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1. FINANCIAL REPORTING
Topic 5: IAS 38 INTANGIBLE ASSETS.
CPA Lyimo

2. Definitions
Amortization: is the systematic allocation of the depreciable amount of
an intangible asset over its useful life.
Depreciable amount: is the cost of an asset, or other amount
substituted for cost, less its residual value.
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.
An intangible asset: is an identifiable non-monetary asset without
physical substance.
Monetary assets: are money held and assets to be received in fixed or
determinable amounts of money.
Research: is original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and
understanding.
2

3. Answer
• In accordance with IAS 38, expenditure on intangible assets must
be expensed unless it meets the recognition criteria for
capitalization. These criteria require the demonstration that future
benefits will arise from the incurred costs. It would be difficult to
prove that this is the case in relation to training costs and IAS 38
specifically states that training costs should always be expensed as
they are incurred and not treated as an intangible asset.
• Hence the treatment adopted by Fazal is not correct and the
costs being carried forward must be expensed to the year’s profits.
3

4. Initial recognition and measurement
Criteria for recognition
An intangible asset shall be recognized if, and only if:
• It is probable that the expected future economic benefits that
are attributable to the asset will flow to the entity; and
• The cost of the asset can be measured reliably
Initial measurement.
An intangible asset shall be measured initially at cost. However the
initial recognition and measurement of intangible asset shall
depend on the way in which the intangible asset was generated.

5. Ways in which intangible assets may be generated include:
• Through separate acquisition
• Acquisition as part of a business combination
• Acquisition by way of a government grant
• Exchanges of assets
• Internally generated goodwill.
• Internally generated intangible assets

6. 1. Separate acquisition
– Normally, the price an entity pays to acquire separately an
intangible asset will reflect expectations about the probability that
the expected future economic benefits embodied in the asset will
flow to the entity.
– In addition, the cost of a separately acquired intangible asset can
usually be measured reliably.
2. Acquisition as part of a business combination.
– The asset shall be recognized if an asset acquired in a business
combination is separable or arises from contractual or other legal
rights, sufficient information exists to measure reliably the fair value of
the asset
– An acquiree’s in-process research and development project shall
be recognized when it:
a) meets the definition of an asset; and
b) is identifiable, ie is separable or arises from contractual or other
legal rights.

7. 3. Acquisition by way of a government grant
– In some cases, an intangible asset may be acquired free of charge,
or for nominal consideration, by way of a government grant.
– This may happen when a government transfers or allocates to an
entity intangible assets such as airport landing rights, licences to
operate radio or television stations, import licences or quotas or
rights to access other restricted resources.
– In accordance with IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance, an entity may choose to
recognise both the intangible asset and the grant initially at fair
value.
– If an entity chooses not to recognise the asset initially at fair value,
the entity recognises the asset initially at a nominal amount (the
other treatment permitted by IAS 20) plus any expenditure that is
directly attributable to preparing the asset for its intended use.

8. EXAMPLE 2
Camel won the government contest to be awarded a licence to
operate 3.5G services. Only 4 such licences were available in the
country. Under the terms of the agreement, Camel can operate
3.5G mobile phone services for a period of 10 years from the
commencement of the licence which was 1 July 20X7.
During that period Camel can sell the licence on if it chooses to
another operator meeting certain government criteria, and
sharing any profits made equally with the government. Camel
paid $344m for the licence on 1 July 20X7. Its market value was
estimated at $370m at that date. Due to lower take up than
expected of 3.5G services, the fair value of the licence was
valued at $335m at the company's year end 30 June 20X8, by
Valyou, a professional services firm.
Required
Explain the accounting treatment of licence in the financial
statements as at 30th June 20x8.

9. ANSWER
 The licence is an intangible asset accounted for under IAS
38 Intangible assets. Given that the market value on the date
of acquisition was more than the amount paid by Camel, a
government grant has been given.
 This means that the asset is normally initially recognised at its
market value of $370m, showing the difference between the
market value and amount paid ($26m) as deferred income.
Alternatively the asset can be recognised at its cost of $344m.
 Given that it has a limited rather than indefinite useful life it
will be amortised over the 10 year licence period to a zero
residual value. Any deferred income will be amortised as a
credit to profit or loss over the same period and disclosed
divided between its current and non-current portions in the
statement of financial position

10. Either way the annual effect on profit or loss is a charge of $34.4m
(either $344m/10 or $370m/10 less a credit of $26m/10).
The lower take up of 3.5G services is an impairment indicator and so an
impairment test must be undertaken at the year end. However, after
taking into account amortisation for the period, the net book value of
the asset at the year end is $309.6m ($344m – $34.4m) or $333m
($370m – $37m) if initially measured at fair value due to the grant).
Therefore the asset is not impaired.
The asset cannot be revalued upwards to $335m because IAS 38 requires
an active market to exist for revaluation of intangible assets and,
despite the fact that the licence can be sold, there is no active market
in these four licences due to their nature. An active market is defined as
a market in which transactions for the particular asset take place with
sufficient frequency and volume to provide pricing information on an
ongoing basis. This is not the case as there are only four licences.

