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cannot be identified separately from the cost of developing the business as a whole. Instead such items are seen as being component parts of internally generated goodwill, the
recognition of which is prohibited. [IAS 38.63]
6.3 The cost of internally generated intangible assets
If an internally generated intangible asset is recognised, it should be measured at its cost. This is the directly attributable cost necessary to create, produce, and prepare the asset for its
intended use. Such costs include, among other things:
materials and services consumed; employment costs of those directly engaged in generating the asset; and
legal, patent or licence registration fees. It is important to note that it is only expenditure incurred after the project has entered its
development phase that can be included as part of the cost. It is not possible at the time of recognition to go back to recognise as an asset expenditure incurred during the research
phase which has already been recognised as an expense in profit or loss.
Illustration 2
An entity is developing a new pharmaceutical ingredient. In the previous year the entity recognised CU1,000 as an expense. During the current year expenditure incurred was
CU1,200. Of this CU800 was incurred before the entity was able to demonstrate that the pharmaceutical ingredient met the criteria for recognition as an intangible asset.
The pharmaceutical ingredient is recognised as an intangible asset at a cost of CU400, being the expenditure incurred since the recognition criteria were met. The CU1,800 incurred before
this should not form part of the cost of the intangible asset recognised in the statement of financial position.
6.4 Web site development costs
A web site has the characteristics of both tangible and intangible assets. An interpretation was issued SIC 32 – Intangible assets – web site costs to provide guidance on how such
costs should be treated to ensure that they are treated in a consistent manner.
SIC 32 is consistent with IAS 38 but provides the link between the standard and the specific characteristics of the development of a web site. SIC 32 makes it explicit that a web site that
has been developed for the purposes of promoting and advertising an entity’s products and services does not meet the requirement in IAS 38 to generate probable future benefits, and
therefore costs incurred in its development should be expensed as incurred.
6.5 Emission rights
IFRIC 3 Emission rights was published in December 2004 to provide guidance to entities that participate in government schemes aimed at reducing greenhouse gas emissions. Several
national governments have issued such schemes to encourage the reduction in greenhouse gas emissions following the ratification of the Kyoto Agreement which aims to reduce air
pollution.
In summary, the Interpretation sets out that any rights under such schemes should be treated as intangible assets in accordance with IAS 38. If allowances are issued by a government
body for less than their fair value, this difference will be recognised as a government grant,
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and as emissions are produced a provision should be set up for its obligation to deliver any allowances in accordance with IAS 37 Provisions, contingent liabilities and contingent assets.
However, the Interpretation was rather short-lived, as the European Financial Reporting Advisory Group EFRAG proposed that it should not be endorsed by the European
Commission. After further debate on the future of the Interpretation the IASB agreed to withdraw it in June 2005.
7 Measurement After Initial Recognition
Measurement of intangible assets, following initial recognition, is similar to the measurement of property, plant and equipment in IAS 16.
An entity can choose to follow a cost model, whereby intangible assets are held at their cost less amortisation and impairment, or to use a revaluation model. The revaluation model may,
however, only be used if fair value can be determined by reference to an active market. Such active markets are uncommon in practice, but do exist, for example freely transferable taxi
licences.
Intangible assets with finite useful lives should be amortised over their useful life. [IAS 38.97] Amortisation is a way of charging part of the cost of an intangible asset as an expense in
each period, so that at the end of the asset’s useful life to the entity, the whole of its cost has been charged to profit or loss. At the end of its useful life the intangible asset will be stated at
nil or its residual value.
The residual value of an intangible asset will normally be assumed to be nil unless certain criteria are met. These include where an active market exists for these items and is likely to
exist at the end of the useful life of the asset to the entity, or where there is a commitment by a third party to buy the asset at the end of its useful life. [IAS 38.100]
Amortisation of an intangible asset should commence when the asset is ready and available for use within the entity. The amortisation method should reflect the pattern in which the
asset’s future economic benefits are expected to be used by the entity. Amortisation methods mentioned in IAS 38 include the straight-line method, the diminishing balance method and the
unit of production method. If it is not possible to identify the pattern in which the economic benefits
are expected to be utilised by the entity, then the straight-line method should be used.
Where an intangible asset is revalued, subsequent amortisation is based on the revalued amount.
The standard sets out a number of factors that should be considered in determining what the useful life of an intangible asset is. These factors include:
expected usage of the asset by the entity, typical product life cycles for similar assets and dependence on other assets of the entity;
the stability of the industry in which the entity is operating, and the expected actions of competitors; and
the speed of technological change and expected obsolescence. Amortisation should normally be recognised in profit or loss. An entity should review its
amortisation periods and methods, and the residual value of intangible assets in each reporting period.
An intangible asset has a useful life that is indefinite if there is no foreseeable limit to the period over which it is expected to generate benefit for the entity. A conclusion that a useful
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life is indefinite should not depend on planned future expenditure that is expected to increase the performance of the asset.
An intangible asset that has been identified as having an indefinite life should not be amortised. Instead the asset is reviewed annually to assess whether there has been a fall in
its value in accordance with IAS 36 Impairment of assets. [IAS 38.107]
8 Disposals of Intangible Assets
Intangible assets should be removed from the statement of financial position when they are sold, or when no future economic benefits are expected from them. When the intangible asset
is removed from the statement of financial position, a profit or loss should be calculated based on any proceeds received and the current carrying amount of the asset. This gain or loss
should be recognised in profit or loss for the period. [IAS 38.112–113]
Illustration 3
An entity acquires a brand for CU300,000. It estimates that the brand will generate cash flows for the entity over the next 15 years, at which time it is thought that the market will have
increased, and the brand will be diluted in value.
