IAS 38 establishes the accounting requirements for intangible assets. An intangible asset must be identifiable, controlled by the entity through custody or legal rights, and expected to generate future economic benefits. Intangible assets are initially measured at cost and can subsequently be measured either at cost or using the revaluation model. Research costs are expensed as incurred while development costs meeting certain criteria are recognized as intangible assets. Goodwill arising from a business combination is recognized as an asset at cost while internally generated goodwill is not recognized.

1. IAS 38 – Intangible
Assets

2. Intangible Assets

3. Objective
The objective of IAS 38 is to prescribe the accounting treatment for intangible
assets that are not dealt with specifically in another IFRS. The Standard requires
an entity to recognise an intangible asset if, and only if, certain criteria are met.
The Standard also specifies how to measure the carrying amount of intangible
assets and requires certain disclosures regarding intangible assets. [IAS 38.1]

4. Scope
IAS 38 applies to all intangible assets other than: [IAS 38.2-3]
• financial assets (see IAS 32 Financial Instruments: Presentation)
• exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources)
• expenditure on the development and extraction of minerals, oil, natural gas, and similar resources
• intangible assets arising from insurance contracts issued by insurance companies
• intangible assets covered by another IFRS, such as intangibles held for sale (IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations), deferred tax assets (IAS 12 Income Taxes), lease assets
(IAS 17 Leases), assets arising from employee benefits (IAS 19 Employee Benefits (2011)), and
goodwill (IFRS 3 Business Combinations).

5. Definition
An intangible asset is an identifiable non-monetary asset without physical
substance' (IAS 38, para 8)
Intangible assets include items such as:
licences and quotas
intellectual property, e.g. patents and copyrights
brand names
trademarks

6. Requirements
It must fall into one of the following two categories:
1. It is separable – the asset can be bought or sold separately from the rest
of the business
2. It arises from legal/contractual rights – this will arise as part of purchasing
an entire company. This will be looked at further in the consolidated
financial statements chapters.

7. Recognition
To be recognised in the financial statements, an intangible asset must meet
the definition of an intangible asset, and
meet the recognition criteria' of the framework (IAS 38, para 18)
– it is probable that future economic benefits attributable to the asset
will flow to the entity
– the cost of the asset can be measured reliably.
If these criteria are met, the asset should be initially recognised at cost.

8. Purchased Intangible Assets
If an intangible asset is purchased separately (such as a licence, patent, brand
name), it should be recognised initially at cost.

9. Measurement After Initial Recognition
There is a choice between:
the cost model
the revaluation model.

10. Cost Model
1. The intangible asset should be carried at cost less amortisation and any impairment losses.
2. This model is more commonly used in practice
.
Amortisation works the same as depreciation. The intangible asset is amortised over the useful life, with the
annual expense being shown in the statement of profit or loss each year.
An intangible asset with a finite useful life must be amortised over that life, normally using the straight-line
method with a zero residual value.
An intangible asset with an indefinite useful life:
should not be amortised
should be tested for impairment annually, and more often if there is an
actual indication of possible impairment.

11. Revaluation Model
1. The intangible asset may be revalued to a carrying amount of fair value less subsequent amortisation and
impairment losses.
2.Fair value should be determined by reference to an active market.
An active market is a market in which transactions for the asset take place with sufficient frequency and volume
to provide pricing information on an ongoing basis.
IAS 38 states that active markets for intangible assets are rare, and specifically prohibits the revaluation of
patents, brand names, trademarks and publishing rights.
As a guide, indicators of an active market would include:
the items traded within the market are homogeneous (identical)
prices are available to the public.
Most intangible assets have value because of their uniqueness,and are therefore unlikely to be homogeneous.
Certain licences may fit this model and could possibly be revalued, but most other intangible assets will not.

12. Illustration 1: How should the following intangible
assets be treated in the
financial statements?
• A publishing title acquired as part of a subsidiary company.
• A licence purchased in order to market a new product.

13. Goodwill
The nature of goodwill
Goodwill is the difference between the value of a business as a whole and the aggregate of the fair values of its separable net assets.
Separable net assets are those assets and liabilities which can be identified and sold off separately without necessarily disposing of the
business as a whole. They include identifiable intangible assets such as patents, licences and trademarks.
Fair value is defined in IFRS 13 as ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date’ (IFRS 13 Appendix A) (i.e. an exit price).
Goodwill may exist because of any combination of a number of possible factors:
reputation for quality or service
technical expertise
possession of favourable contracts
good management and staff.

