development
expenditure is expensed in the Income
statement.
Capitalisation journal:
Debit Intangible non current asset
Credit Bank
The criteria for capitalisation of development expenditure under IAS 38
(SECT)
S
Separately and clearly defined project
E
Expenditure is separately identifiable
C
Commercially viable, and overall profit is expected
T
Technically feasible, and resources exist to complete the project
The business therefore needs to have a detailed project plan detailing the above conferment, and
reviewing it regularly to ensure that the capitalisation criterion is being met.
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Once capitalised the development expenditure must be amortised. Amortisation will begin when
the asset is available for use. The annual amortisation charge will be based on the expected useful
life of the asset.
The useful life of the intangible assets is regarded to be no more than 20 years, but this may not
necessarily be the case.
11.4
Other issues with intangible assets
Disposal or retirement of intangible assets
When an intangible asset is sold or is no longer used by the organisation, it needs to be removed
from the statement of financial position. The gain or loss on disposal is calculated in the same way
as for tangible assets as:
Sales proceeds less carrying amount
The gain or loss is taken to the income statement.
Amortisation
Most intangible assets are expected to have a useful economic life of 20 years, apart from
purchased goodwill. This may not be the case for some assets. Amortisation is to be charged on a
systematic basis to reflect the use of the intangible asset. The amortisation is calculated in the
same way as depreciation and is charged to the Income statement.
Impairment
Under IAS 36, all intangible assets must be reviewed for impairment every year, this means
comparing their carrying value with the recoverable amount. The treatment of impairment losses is
same as for tangible assets.
Disclosures required by IAS 38 for each class of intangible asset
§ Reconciliation of the carrying amount at the beginning and the end of the period.
§ Useful life, amortisation rate and method.
§ Basis for determining that an intangible has an indefinite life.
§ Description and carrying amount of individually material intangible assets
§ Intangible assets acquired by way of government grants
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Key summary of chapter “intangible assets”
Intangible assets are non monetary non current assets that do not have physical substance but are
identifiable and controlled by the entity through custody or legal rights (i.e. purchase or self-
creation) and are able to provide future economic benefits.
Intangible non current assets are initially recognised at cost in the statement of financial position.
To recognise the asset in the statement of financial position it must meet the definitions and criteria
set out by IAS 38 (i.e. identifiable, control and future economic benefits).
Subsequent expenditure on an intangible asset should be recognised as an expense when it is
incurred, unless this expenditure will enable the asset to generate future economic benefits in
excess of its originally assessed standard of performance and the expenditure can be measured and
attributed to the asset reliably.
Intangible non current assets must either be carried using the cost model or the revaluation model.
Intangible assets are classified as:
§
Indefinite life (benefit generated from the asset will continue forever).
§
Finite life (a limited period of benefit to the entity).
Finite life - all intangible assets that have been capitalised and that have a finite life must be
amortised (except for purchased goodwill).
Indefinite life - an intangible asset with an indefinite useful life must not be amortised but must be
reviewed annually.
Positive purchased goodwill – IFRS 3 business combinations
A very important purchased intangible asset is purchased goodwill, which is covered by IFRS 3
business combinations. When an organisation acquires another organisation on a going concern
basis, they usually pay a higher price than the value of the net assets being acquired from the
organisation. Purchased goodwill is capitalised in the consolidated financial statements of the
parent company.
Negative purchased goodwill
When the price paid for a acquiring another business is less than the fair value of the net assets
acquired, it will result in negative goodwill. This simply means that it was bought at a bargain
price. The treatment of negative purchased goodwill is to recognise it immediately in the income
statement as a credit.
Internally generated goodwill (also referred to as inherent goodwill) is never capitalised. This is
goodwill that the business has created due to the way it conducts it business, for example the way it
treats its customers, the quality of its customer services etc. IFRS 3 states that internally generated
goodwill is never capitalised as it is hard to measure with reasonable certainty.
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Research and development costs – IAS 38
Research - original and planned investigation carried out in order to gain new scientific or technical
knowledge
Accounting treatment - all expenditure on research costs must be expensed in the income
statement.
Debit
Expenses (income statement)
Credit Bank (statement of financial position)
Development - once the research has been successful, development begins on a product or service
that will generate economic benefits in the future.
Accounting treatment - an intangible asset should only be created when the development phase
meets the strict criteria set out by IAS 38. If the criterion is not met, development expenditure is
expensed in the income statement.
Capitalisation journal:
Debit
Intangible non current asse (statement of financial position)
Credit Bank (statement of financial position)
The criteria for capitalisation of development expenditure under IAS 38 (SECT)
S
Separately and clearly defined project
E
Expenditure is separately identifiable
C
Commercially viable, and overall profit is expected
T
Technically feasible, and resources exist to complete the project
Disposal or retirement of intangible assets - when an intangible asset is sold or is no longer used
by the organisation, it needs to be removed from the statement of financial position. The gain or
loss on disposal is calculated in the same way as for tangible assets as: sales proceeds less carrying
amount. The gain or loss is taken to the income statement.
Amortisation - Most intangible assets are expected to have a useful economic life of 20 years,
apart from purchased goodwill. This may not be the case for some assets. Amortisation is to be
charged on a systematic basis to reflect the use of the intangible asset. The amortisation is
calculated in the same way as depreciation and is charged to the income statement.
Impairment - under IAS 36, all intangible assets must be reviewed for impairment every year, this
means comparing their carrying value with the recoverable amount. The treatment of impairment
losses is same as for tangible assets.
Disclosures required by IAS 38 for each class of intangible asset
§
Reconciliation of the carrying amount at the beginning and the end of the period.
§
Useful life, amortisation rate and method.
§
Basis for determining that an intangible has an indefinite life.
§
Description and carrying amount of individually material intangible assets
§
Intangible assets acquired by way of government grants
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