Intangible Assets - IAS 38 - Accounts

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

IAS 38 should be applied to all intangible assets Except for …

§Financial assets, as defined in IAS 39

§Exploration and evaluation assets (IFRS 6)

§Expenditure on the development and extraction of minerals, oil, natural gas and similar non-regenerative resources

… and except for intangibles covered by other IFRSs, e.g.:

§Intangibles held for sale in ordinary course of business (IAS 2 and IAS 11)

§Deferred tax assets (IAS 12)

§Leases within scope of IAS 17

§Assets arising from employee benefits (IAS 19)

§Financial assets (IAS 32/39 and 27/28/31)

§Goodwill arising on a business combination (IFRS 3)

§Deferred acquisition costs and intangibles arising from insurance contracts within scope of IFRS 4

§Intangibles classified as held for sale under IFRS 5

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

Lack of Physical Substance

Lack of Physical Substance is one of essential characteristic of an intangible asset. An Intangible asset is often contained in or on a physical substance. Examples :- Compact disc that contains computer software, legal documentation that evidences a patent or a license, a building to which a trading license attached etc.

In such cases, the physical and non-physical elements may be incapable of separation and judgment is required to determine which element is more significant. If the tangible element is the more significant the asset should be treated as a tangible fixed asset and vice versa. There may also be situation where, although the tangible and intangible elements cannot operate independently of each other, their costs are each significant. In such cases, it may be appropriate to account for each element separately.

Example:- A data base may be contained on expensive computer hardware and the costs of the hardware may be separately identifiable from those of the database. Each element may have a different useful life, for example the hardware may become obsolete and the database may be transferred to another computer system.

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

Recognition

An item should be recognised in the financial statements as an intangible asset, if it meets the definition of an intangible asset, The recognition criteria are :-

• it is probable that future economic benefits from the asset will flow to the entity;

• the cost of the asset can be measured reliably.

If the recognition criteria cannot be demonstrated the costs must be expensed.

“Probable” as used in ‘Probable economic benefit’ is not defined in IAS-38. As per IAS-37 “Probable” mean ‘more likely than not’. Therefore, if management consider it more likely than not that the expected future economic benefits will flow to the entity, and this can be substantiated, then this criterion will be met

Judgment is required in assessing the degree of certainty to attach to the flow of economic benefits expected from the asset’s use based on evidence available at the date of initial recognition. Management should place greater reliance on external evidence.

The nature of many intangible assets is that there are often no additions to the asset or replacement of parts of it. Therefore, most subsequent expenditure is likely to be incurred to maintain the asset. For this reason, most subsequent expenditure will not qualify as an asset and will be expensed as incurred.

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

IFRS-3 contains a list of items acquired in a business combination that meet the definition of intangible assets and which are recognised as such separately from goodwill, if their fair values can be reliably measured. The list is virtually identical to a similar list in the US Standard (SFAS 141).

The following item should not be recognised as intangible assets in business combination.

§ Customer Service Capability

§ Customer base of a Retailer

§ Presence in geographic markets or locations

§ Non- union status or strong labour relations

§ On-going training or recruiting programs.

§ Outstanding credit ratings and access to capital markets

§ Favorable government relations

§ Assembled workforce

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

Research and Development

The process of generating an intangible asset is divided into

• Research phase and

• Development phase

If the two phases are indistinguishable all the expenditure on asset should be attributed to the research phase.

Development Expenditure that meets the recognition criteria must be capitalised.

Expenditure on the research phase of an internal project should be expensed to the income statement as incurred. No intangible asset arising from research or from the research phase of an internal project can be recognised. Therefore, expenditure on research is expensed as incurred. However, research projects that are acquired as part of a business combination are treated an asset.

Although research expenditure is not recognised as an asset, an entity may sometimes purchase patents and other rights over processes that are used in a research and development projects. Theses rights would qualify for recognition as separately acquired intangible asset even though they are used in the research activity. This is because the “future economic benefits” criteria is satisfied.

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

The standard setout criteria to assist in determining the point at which an entity moves from the research phase (when costs are expensed) to the development phase (Recognised as an assets). The criteria are following :

• Technical feasibility

• Intention to complete the intangible asset and use or sell it

• Ability to use or sell the intangible asset

• How the intangible asset will generate probable future economic benefits

• Adequate technical, financial and other resources to complete the development

• Ability to measure the expenditure attributable to the intangible asset

In order to determine at what stage a project meets the recognition criteria, the company will need to consider the product life cycle and then apply the criteria at each stage of that cycle.

Expenses incurred before a project meets the criteria for recognition as an intangible asset must be expenses as incurred. Once the project has reached the stage when as asset must be recognised, the previously written off costs may be not be reinstated as part of the intangible asset.

