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1. Chapter 8: Intangible assets
Learning objective:
At the completion of studying this chapter, you will be able to:
 Define the criteria for the initial recognition and measurement of
intangible assets
 Explain the subsequent accounting treatment of intangible assets
 Apply the requirements of IAS to internally generated assets other than
goodwill
 Identify the disclosure requirements for intangible assets
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2. 1. OBJECTIVE OF IAS 38
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 The objective of IAS 38 is:
 To prescribe the accounting treatment for
recognising, measuring and disclosing all intangible
assets that are not dealt with specifically in another
IFRS.

3. 2. THE SCOPE OF IAS 38
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 IAS 38 does not apply to accounting for:
 Intangible assets that are within the scope of another
standard;
 Financial assets, as defined in IAS 32 – Financial
Instruments: Presentation;
 The recognition and measurement of exploration and
evaluation assets within the scope of IFRS 6 –
Exploration for and Evaluation of Mineral Resources;
and
 Expenditure on the development and extraction of,
minerals, oil, natural gas and similar non-regenerative
resources

4. Term Definition
Asset
Control
Amortization
 An asset is a resource: [IAS 38.8]
a) Controlled by an entity as a result of past
events; and
b) From which future economic benefits are
expected to flow to the entity
• The power to obtain the future economic
benefits flowing from the underlying resource
and to restrict the access of others to those
benefits
• The systematic allocation of the depreciable
amount of an intangible asset over its useful life
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3. Definition of Terms

5. Terms Definition
Research
Development
 Original and planned investigation
undertaken with the prospect of gaining
new scientific or technical knowledge and
understanding. [IAS 38.8].
 The application of research findings or
other knowledge to a plan or design for
the production of new or substantially
improved materials, devices, products,
processes, systems or services before the
start of commercial production or use.
[IAS 38.8].
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Definition of terms Cont…

6. Terms Definition
Goodwill is an intangible asset associated with the purchase
of one company by another. Specifically, goodwill
is recorded in a situation in which the purchase
price is higher than the sum of the fair value of all
identifiable tangible and intangible assets
purchased in the acquisition and the liabilities
assumed in the process.
Includes the value of a company’s brand name,
solid customer base, good customer relations,
good employee relations, and patents or
proprietary technology represent some example of
good will
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7. What is an intangible asset?
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Definition
Intangible Assets:- are an 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 purpose.
 Some of the more common ones you may see on a company’s
statement of financial position will include:
✓ Brands, computer software, copyright ownerships, licenses
& trademarks

8. 4.2 The essential characteristics of intangible assets are
that they should be
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a) Identifiable
• Be capable of being detached from the company and sold or
separable from other assets, transferred, licensed, rented or
exchanged, individually or together with a related asset or
liability
• Arise from contractual or other legal rights
b) Controlled by the entity
• The power to obtain the future economic benefits generated by
the resource and the ability to restrict the access of others to
those benefits
c) Capable of Generating economic benefits for the entity
d) Lack physical substance

9. 4.3 Whether to record an asset as tangible or intangible
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 The intangible part is more likely to be an asset in its own right if it was
developed separately or if it can be used independently of the item of
property, plant and equipment of which it apparently forms part
Software that is embedded in computer-controlled equipment that
cannot operate without it is an integral part of the related hardware and
is treated as property, plant and equipment; [IAS 38.4]
Application software that is being used on a computer is treated as an
intangible asset because it is generally easily replaced and is not an
integral part of the related hardware, whereas the operating system
normally is integral to the computer and is included in property, plant
and equipment; [IAS 38.4]
A database that is stored digitally is considered to be an intangible asset
where the value of the physical medium is wholly insignificant
compared to that of the data collection;

10. 5. Recognition and Measurement
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5.1 Recognition
5.1.1 An item that meets the definition of an
intangible asset (see 4.1 above) should only be
recognised if, at the time of initial recognition
of the expenditure:
a) It is probable that the expected future
economic benefits that are attributable to
the asset will flow to the entity; and
b) The cost of the asset can be measured
reliably.

