International Accounting

Standards

IAS 38 “ Intangible Assets”

1
Objective

• To set down the recognition and

measurement rules for intangible assets

2
Scope
Excludes
• Intangibles covered by other IAS
• Financial assets
• Mineral rights and expenditure on
exploration, development and extraction of
minerals, oil, natural gas and similar non-
regenerative resources

3
Intangible assets covered by other IASs

• Those held for sale in the ordinary course of

business (inventories/ construction contracts)
• Deferred tax assets
• Leases
• Those arising from employee benefits
• Goodwill arising in business combination

4
 Definition of intangible asset
• 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

5
Examples
• Scientific or technical knowledge, the design or
implementation of new processes or systems,
licenses, intellectual property, market
knowledge, trademarks (including brand names
and publishing titles).
• Includes computer software, patents, copyrights,
motion picture films, customer lists, mortgage
servicing rights, fishing licenses, import quotas,
franchises, customer or supplier relationships,
customer loyalty, market share, marketing rights.

6
Intangible Assets

• Recognize if , and only if:

• Future economic benefits
• Cost an be reliably measured
• Initial measurement
• At cost

7
Intangible Assets
• Internally generated goodwill
• Not to be brought to account
• Research expenditure
• Recognize as expense when incurred
• Development expenditure
• Recognize intangible asset if…..

8
Criteria for capitalizing development
expenditure.
• Be able to demonstrate:
• Technical feasibility
• Intention to complete and use or sell
• Ability to use or sell
• Ability to generate probable economic benefits
• Availability of adequate technical, financial and
other resources to complete development and to use
or sell
• Ability to measure attributable expenditure reliably
during development

9
Intangible Assets

• Internally generated brands, mastheads,

publishing titles, customer lists and similar items
should not be recognized as intangible assets

10
Intangible Assets

Expenditure previously expensed not to be

recognized as part of an intangible asset
subsequently

11
Examples of activities that typically
would be included in research
Activities typically included in research:
• Laboratory research aimed at discovery of
new knowledge
• Searching for applications of new research
findings or other knowledge
• Conceptual formulation and design of
possible product or process alternatives

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Examples of activities that typically
would be included in development
Activities typically included in development:
• Testing in search for, or evaluation of,
product or process alternative.
• Design, construction, and testing of pre-
production prototypes and models
• Design of tools, jigs, moulds, and dies
involving new technology.

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Examples of activities that typically would
not be considered research or development

Activities excluded from research and development

• Engineering follow-through in an early phase of
commercial production
• Quality control during commercial production,
including routine testing of products
• Trouble-shooting in connection with breakdowns
during commercial production
• Routine or periodic alterations to existing products,
production lines,

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Continued- Example…
• Manufacturing processes and other ongoing operations,
even though such alterations may represent
improvements.
• Adaptation of an existing capability to a particular
requirement ot customer’s needs as part of a continuing
commercial activity.
• Routine design of tools, jigs, moulds, and dies
• Activity, including design and construction engineering,
related to construction, relocation, rearrangement or
start-up of facilities or equipment other than facilities or
equipment whose sole use is for a particular research
and development project.

15
Cost of internally generated
intangible asset
The cost of an internally generated intangible
is the total expenditure incurred from the
date when the intangible asset first meets
the recognition criteria. Costs that have
been recognized as expenses prior to the
criteria being met, should not be
retrospectively recognized as part of the
cost of an intangible asset at a later date.

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Capitalization of omputer
Software Cost
The main rules are:
• All costs incurred to establish the
technological feasibility of a computer
software product to be marketed or leased
should be expensed when incurred.
• Costs of producing product masters incurred
subsequent to establishing technological
feasibility shall be capitalized. These costs
include coding and testing subsequent to
establishing technological feasibility.

17
Recognition of an expense
Essentially, all expenditure relate to an intangible
which does not meet the criteria for recognition
either as an identifiable intangible asset or as
goodwill arising on an acquisition should be
expensed as incurred. Prepaid costs for services,
for example advertising or, marketing costs for
campaigns that have been prepared but not
launched, can still be recognized as prepayment.

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Cost and Recognition
• Cost may only include expenditures past
the date of intangible qualification – not
before.
• Costs must be directly distributed or
reasonably allocated, related to creating,
producing, or preparing the asset for use.
• Previously expensed and pre-qualification
expenditures cannot be capitalized.

19
Measurement after initial recognition

• Benchmark
• Cost less accumulated amortization and any
impairment losses
• Allowed alternative
• Fair values less accumulated amortization and an
impairment losses

20
Intangible Assets
• Fair values
• Determine by reference to an active market
• To be kept up to date
• To be applied to all assets in class (unless no
active market)
• If no active market
• Carry at cost less accumulated amortization and
impairment losses

21
Intangible Assets
• Amortization period
• Best estimates of useful life
• Rebuttable presumption
• Not greater than 20 years

• Legal rights for finite period

• Use that period unless
• Renewable and renewal virtually certain

22
Factors to Consider in Estimating
the Life of an Intangible Asset
The following factors should be considered
in estimating the life of an intangible
asset:
• Legal, regulatory, or contractual provisions that
may limit the maximum useful life.
• Provisions for renewal or extension that may alter
a specified limit on useful life.
• Effects of obsolescence, demand, and other
economic factors that may reduce useful life.

23
Amortization method

• To reflect pattern of benefits

• Straight-line if pattern not reliably
determinable
• Expense amortization (unless to be
capitalized under another IAS)

24
Continued-Factors to…
• Useful life that may parallel the service
life expectancies of individual or groups
of employees.
• Expected actions of competitors and
others that may restrict present
competitive advantages.
• An intangible asset that may be a
composite of many individual factors with
varying effective useful lives.

25
Amortization of Capitalized
Software Costs
The annual amortization amount is
computed on a product-by-product basis
and must be the greater of:
• The ratio of current period gross revenues from
the product to total current and anticipated gross
revenues from the product over its remaining
estimated economic life.
• The amount determined by the straight-line
method of amortization over the remaining
estimated economic life of the product.

26
Residual value

• Assume to be zero unless

• third party committed to buy, or
• active market exists and will continue to exist for
asset at end of useful life

27
Review of amortization period/method

• Each financial year

• Changes to treated as change in
accounting estimates under IAS 8
• Adjust amortization in current and future
periods

28
Impairment losses

In addition to IAS 36 requirements, review

annually, even if no indications of
impairment exist, when
• asset not yet available for use and
• amortization period is to exceed 20 years

29
Disposals/retirements

As for other assets

30
Disclosures

• Distinguish between internally generated

and other intangible assets
• Extensive, especially if allowed alternative
treatment followed

31
Transitional provisions

Complex table

32
IAS 38 Intangible Assets

Effective periods beginning or after

1 July 1999

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