Nature of investment properties Scope

Chapter 12 – Intangibles Page 145

Chapter 12 INTANGIBLES

1 Business Context Brand names such as Coca-Cola and Microsoft are in many cases an entity’s most valuable asset, but they are extremely difficult to value when they have been generated internally and over a period of time. Brands are one example of an intangible asset. Internally generated brands that cannot be measured reliably are not recognised in the statement of financial position because of the difficulties that surround their valuation. However, an entity that has acquired, as opposed to internally generated, an equally valuable brand will recognise it, since a fair value can be attributed to it. As the acquirer has paid a price to acquire this brand, that price provides a reliable measurement. This inconsistent treatment has in the past led to some companies writing off acquired brands i.e. removing the asset from the statement of financial position and recognising this amount in profit or loss. 2 Chapter Objectives This chapter deals with IAS 38 Intangible assets, which sets out the reporting requirements relating to intangible assets. On completion of this chapter you should be able to:  demonstrate a knowledge of the objectives and scope of IAS 38;  demonstrate a knowledge of the important terminology and definitions which relate to intangible assets;  demonstrate an understanding of how to identify, measure, disclose and account for the disposal of intangible assets; and  apply IAS 38 knowledge and understanding in particular circumstances through basic calculations. 3 Objectives, Scope and Definitions of IAS 38 An intangible asset is defined as an identifiable non-monetary asset that does not have physical substance. Non-monetary assets are those which are not ‘monetary assets’ monetary assets are defined as items whose value is fixed in money terms, for example, a receivable or cash. [IAS 38.8] The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in other standards. It requires an entity to recognise an intangible asset if certain criteria are met. It also specifies how to measure the carrying amount of intangible assets and the nature of the disclosures required. Examples of assets outside the scope of IAS 38 include: [IAS 38.2]  goodwill which is accounted for under IFRS 3 Business combinations;  financial assets as defined in IAS 32 Financial instruments: Presentation; and 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