11. 4. Exchanges of assets
• One or more intangible assets may be acquired in exchange
for a non monetary asset or a combination of monetary and
nonmonetary assets.
• The cost of such an intangible asset is measured at fair value
unless
a) the exchange transaction lacks commercial substance or
b) the fair value of neither the asset received nor the asset given
up is reliably measurable. If the acquired asset is not
measured at fair value, its cost is measured at the carrying
amount of the asset given up

12. Example 3
A company entered into the following exchange transactions
during the year.
a. Exchanged an office property it owned in Sheffield with one in
Birmingham. The properties were both of similar size, condition and
age. The property in Sheffield had a carrying amount of £4.5m and
an estimated fair value of £7.2m.The Birmingham property had a
similar estimated fair value. Both fair values were reliable.
b. Exchanged a power station it owned in Cardiff (carrying amount
£15m, fair value £20m) with one in Lancashire. The Cardiff power
station is coal fired produces 100MW and has approximately 10
years remaining useful life. The Lancashire power station is gas fired,
produces 60MW and has 20-year remaining life.
c. Exchanged a broadcasting licence to broadcast radio in Estonia
(carrying amount £4.6m) with one to broadcast in Latvia. It was not
possible to determine the fair value of either licence

13. d. Exchanged a property it owns (carrying amount £5m) for land
with development potential. The owners of the land will, in
addition, pay £1.5m. The property was recently vacated by the
company who had plans to redevelop and rent it out. The
company intends to hold the land for some time as it believes
market value will increase. The property has a current fair value
of £7.2m.
Required:
Explain how the above transactions should be dealt with and
prepare any necessary journal entries.

14. 5. Internally generated goodwill.
– Internally generated goodwill shall not be recognised as an asset.
– Internally generated goodwill is not recognised as an asset because
it is not an identifiable resource (ie it is not separable nor does it arise
from contractual or other legal rights) controlled by the entity that can
be measured reliably at cost.
Types and features of 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 Compiled by Godson
Leonard.
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15. 6. Internally generated intangible assets
• It is sometimes difficult to assess whether an internally generated
intangible asset qualifies for recognition because of problems in:
a) Identifying whether and when there is an identifiable asset that
will generate expected future economic benefits; and
b) Determining the cost of the asset reliably.
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16. • To assess whether an internally generated intangible asset meets the
criteria for recognition, an entity classifies the generation of the asset
into:
a) a research phase; and
b) a development phase.
Research phase
• No intangible asset arising from research shall be recognized.
Expenditure on research shall be recognized as an expense when it is
incurred.
• In the research phase of an internal project, an entity cannot
demonstrate that an intangible asset exists that will generate probable
future economic benefits. Therefore, this expenditure is recognized as an
expense when it is incurred.
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17. Examples of research activities are:
a)activities aimed at obtaining new knowledge;
b)the search for, evaluation and final selection of, applications of
research findings or other knowledge;
c)the search for alternatives for materials, devices, products,
processes, systems or services; and
d)the formulation, design, evaluation and final selection of possible
alternatives for new or improved materials, devices, products,
processes, systems or services.

18. Development phase
An intangible asset arising from development (or from the
development phase of an internal project) shall be recognised if, and
only if, an entity can demonstrate all of the following:
a) the technical feasibility of completing the intangible asset so that it
will be available for use or sale.
b) its intention to complete the intangible asset and use or sell it.
c) its ability to use or sell the intangible asset.
d) how the intangible asset will generate probable future economic
benefits.
e) the availability of adequate technical, financial and other
resources to complete the development and to use or sell the
intangible asset.
f) its ability to measure reliably the expenditure attributable to the
intangible asset during its development

19. 06/02/25
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Examples of development activities are:
a)the design, construction and testing of pre-production or preuse
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.
Note: Internally generated brands, mastheads, publishing titles, customer
lists and items similar in substance shall not be recognized as intangible
assets.