14. Purchased & Non-Purchased Goodwill
Purchased goodwill:
arises when one business acquires another as a going concern
includes goodwill arising on the consolidation of a subsidiary
will be recognised in the financial statements as its value at a
particular point in time is certain.
Non-purchased goodwill:
is also known as inherent goodwill
has no identifiable value
is not recognised in the financial statements.

15. Accounting for Non-Purchased Goodwill
Non-purchased goodwill should not be recognised in the financial statements. It certainly
exists but fails to satisfy the recognition criteria in the Framework, since it is not capable of
being measured reliably.

16. R & D
Definitions:
'Research is original and planned investigation undertaken with the prospect of
gaining new scientific knowledge and understanding’ (IAS 38, para 8).
'Development is 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, para 8).

17. R & D Accounting Treatment
Research expenditure: write off as incurred to the statement of profit or loss.
Development expenditure: recognise as an intangible asset if, and only if, an entity can
demonstrate all of the following:
Probable flow of economic benefit from the asset, whether through sale or internal cost savings.
Intention to complete the intangible asset and use or sell it
Reliable measure of development cost
Adequate resources to complete the project
Technical feasibility of completing the intangible asset so that it will be available for use or sale
Expected to be profitable, i.e. the costs of the project will be exceeded by the benefits
generated.

18. Development Expenditure C’ont
It is only expenditure incurred after the recognition criteria have been
met which should be recognised as an asset. Development expenditure
recognised as an expense in profit or loss cannot subsequently be
reinstated as an asset.
If an item of plant is used in the development process, the depreciation on
the plant is added to the development costs in intangible assets during the
period that the project meets the development criteria. That is because the
economic benefit gained from the plant in this period is only realised when
the development project is complete and production is underway. It will be
taken to the statement of profit or loss as amortisation within the
amortisation of the development costs.

19. Amortization
Development expenditure should be amortised over its useful life as soon as commercial
production begins.

20. Disclosure
For each class of intangible asset, disclose: [IAS 38.118 and 38.122]
• useful life or amortisation rate
• amortisation method
• gross carrying amount
• accumulated amortisation and impairment losses
• line items in the income statement in which amortisation is included
• reconciliation of the carrying amount at the beginning and the end of the period showing:
• additions (business combinations separately)
• assets held for sale
• retirements and other disposals
• revaluations
• impairments
• reversals of impairments
• amortisation
• foreign exchange differences
• other changes
• basis for determining that an intangible has an indefinite life
• description and carrying amount of individually material intangible assets
• certain special disclosures about intangible assets acquired by way of
government grants
• information about intangible assets whose title is restricted
• contractual commitments to acquire intangible assets
• Additional disclosures are required about:
• intangible assets carried at revalued amounts [IAS 38.124]
• the amount of research and development expenditure recognised as an
expense in the current period [IAS 38.126]

21. Test Your Understanding 1
An entity has incurred the following expenditure during the current year:
(a) $100,000 spent on the initial design work of a new product – it is anticipated that this
design will be taken forward over the next two-year period to be developed and tested
with a view to production in three years' time.
(b) $500,000 spent on the testing of a new production system which has been designed
internally and which will be in operation during the following accounting year. This new
system should reduce the costs of production by 20%.
How should each of these costs be treated in the financial statements of the
entity?

22. Test Your Understanding 2
An entity has incurred the following expenditure during the current year:
(i) A brand name relating to a specific range of chocolate bars, purchased for $200,000.
By the year end, a brand specialist had valued this at $250,000.
(ii) $500,000 spent on developing a new line of confectionery, including $150,000 spent
on researching the product before management gave approval to fully fund the project.
(iii) Training costs for staff to use a new manufacturing process. The total training costs
amounted to $100,000 and staff are expected to remain for an average of 5 years.
Explain the accounting treatment for the above issues.

23. Illustration 2 – Amortisation of
development expenditure
Improve has deferred development expenditure of $600,000 relating to the development of
New Miracle Brand X. It is expected that the demand for the product will stay at a high level
for the next three years. Annual sales of 400,000, 300,000 and 200,000 units respectively
are expected over this period. Brand X sells for $10.
How should the development expenditure be amortised?

24. IA 38 Summary