Initial recognition INVESTMENT PROPERTY

Chapter 12 - Intangibles Page 146  exploration and evaluation assets which are accounted for under IFRS 6 Exploration for and evaluation of mineral resources. One of the principal distinctions between property, plant and equipment and intangible assets is that while the former have physical substance, the latter do not. The distinction can sometimes be blurred where, for example, an item itself does not have physical substance but is held in or on something that does. Examples of this are computer software held on compact disc, a licence or patent written into a legal document, or a film held on tape. In such cases judgement will be needed to assess whether the item should be accounted for in accordance with IAS 16 Property, plant and equipment or IAS 38. If software forms an integral part of the related hardware, then it will be accounted for as part of the hardware under IAS 16; if, however, it is a piece of independent software, then it should be accounted for under IAS 38. IAS 38 specifically applies to expenditure incurred on activities such as advertising, training, start-up activities, and research and development. The standard also applies to rights under licensing agreements for items such as motion pictures, video recordings, plays, manuscripts, patents and copyrights. An intangible asset should be initially measured at cost. [IAS 38.24] 4 The Definition of Intangible Assets

4.1 Identifiability

The definition of an intangible asset, as set out above, includes the requirement for the asset to be identifiable. The reason for this requirement is to distinguish it from goodwill, which arises on the acquisition of a subsidiary. Goodwill is not identifiable itself since it represents future economic benefits arising from assets not capable of individual identification and separate recognition. For an intangible asset to be determined as identifiable it should either be: [IAS 38.12]  separable; or  arise from contractual or other legal rights. An asset is separable if it can be sold, licensed, or rented to another party on its own, rather than as part of the business. Rights to films, airport landing slots, fishing or milk quotas, taxi licences, patents, copyrights and trademarks are all examples of separable assets and therefore fall within the definition of intangibles. A trading licence which is not transferable to another entity is not separable, but it still is an intangible asset because it arises from legal rights.

4.2 Control

One of the characteristics of an asset is that it is under the control of the entity. Control results in the entity being able to obtain the future economic benefits generated by using an asset and to restrict other parties from obtaining them. This would normally arise where there are legal rights enforceable in a court of law, for example trademarks, copyrights and patents. The existence of legal rights is not, however, an essential element in determining control, although control is more difficult to identify without their presence. Staff is a common example of an asset that is not controlled by the entity and does not therefore meet the definition of an intangible asset. Although the entity expects that staff skills Chapter 12 – Intangibles Page 147 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