11. 5.1.2 Recognition of Internally generated
Intangible Assets
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 IAS 38 explicitly prohibits the recognition of internally
generated goodwill as an asset because internally generated
goodwill is neither separable nor does it arise from
contractual or legal rights. As such, it is not an identifiable
resource controlled by the entity that can be measured
reliably at cost
• On the other hand, the other issue in here is whether all
cost incurred (i.e. cost of research and Development cost)
for internally generated Intangible Assets should be
capitalized or not. The first question that will be raised here
is, does such type of cost fulfill the recognition criteria for
intangible asset.

12. Research cost Development cost
Research:- is originally and
planned investigation
undertaken with prospect of
gaining new scientific or
technical knowledge and
understanding
For example: if a company
incurred 250,000.00 Birr to
investigate whether a particular
substance will make their shoe
product durable or not
Development:- is application
of research findings or other
knowledge to a plan or design
for the production of new
substantially improved
materials devices products,
processes, systems or services
prior to the commencement of
commercial: Ex: if a company
incurred Birr 300,000.00 that will
make their shoe product durable,
such type cost should be capitalized
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5.1.3The Difference Between Research
& Development cost

13. Research & Development cost cont…
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 Any costs incurred by the company
during the research stage – they’re
written straight off to profit or loss
as and when they’re incurred.
 Examples of research activities will include:-
a) Activities aimed at obtaining new
knowledge
b) The search for, and, evaluation and
final selection of, application of
research findings or other knowledge
c) The search for alternatives for
materials, devices, products,
processes, system or services
d) The formulation, design, evaluation
and final selection of possible
alternatives for new improved
materials, devices, products,
processes, systems services.
 Any costs incurred by the company
during the development stage will
be capitalized examples of
development activities:
a) The design, construction and testing
of pre-production or pre-use
prototypes and models;
b) The design of tools, jigs, moulds and
dies involving new technology;
c) The design, construction and
operation of a pilot plant that is not of
a scale economically feasible for
commercial production; and
d) The design, construction and testing
of a chosen alternative for new or
improved materials, devices,
products, processes, systems or
services. [IAS 38.59].

14. 5.1.4 Condition to be met before capitalising
Development cost
• You can only recognize development expenditure as an
intangible asset on the statement of financial position if, and
only if, the following condition met before capitalization:
 Technical feasibility of completing the intangible asset so
that it will be available for use or for resale
 Technical feasibility of completing the intangible asset or
sell it
 An analysis of whether the intangible asset will generate
future economic benefits.
 Has adequate technical, financial and other resources on
hand in order to complete the development and to use or
sell the intangible asset
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15. 5.2 Measurement of Intangible Asset
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5.2.1 Initial Measurement
5.2.1.1 General
On initial recognition an intangible asset should
be measured at cost. The standard defines this
as the amount of cash or cash equivalents paid
or the fair value of other consideration given to
acquire an asset at the time of its acquisition or
construction
The cost of a separately acquired intangible
asset can usually be measured reliably,
especially in the case of cash or other monetary
purchase considerations.

16. 5.2.1.2 The cost of a separately acquired intangible asset
comprises:
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• Cost for separately acquired Intangible asset includes:
 Its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade discounts
and rebates; and
 Any directly attributable costs of preparing the intangible
asset for its intended use. (Directly attributable costs are
those costs directly incurred in bringing the intangible
asset to its present location and condition.)
 Costs of testing whether the asset is functioning properly.

17. 5.2.1.3 when Capitalisation of expenditure starts and
ceases:
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 The cost of an internally generated intangible asset is the sum of the
expenditure incurred from the date when the intangible asset first
meets the recognition criteria of the standard, [IAS 38.65] and meets
the detailed conditions for recognition of development phase costs as
an asset (see 5.1.4 above).
 Costs incurred before these criteria are met are expensed [IAS
38.68] and cannot be reinstated retrospectively, [IAS 38.65],
because IAS 38 does not permit recognition of past expenses as an
intangible asset at a later date.
 Capitalisation of expenditure ceases when the asset is in the condition
necessary for it to be capable of operating in the manner intended by
management. This may will be before the date on which it is brought
into use or after testing at each site completed.

