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and knowledge will lead to increased economic benefits flowing to it, it has insufficient control over them, since they can usually leave at short notice. Without the protection of a legal right,
the entity has insufficient control over the expected future economic benefits from customer relationships to meet the definition of an intangible asset. However, it is possible for an entity
to sell part of a customer list, but such a sale is not a business combination. The ability to exchange, for example, a customer relationship is evidence that the entity has control over
the future economic benefits flowing from that relationship, and therefore meets the definition of an intangible asset.
Future economic benefits flowing from an intangible asset may arise from increased revenue, but may also arise from the reduction of costs as a result of, for example, a legal right to use a
new technology.
5 Initial Recognition and Measurement
Before an intangible asset can be recognised in the financial statements, not only does it need to meet the definition discussed above but it also needs to meet certain recognition
criteria.
The recognition criteria are that: [IAS 38.21] it is probable that future economic benefits from the asset will flow to the entity; and
the cost of the asset can be measured reliably. IAS 38 provides examples of where expenditure is incurred to provide future economic
benefits to the entity, but where no intangible asset should be recognised because the relevant expenditure cannot be measured reliably. Such expenditure should instead be
recognised as an expense. Examples include expenditure on start-up activities, staff training costs even where this is directly related to a new asset, advertising and promotional
activities, and expenditure on relocating an activity. [IAS 38.69]
5.1 Separately acquired intangible assets
In most cases separately acquired intangible assets, for example brands, licences, computer software and patents, meet the above recognition criteria.
An intangible asset should be initially recognised at its cost. Cost includes the net amount paid for the asset after taxes, trade discounts and other directly attributable costs. Other
directly attributable costs might include, for example, professional fees, or costs incurred to test the functionality of the asset. Such costs do not include the cost of incorporating the new
asset into the existing business, or general administrative and overhead costs.
The requirements for the recognition and timing of costs capitalised as part of the cost of the intangible asset are similar to those set out in IAS 16. Capitalisation of costs should cease
when the asset is ready for use even if the asset has not yet been put into use, or is operating at below expected levels.
Illustration 1
An entity acquires new technology that will revolutionise its current manufacturing process. The costs are set out below:
CU Original cost of the new technology
1,000,000 Discount provided
100,000 Staff training incurred in operating the new process
50,000
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Testing of the new manufacturing process 10,000
Losses incurred whilst other parts of the plant stood idle 20,000
The cost that should be capitalised as part of the intangible asset is: CU
Cost 1,000,000
Less discount 100,000
Plus testing of process 10,000
5.2 Exchanges of assets
Where one non-monetary asset is exchanged for another, the intangible asset acquired is normally measured at its fair value. Where it is not possible to fair-value the asset acquired,
for example where the fair value is not reliably measurable, then it should be recognised at the carrying amount of the intangible asset given up.
5.3 Intangible assets acquired as part of a business combination
The cost of an intangible asset acquired as part of a business combination should be assessed at its fair value at the acquisition date. Fair value is defined as ‘the amount for
which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction’.
[IAS 38.8]
Fair value may be observable from an active market or recent similar transactions. Other methods may also be used, but if no means are available of ascertaining its fair value reliably,
then the asset does not meet the recognition criteria. In such circumstances no separate intangible asset would be recognised. However, the carrying amount of goodwill would
increase.
If an intangible asset acquired in a business combination is separable or arises from legal rights, sufficient information exists to measure reliably its fair value.
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6 Internally Generated Intangible Assets
Internally generated goodwill should not be recognised as an asset. [IAS 38.48] The key difficulties in deciding whether an internally generated asset should be recognised
are pinpointing exactly when it comes into existence and measuring its costs reliably. It is difficult to distinguish the costs of generating an intangible asset from those of maintaining or
enhancing the day-to-day operations of the business.
In order to assist in defining an internally generated asset, its evolution is thought of in terms of a research phase and a development phase. These phases relate to all intangible assets
and are not limited to the area of research and development expenditure.
6.1 The research phase
All expenditure identified as arising during the research phase should be recognised as an expense as it is incurred. An intangible asset should not be recognised during the research
phase. [IAS 38.54]
During this phase the probability that future economic benefits will be generated for the entity is too low.
Examples of activities within the research phase include: i
the search for alternative materials, devices, products, processes, systems or services; and
ii the formulation, design, evaluation and final selection of possible alternatives for
new or improved materials, devices, products, processes, systems or services.
6.2 The development phase
During the development phase it may be possible to identify an intangible asset which should be recognised. The development phase of a project is further advanced than the research
phase; it is the next stage and therefore the probability of determining whether economic benefits will be generated is greater. The development phase will typically see the design and
development of a new product, tool, process or system.
To be recognised as an intangible asset arising from development, or the development phase, a number of stringent conditions should be satisfied. The characteristics that should
be demonstrated if an intangible asset is to be recognised are: [IAS 38.57]
1. the technical feasibility to complete the asset, and the intention and ability to use or
sell it these requirements relate to the completion of the process to be able to obtain future economic benefits;
2. the means by which the probable future economic benefits will be generated and
the availability of the resources to complete the development this relates to both the definition of an asset and the recognition criteria; and
3. the ability to measure the development expenditure reliably to meet the recognition
criteria. All three characteristics should be present. The second of these criteria specifically requires
that the entity can demonstrate the existence of a market for the output of the intangible asset or, if it is to be used internally, the usefulness of the intangible asset.
IAS 38 explicitly states that internally generated brands, mastheads, publishing titles, customer lists and similar items should not be recognised as intangible assets. Such items
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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,