The brand is therefore amortised straight-line over 15 years. Annual amortisation of CU20,000 is charged CU300,000 15 years.
A third party makes an offer to buy the brand for CU250,000 at the end of the fifth year. The carrying amount of the brand is CU200,000 CU300,000 less CU20,000 x 5 years.
The entity accepts the offer and the brand is sold. The carrying amount of the brand is removed from the statement of financial position, the CU250,000 cash is received, and a
profit of CU50,000 the difference between the carrying amount of CU200,000 and the proceeds of CU250,000 is recognised directly in profit or loss for the period.
9 Disclosure
A number of detailed disclosures are required for each class of intangible assets to enable users to determine the mechanisms and factors affecting intangible asset values. If the entity
has recognised internally generated intangible assets, then the disclosure information should be shown separately for these assets. [IAS 38.118]
Disclose: 1. the amortisation rates for intangible assets and the methods used;
2. the identification of the line item in the statement of comprehensive income where amortisation has been charged, and separate disclosure of any impairment losses
incurred with any reversals;
3. a full reconciliation of movements in the carrying amount of intangible assets, for example additions, amortisation, impairment and disposals;
4. net exchange differences that arose on translation; and 5. the aggregate amount of research and development expenditure recognised as an
expense during the period.
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In addition to these disclosures, if an intangible asset has been assessed as having an indefinite life, its carrying amount and the reasons supporting the indefinite life assessment
should be disclosed.
If an individual intangible asset is considered to be significant to the entity’s financial statements, a description of the asset should be provided, along with its carrying amount and,
in the case of an asset with a finite useful life, the remaining amortisation period should be set out.
Disclosure is required where the title of an intangible asset is restricted in some way, or the asset is pledged as security for the entity’s liabilities. If the entity is contractually committed at
the period end to acquiring intangible assets, the amount of this commitment should be disclosed.
For intangible assets that have been revalued, information should be disclosed about the effective date of the last valuation, the methods and assumptions used in calculating fair
value, the current carrying amount for the class of intangibles, and what the carrying amount would have been had the entity continued to use the cost method. A reconciliation of the
revaluation reserve should be set out to the extent that it contains balances in relation to revalued intangible assets.
10 Chapter Review
This chapter has been concerned with key issues relating to intangible assets and how they are recognised and measured in the financial statements.
This chapter has covered: the objectives, scope, definitions and disclosure requirements of IAS 38;
recognition and measurement; the differences between separately acquired including in a business combination
and internally generated intangibles; cost versus revaluation approaches;
disposals of intangibles; and disclosure requirements.
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11 Self Test Questions
Chapter 12
1. Are the following statements true or false, according to IAS38 Intangible
assets? 1
The cost of an asset should include the amount of any cash or cash equivalents paid to acquire the asset.
2 The cost of an asset should include non-cash consideration measured
at fair value. Statement 1
Statement 2
A False
False
B False
True
C
True False
D True
True
2. Are the following statements in relation to development true or false,
according to IAS38 Intangible assets? 1
The products being developed should have already been put into commercial production or use.
2 Development involves the application of research findings.
Statement 1 Statement 2
A False
False
B
False True
C
True False
D True
True
3. According to IAS38 Intangible assets, which TWO of the following criteria are
relevant in determining the useful life of an intangible asset?
A
Obsolescence
B The amortisation period
C
The expected usage of the asset
D
The residual value of the asset
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4. According to IAS38 Intangible assets, amortisation of an intangible asset with
a finite useful life should commence when select one answer
A it is first recognised as an asset
B
it is probable that it will generate future economic benefits
C
it is available for use
D the costs can be identified with reasonable certainty
5. A brand name that was acquired separately should initially be recognised,
according to IAS38 Intangible assets, at select one answer
A recoverable amount
B
either cost or fair value at the choice of the acquirer
C fair value
D
cost
6. According to IAS38 Intangible assets, the recognition criteria for an intangible
asset include which TWO of the following conditions?
A
It must be measured at cost
B Its cost can be measured reliably
C
It is probable that future economic benefits will arise from its use
D It is an integral part of the business
7. Are the following statements are true or false, according to IAS38 Intangible
assets? 1
Intangible assets cannot be treated as having an indefinite useful life. 2
Intangible assets with a finite useful life should be measured at cost and tested annually for impairment.
Statement 1 Statement 2
A False
False
B
False True
C
True False
D True
True
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8. Are the following statements true or false, according to IAS38 Intangible
assets? 1
Expenditure during the research phase of a project may sometimes be capitalised as an intangible asset.
2 Expenditure during the development phase of a project may
sometimes be capitalised as an intangible asset. Statement 1
Statement 2
A False
False
B
False True
C True
False
D
True True
9. Are each of the following factors relevant, according to IAS38 Intangible
assets, in determining the annual amortisation expense on an intangible asset?
1 The cost.
2 The amortisation method.
Factor 1 Factor 2
A
Not relevant Not relevant
B
Not relevant Relevant
C Relevant
Not relevant
D
Relevant Relevant
10. Are the following statements true or false, according to IAS38 Intangible
assets? 1
Intangible assets acquired in a business combination should only be recognised if they have already been recognised by the entity being
acquired.
2 Intangible assets acquired in a business combination should not be
recognised separately from goodwill. Statement 1
Statement 2
A
False False
B
False True
C True
False
D True
True
