IAS 38

INTANGIBLE ASSETS

Chapter Objectives
At the completion of studying this chapter, you will
be able to:

define the criteria for the initial recognition and

measurement of intangible assets
explain the subsequent accounting treatment
of intangible assets
apply the requirements of IAS to internally
generated assets other than goodwill
identify the disclosure requirements for
intangible assets
2

KEY DEFINITIONS

An intangible asset is an identifiable non-monetary

asset without physical substance held for use in the
production or supply of goods or services, for rental to
others, or for administrative purposes
Useful life is the period of time over which an asset is
expected to be used by the entity
Research is original and planned investigation
undertaken with the prospect of gaining new scientific
or technical knowledge and understanding
Development is the application of research findings or
other knowledge to a plan or design for the production
of new or substantially improved materials, devices,
products, processes, systems or services prior to the
commencement of commercial production or use

OBJECTIVE OF IAS 38

The objective of IAS 38 is:

to prescribe the accounting treatment
for
recognising,
measuring
and
disclosing all intangible assets that are
not dealt with specifically in another
IFRS.

THE SCOPE OF IAS 38

The Standard is to be applied in accounting

for all intangible assets EXCEPT:
Those that are within the scope of another
Standard
Financial assets as defined in IAS 39,
Financial Instruments: Recognition and
Measurement
Mineral
rights and expenditure on the
exploration for, or development and
extraction of, minerals, oil, natural gas, and
similar non-regenerative resources

THE SCOPE OF IAS 38CTD

The Standard does not apply to :

Intangible assets held for sale in the ordinary course of
business (IAS 2)
Deferred tax assets (IAS 12)
Leases within the scope of IAS 17 and IFRS 16
Assets arising from employee benefit plans (IAS 19)
Financial assets covered by IAS 39, IAS 27, IAS 28, IAS 31,
or IFRS 9
Goodwill acquired in a business combination (IFRS 3)
Deferred acquisition costs and intangible assets arising
from insurance contracts (IFRS 4) (However, the
disclosure requirements are applicable.)
Non-current intangible assets classified as held for sale
6
(IFRS 5.)

THE SCOPE OF IAS 38CTD

This Standard does apply to expenditure

such as advertising, training, start-up
costs, research and development, patents,
licensing, motion picture film, software,
technical knowledge, franchises, customer
loyalty, market share, market knowledge,
customer lists, and the like.

Example on the scope of IAS

38

Case (a): Entity E acquired a computer-controlled

machine for production purposes together with
software. Without the software the machine would
not be able to operate. The tangible element (i.e. the
machine) is more significant than the intangible
element (i.e. the software).
Case (b): E has produced a new computer game. E
sells this game to its customers in the ordinary
course of business.
Case (c): E created a software program that is used
by Es employees for handling Es accounting.
Required: Assess which standard has to be applied
by E to the items described above.
8

CRITERIA FOR RECOGNITION

No

Not an
intangible
asset

No

3. Capable of generating
future economic benefits?
2.
Controlled?

Yes

Defined

4. Probable that future

economic benefits will be
generated?
Yes

No

1.
Identifiable?

Intangible
resource

Yes

No

5. Cost reliably
measured?
Yes

Yes

Recognised

No

Not
recognised

RECOGNITION
INTERNALLY GENERATED
INTANGIBLE ASSETS
Internally
generated
intangible assets

Internally
generated goodwill

NO!

Research
phase

Development
phase

NO!

Only if strict
criteria met

RESEARCH PHASE

Examples of research activities:

Activities aimed at obtaining new knowledge
The search for, and evaluation and final selection
of, applications of research findings or other
knowledge
The search for alternatives for materials, devices,
products, processes, systems or services
The formulation, design, evaluation and final
selection of possible alternatives for new or
improved materials, devices, products, processes,
systems or services

DEVELOPMENT PHASE

Conditions to be met before capitalisation:

Technical feasibility of completing the asset
Intention to complete it and use/sell the asset
Ability to use/sell the asset
An analysis of whether the asset will generate
future economic benefits
Availability of resources to complete the asset
and to use/sell it AND
Ability to reliably measure the attributable
expenditure

PROHIBITED COST

Internally generated goodwill must not be

recognized in the statement of financial position.
recognition of the following internally generated
items as intangible assets in the statement of
financial position is always prohibited
Brands
Mastheads
Publishing titles
Customer lists
Items similar in substance
13

Test your understanding

In 20x1 entity E incurred the following
expenses:
1. Implementation of an advertising campaign
2. Testing of a preproduction prototype
3. Internal generation of a brand
4. Search for alternatives for a production
process
Required: Assess if these expenses have to
be capitalized.

14

MEASUREMENT

Initial
measurement:
cost

Subsequent
costs:
expense
(unless can
prove
enhanced
economic
benefits)

Benchmark treatment
continue to carry at cost*
Alternative treatment
carry at re-valued amount*
by reference to active market
* less amortisation and
impairment provisions

Test your understanding

Active Asset Inc. owns a freely transferable taxi

operators license, which it acquired on January 1,
20X1, at an initial cost of Birr 10,000. The useful life
of the license is five years (based on the date it is
valid for). The entity uses the straight-line method
to amortize the intangible.
Such licenses are frequently traded either between
existing operators or with aspiring operators. At the
balance sheet date, on December 31, 20X2, due to
a government-permitted increase in fixed taxi fares,
the traded values of such a license was Birr 12,000.
16

Test your understanding

ctd

Required: What journal entries are required:

1. at December 31, 20x1 and 20X2, to recognize
the amortization of the intangible asset?
2. at
December 31, 20X2, to reflect the
increase/decrease in carrying value (cost or
revaluated
amount
less
accumulated
depreciation) on the revaluation of the
operating license based on the traded values
of similar license?
3. What would be the resultant carrying value of
the intangible asset after the revaluation?
17

Test your understanding

ctd

The company must recognize the intangible

assets annual amortization expenses at the end
of each year. Hence, the journal entries to be
recorded in the books of account at December 31
of the years 20x1 and 20x2 are:
At December 31, 20X1 (Birr)
Dr Intangible assetamortization Expense
2,000
Cr
Intangible assetAccumulated Amortization
At December 31, 20X2
Dr Intangible assetamortization Expense
2,000
Cr
Intangible assetAccumulated Amortization

2,000

2,000

18

Test your understanding

ctd

The journal entries to be recorded in the books of

account in 20x2 to reflect the increase in carrying
value are (Birr)

Intangible assetaccumulated amortization

Intangible assetcost 4,000

(Being elimination of accumulated

against the cost of the asset)

Dr
Cr

Dr
Cr

4,000

depreciation

Intangible assetcost 6,000

Revaluation reserve
6,000

(Being uplift of net book value to revalued amount)

The net result is that the asset has a revised
carrying amount of 12,000 (10,000 4,000 + 6,000).
19

MAJOR DISCLOSURES
Internally
generated

Useful lives
or
amortisation
rates

Gross
opening &
closing
balances

Disclose
separately

Acquired

Reconciliation
of movements
in year

Also, R&D costs expensed in the period

Re-valued
intangibles