20. EXAMPLE 4
Doug Co is developing a new production process. During 20X3,
expenditure incurred was $100,000, of which $90,000 was incurred
before 1 December 20X3 and $10,000 between 1 December 20X3
and 31 December 20X3. Doug Co can demonstrate that, at 1
December 20X3, the production process met the criteria for
recognition as an intangible asset. The recoverable amount of the
know-how embodied in the process is estimated to be $50,000.
Required How should the expenditure be treated?
Answer
At the end of 20X3, the production process is recognised as an
intangible asset at a cost of $10,000. This is the expenditure incurred
since the date when the recognition criteria were met, that is 1
December 20X3. The $90,000 expenditure incurred before 1
December 20X3 is expensed, because the recognition criteria were
not met. It will never form part of the cost of the production process
recognised in the statement of financial position

21. Example 5
During the year ended 31 December 2011, Scone spent TZS 2 million
on researching and developing a new product. The entity has
recognised all TZS 2 million as an intangible asset. A breakdown of
the expenditure is provided below:
TZSm
Research into materials 0.5
Market research 0.4
Employee training 0.2
Development activities 0.9
The expenditure on development activities was incurred evenly over
the year. It was not until 1 May 2011 that market research indicated
that the product was likely to be profitable. At the reporting date,
the product development was not yet complete.
Required:
Discuss the correct accounting treatment of the research and
development expenditure in the year ended 31 December 2011

22. ANSWER
Expenditure on research, market research and employee training
cannot be capitalised and so must be written off to profit or loss.
In relation to development activities, TZS 0.3 million (4/12 × TZS 0.9m)
was incurred before the product was known to be commercially
viable. This amount must also be written off to profit or loss. In total,
TZS 1.4 million (TZS 0.5m + TZS 0.4m + TZS 0.2m + TZS 0.3m) must be
written off from intangible assets to profit or loss:
Dr Profit or loss TZS 1.4m
Cr Intangible assets TZS 1.4m
The intangible asset recognised on the statement of financial
position will be TZS 0.6 million (TZS 2m – TZS 1.4m). No amortisation will
be charged because the product is not yet complete.
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23. EXAMPLE 6
Ten years ago, Innovate developed a video game called ‘Our Sports’. This
game sold over 10 million copies around the world and was extremely
profitable. Due to its popularity, Innovate release a new game in the Our
Sports series every year. The games continue to be best-sellers.
The directors have produced cash flow projections for the Our Sports
series over the next five years. Based on these projections, they have
prudently valued the Our Sports brand at $20 million and wish to recognise
this in the statement of financial position as at 30 September 20X3.
On 30 September 20X3, Innovate also paid $1 million for the rights to the
‘Pets & Me’ videogame series after the original developer went into
administration.
Required:
Discuss the accounting treatment of the above in the financial statements
of Innovate for the year ended 30 September 20X3
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24. ANSWER
According to IAS 38, an intangible asset can be recognised if:
• it is probable that expected future economic benefits attributable to
the asset will flow to the entity
• the cost of the asset can be measured reliably.
Cash flow projections suggest that the Our Sports brand will lead to
future economic benefits. However, the asset has been internally
generated and therefore the cost of the asset cannot be measured
reliably. This means that the Our Sports brand cannot be recognised
in the financial statements.
The Pets & Me brand has been purchased for $1 million. Therefore, its
cost can be measured reliably. An intangible asset should be
recognised in respect of the Pets & Me brand at its cost of $1 million.
In subsequent periods, the Pets & Me brand will be amortised over its
expected useful life

25. EXAMPLE 7
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?
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26. ANSWER
a)These are research costs as they are only in the early design stage
and therefore should be written off to the statement of profit or loss in
the period.
a)These would appear to be development stage costs as the new
production system is due to be in place fairly soon and will produce
economic benefits in the shape of reduced costs. Therefore these
should be capitalised as development costs.
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27. Subsequent measurement
Measurement after recognition
• An entity shall choose either the cost or the revaluation model as
its accounting policy.
• If an intangible asset is accounted for using the revaluation model,
all the other assets in its class shall also be accounted for using the
same model, unless there is no active market for those assets.
• After initial recognition, an intangible asset shall be carried at a
revalued amount, being its fair value at the date of the revaluation
less any subsequent accumulated amortisation and any subsequent
accumulated impairment losses.
• For the purpose of revaluations under this Standard, fair value shall
be measured by reference to an active market. Revaluations shall
be made with such regularity that at the end of the reporting period
the carrying amount of the asset does not differ materially from its
fair value.
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28. 28
NOTE:
• It is uncommon for an active market to exist for an intangible asset,
although this may happen. For example, in some jurisdictions, an active
market may exist for freely transferable taxi licences, fishing licences or
production quotas. However, an active market cannot exist for brands,
newspaper mastheads, music and film publishing rights, patents or
trademarks, because each such asset is unique.
• The revaluation model does not allow:
a)the revaluation of intangible assets that have not previously been
recognized as assets; or
b)b) the initial recognition of intangible assets at amounts other than
cost. However the revaluation model may be applied to an intangible
asset that was received by way of a government grant and recognized
at a nominal amount.