18. Example: If our entity incurs the following cost for
purchase of New IT system:
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 For purchase of new software system Birr 60,000,000.00
 For the New server machine purchase Birr 15,000,000.00
 Payment made for system license Birr 1,000,000.00
 For installing the IT new system at various region Birr 8,000,000.00
Total Birr 84,000,000.00
Accounting Action
Dr Cr
Intangible Asset A/C
(purchase of new application software) 60,000,000.00
PPE - IT Equipment (purchase of server
& its hardware cost) 15,000,000.00
Intangible Asset A/C (payment made for license) 1,000.000.00
Intangible Asset A/C system Installation cost 8,000,000.00
Cash at bank/material etc., 84,000,000.00

19. 5.2.1.4 Costs to be considered as Expense
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 Costs of introducing a new product or service, including costs of
advertising and promotional activities;
 Costs of conducting business in a new location or with a new class
of customer, including costs of staff training;
 Administration and other general overhead costs;
 Costs incurred in using or redeploying an intangible asset;
 Costs incurred while an asset capable of operating in the manner
intended by management has yet to be brought into use; and
 Initial operating losses, such as those incurred while demand for
the asset’s output builds up.
 Accordingly, start-up costs, training costs, advertising and
promotional activities, and relocation or reorganization costs
should be expensed

20. 5.2.2 Cost Subsequent To Acquisition
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 In general, additional expenditures incurred
subsequent to the Intangible asset acquisition,
that will increase their service life beyond they
were originally expected or enhance their
economic benefit or efficiency will be capitalized

21. 5.2.3 Subsequent Measurement
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 For subsequent measurement of Intangible assets, we can
use either:
 Cost Mode
 Revaluation model
5.2.3.1 The cost model
 Carry the non-current intangible asset in the statement
of financial position at cost less accumulated
amortization (writing off the cost of an intangible non-
current asset over its estimated useful life) and any
accumulated impairment losses (where the carrying
value of an asset exceeds its recoverable amount). The
cost model is the one usually used in practice.

22. Subsequent measurement cont.
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5.2.3.2 The revaluation model
 Carry the intangible asset at its fair value at each reporting date,
less any subsequent amortization and impairment losses. Credit
any increases in the fair value of the intangible asset directly to
a revaluation surplus in the equity section (shareholders’ funds)
of the statement of financial position, except to the extent that
the increase reverses a loss previously recognized in profit or
loss.
 You can only use the revaluation model if you can determine
the fair value by reference to an active market (one where
similar goods/services are traded and from which you get
reliable prices). IAS 38 recognizes that such active markets are
uncommon for intangible non-current assets.

23. Amortization and Useful Life
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Amortization
a) General
Amortization: is writing off the cost of an
intangible non-current asset over its estimated
useful life
Amortization methods: Since, our intangible
asset usually related with new system
implementation and such type of asset
consumption trend not that much vary through
their usage life years it will be fair to use straight
line method of amortization.

24. Amortization continued
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b) Accounting Action for Intangible Assets
 When the Intangible asset start giving service, all cost incurred for
such type of asset will be recorded in the following way
Dr Cr
Intangible Asset A/C XXX
Cash at bank/material …etc, XXX
 At the end of each accounting period, we will take the following
accounting action to recognize depreciation expense & Impairment
loss
Dr Cr
Intangible asset—amortization Expense XXX
Impairment Loss Intangible asset XXX
Intangible asset—Accumulated Amortization XXX
Intangible asset—Accumulated Impairment XXX

25. 5.2.3.3.2 Useful life
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 Intangible assets can have an indefinite or a finite
life.
a) Indefinite life:
• Based on an analysis of all relevant factors, you can’t see a
foreseeable limit to the period over which the intangible
asset is expected to generate cash flows for the organization.
In this case you don’t amortize the intangible asset, but
instead you test the intangible asset annually for impairment
( for instance goodwill under IFRS 3). Where there’s
evidence that the intangible asset is impaired, you reduce it
to the intangible asset’s recoverable amount.
 For example, can we estimate life year for Coca Cola brand

26. Useful life cont…
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b) Finite life:
• You amortize the asset over its estimated useful life. You
calculate the depreciable amount (the cost less its
estimated residual value) and you start to amortize the
balance when the intangible asset is first available for
use. Normally, the residual value of an intangible asset
is assumed to be zero unless you’ve got a commitment
from a third party to buy the intangible asset, or there’s
an active market from which a residual value can be
obtained and it’s probable that such an active market
will exist at the end of the asset’s useful life.

27. The end of Chapter 8
Thank you for Attendance
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