29. EXAMPLE 8
An intangible asset is measured by a company at fair value. The asset
was revalued by TZS 400,000 in 20X3, and there is a revaluation
surplus of TZS 400,000 in the statement of financial position. At the end
of 20X4, the asset is valued again, and a downward valuation of TZS
500,000 is required.
Required:
State the accounting treatment for the downward revaluation.
Answer
In this example, the downward valuation of TZS 500,000 can first be set
against the revaluation surplus of TZS 400,000. The revaluation surplus
will be reduced to TZS nil and a charge of TZS 100,000 made as an
expense in 20X4.

30. EXAMPLE 9
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.

31. ANSWER
i.The brand name is a purchased intangible asset, so can be capitalised at the
cost of $200,000. Intangible assets can only be revalued if an active market
exists. This is unlikely here, as the brand name will not be a homogeneous
item. Therefore the item should be held under the cost model. The brand
should be written off over its expected useful life. If this has an indefinite useful
life then no amortisation is charged. However, an annual impairment review
would be required.
ii.The $500,000 relates to research and development. Of the total, $150,000
should be expensed to the statement of profit or loss, as management had not
displayed either the intention to complete, or the release of the resources to
complete. Therefore $350,000 can be capitalised as an intangible asset as
development costs.
iii.iii. The training costs must be expensed in the statement of profit or loss. The
movement of staff cannot be controlled, and therefore there is no way of
restricting the economic benefits. If the staff leave, the company Compiled by
Godson Leonard receives no benefit.

32. Useful life
i.An entity shall assess whether the useful life of an intangible asset is
finite or indefinite and,
ii.if finite, the length of, or number of production or similar units
constituting, that useful life.
iii.An intangible asset shall be regarded by the entity as having an
indefinite useful life when, based on an analysis of all of the relevant
factors, there is no foreseeable limit to the period over which the asset
is expected to generate net cash inflows for the entity

33. Intangible asset with finite
• The depreciable amount of an intangible asset with a finite useful life shall
be allocated on a systematic basis over its useful life.
• Amortisation shall begin when the asset is available for use, ie when it is
in the location and condition necessary for it to be capable of operating in
the manner intended by management.
Intangible asset with indefinite
• An intangible asset with an indefinite useful life shall not be amortised.
• In accordance with IAS 36, an entity is required to test an intangible asset
with an indefinite useful life for impairment by comparing its recoverable
amount with its carrying amount
a) annually, and
b) whenever there is an indication that the intangible asset may be
impaired.
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34. TUTORIAL QUESTION
QUESTION 1
IAS 38 - Intangible Assets sets out the principles of accounting for the
recognition and measurement of intangible assets. The standard
differentiates between intangible assets acquired individually, those
acquired as part of a business combination, and those which are internally
generated. Charlie Plc (Charlie) has entered into the following transactions
during the financial year ended 31 July 2019:
i. On 1 August 2018 Charlie acquired the exclusive Irish distribution rights
for a unique home entertainment digital set-top box. The cost of the rights
to Charlie was TZS 2.1 million, and the term of the deal was 3
years.
ii. On 1 August 2018 Charlie commenced work on promoting the brand and
developing sales of the product referred to in (i) above. This effort was
hugely successful, and the “Charlie” brand became massively popular and
well known. Charlie wishes to include the brand in its financial statements
for year ended 31 July 2019 at its estimated fair
value of TZS 12 million.

35. iii. Charlie wishes to replicate its Irish success in other countries by
selling the product into other markets. The company has spent TZS
500,000 during the year researching the UK market and wishes to
capitalize this expenditure as an intangible asset.
REQUIREMENT:
a)Discuss the requirements of IAS 38 with respect to the initial
recognition and measurement of intangible assets acquired
(1) separately for cash, (2) as part of a business combination, and
(3) internally generated.
b) In each of the scenarios (i) to (iii) above, outline the appropriate
accounting treatment for the year ended 31 July 2019.

36. QUESTION 2
a) Over the last 20 years many companies have spent a great deal of
money internally developing new intangible assets such as software.
The treatment for these assets is prescribed by IAS 38 Intangible
assets.
Required
In accordance with IAS 38, discuss whether internally-developed
intangible assets should be recognised, and if so how they should be
initially recorded and subsequently accounted for.
b) Biogenics is a publicly listed pharmaceutical company. During the
year to 31 December 20X9 the following transactions took place:
(i) $6m was spent on developing a new obesity drug which received
clinical approval on 1 July 20X9 and is proving commercially
successful. The directors expect the project to be in profit within 12
months of the approval date. The patent was registered on 1 July
20X9. It cost $1.5m and remains in force for three years

37. ii. A research project was set up on 1 October 20X9 which is expected
to result in a new cancer drug. $200,000 was spent on computer
equipment and $400,000 on staff salaries. The equipment has an
expected life of four years.
iii. On 1 September 20X9 Biogenics acquired an up-to-date list of GPs
at a cost of $500,000 and has been visiting them to explain the new
obesity drug. The list is expected to generate sales throughout the life-
cycle of the drug.
Required
Prepare extracts from the statement of financial position of Biogenics at
31 December 20X9 relating to the above items and summarize the
costs to be included in the statement of profit or loss for that year.

38. QUESTION 3
During 2015 Henry has the following research and development
projects in progress.
Project A was completed at the end of 2014. Development
expenditure brought forward at the beginning of 2015 was TZS
412,500 on this project. Savings in production costs arising from this
project are first expected to arise in 2015. In 2015 savings are
expected to be TZS 100,000, followed by savings of TZS 300,000 in
2016 and TZS 200,000 in 2017.
Project B commenced on 1 April 2015. Costs incurred during the year
were TZS 56,000. In addition to these costs a machine was purchased
on 1 April 2015 for TZS 30,000 for use on the project. This machine
has a useful life of five years. At the end of 2015 there were still some
uncertainties surrounding the completion of the project

39. Project C had been started in 2014. In 2014 the costs relating to this
project of TZS 36,700 had been written off, as at the end of 2014 there
were still some uncertainties surrounding the completion of the project.
Those uncertainties have now been resolved and a further TZS 45,000
costs incurred during the year.
Required
Show how the above would appear in the financial statements
(including notes to the financial statements) of Henry as of 31
December 2015.

40. QUESTION 4
Toby entered into the following transactions during the year ended 31
December 2015. The directors of Toby wish to capitalise all assets
wherever possible.
(1) On 1 January Toby acquired the net assets of George for TZS
105,000. The assets acquired had the following book and fair values.
Book value Fair value
TZS. TZS.
Goodwill 5,000 5,000
Patents 15,000 20,000
Non-current assets 40,000 50,000
Other sundry net assets 30,000 25,000
––––––– ––––––––
90,000 100,000

41. The patent expires at the end of 2022. The goodwill arising from the
above had a recoverable value at the end of 2015 of TZS 7,000.
(2) On 1 April Toby acquired a brand from a competitor for TZS 50,000.
The directors of Toby have assessed the useful life of the brand as five
years.
(3) During the year Toby spent TZS 40,000 on developing a new brand
name. The development was completed on 30 June. The useful life of
this brand has been assessed as eight years.
(4)The directors of Toby believe that there is total goodwill of TZS 2
million within Toby and that this has an indefinite useful life.
Required
Prepare the note to the financial statements for intangible assets as at
31 December 2015.

42. QUESTION 5
a) Discuss the criteria that should be used while recognizing intangible
assets arising from research and development work.
b) Raisin International (RI) is planning to expand its line of products. The
related information for the year ended 31 December 2015 is as follows:
i. Research and development of a new product commenced on 1
January 2015. On 1 October 2015, the recognition criteria for capitalization
of an internally generated intangible asset were met. It is estimated that the
product would have a useful life of 7 years.
Details of expenditures incurred are as follows:
TZS. m
Research work 4.50
Development work 9.00
Training of production staff 0.50
Cost of trial run 0.80
Total costs 14.80

43. ii. The right to manufacture a well-established product under a patent for a
period of five years was purchased on 1 March 2015 for TZS 17 million.
The patent has an expected remaining useful life of 10 years. RI has the
option to renew the patent for a further period of five years for a sum of
TZS 12 million.
iii. RI has acquired a brand at a cost of TZS 2 million. The cost was
incurred in the month of June 2015. The life of the brand is expected to be
10 years. Currently, there is no active market for this brand. However, RI
is planning to launch an aggressive marketing campaign in February
2016.
iv. In September 2014, RI developed a new production process and
capitalized it as an intangible asset at TZS 7 million. The new process is
expected to have an indefinite useful life. During 2015, RI incurred further
development expenditure of TZS 3 million on the new process which
meets the recognition criteria for capitalization of an intangible asset.

44. Required
In the light of International Financial Reporting Standards, explain how
each of the above transaction should be accounted for in the financial
statements of Raisin International for the year ended 31 December 2015.
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