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

Internally Generated Intangible Assets

Intangible Assets that are developed or generated internally must satisfy both criteria for recognition (Control and Probable Future Economic Benefits). As there is no exchange transaction, so its very difficult to establish a cost or fair value of the assets.

The difficulties associated with identifying internally generated intangible assets and with satisfying the recognition and measurement criteria mean that such assets either are indistinguishable from the rest of the business or cannot be reliably measured.

Sometime its difficult to determine whether costs incurred may be recognised as an intangible assets because :

• It may be uncertain whether the cost meet the definition of an intangible assets

• If cost is not identifiable to particular product or project.

Example:- XYZ Inc. has two lines of business : Chocolates and candies. The chocolates unit comprises 5 brands and the candies units has 3 brands. Management incurs 1 MINR related to R & D cost for attract new customers.

The R & D costs should not be capitalised as an internally generated intangible assets because Development cost must be identifiable and attributable to a specific products in order to meet the recognition criteria.

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

Once the recognition criteria have been satisfied, the cost of an internally generated intangible asset is the sum of subsequent directly attributable expenditure incurred to create, produce and prepare the asset so that it is capable of operating in the manner intended by management.

Example of directly attributable cost :-

§ Cost of material and services used or consumed in generating the intangible asset.

§ Cost of employee benefits, as defined in IAS 19

§ Fees paid to register a legal right, such as patent registration fees.

§ Amortization of patents and licence that are used in generating the asset

§ Borrowing Cost as per IAS 23

Further capitalisation may also be possible during the commissioning phase before and asset is capable of operating in the manner intended by management. However, not all the cost will always be eligible or relevant. Example termination benefit. The capitalisation will stop when the asset “is capable of operating in the manner intended by management”

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

Excluded Costs

Cost that do not meet the recognition criteria. (including not meeting the definition of an intangible asset), e.g.

§ Internally generated goodwill

§ Internally generated brands, mastheads, publishing titles, customer lists and items “similar in substance”

§ Research Start-up costs (establishment, pre-opening and pre-operating costs)

§ Training

§ Advertising and promotional activities

§ Relocating and re-organising (restructuring)

Expenditure that does not meet the recognition criteria is written off immediately. Internally generated goodwill is not recognised as an asset because its not an identifiable resource, that is, its not separable nor does it arise from contractual or other legal rights that are controlled by the entity and that are reliably measurable

BALASUBRAMANYA B N (CCI STUDENT....) (44668 Points)
Replied 07 August 2009

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CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

Cost of Intangible Assets

Example :- Which Costs will capitalised in a newly established entity under IAS 38

(a) Pre opening costs of a business facility (b) Recipes, secret formulas, models and designs, prototype (c) Training, customer loyalty, and market share (d) An in-house–generated accounting software (e) The design of a pilot plan (f) Licensing, royalty, and stand-still agreements (g) Operating and broadcast rights (h) Goodwill purchased in a business combination (i) A company-developed patented drug approved for medical use (j) A license to manufacture a steroid by means of a government grant (k) Cost of courses taken by management in quality engineering management (l) A television advertisement that will stimulate the sales in the technology industry

Costs that are eligible for capitalization include items (b), (e), (f), (g), and (h); for item (j), after initial recognition at cost, both the asset and the grant can be recognized at fair value.

Costs that should be expensed under IAS 38 include items (a), (c), and (d). Item (i) is a case of an internally generated intangible asset that can be capitalized only provided it meets the development criterion. In item (k) is entity does not have “control” over its workforce. Despite the obvious benefit of item (l) to the business, such expenditure on advertisement does not meet the criterion of “control.”

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

Separate Acquisition

The cost of separately acquired intangible asset can usually be reliably measured. Cost for an intangible assets comprises :

§ Purchase Price, including import duties and non-refundable purchase taxes. Trade discounts and rebates are deducted in arriving at the purchase price

§ Any directly attributable cost of preparing the asset for its intended use

Some activities occur in the course of developing an intangible asset that are not necessary to bring the asset to its intended working condition that cost should not be capitalised. It will be charged to P/L A/c.

Example :- An entity issue 100,000 shares for the acquisition of an intangible assets comprising certain rights. Similar assets are available in the cash price of Rs. 300,000. The share price of the entity ordinary shares at the date of transaction is Rs. 2.95. At what value assets should be recognised.

The asset should be recognised at the fair value of the rights i. e Rs. 3,00,000. If the fair value of the rights had no been reliably measurable the asset would be recorded at Rs. 295,000.

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

An entity may obtain an intangible asset in a number of ways.

Measurement subsequent to Initial Recognition

• By separate acquisition for monetary or other consideration

• As part of a business combination.

• By exchange for other non-monetary assets.

• By way of government grant

• By developing or generating the asset internally.

Subsequent to initial recognition, an entity may adopt either the cost model or the revaluation model as its accounting policy. The revaluation model may only be adopted if the intangible assets are traded in an active market; hence its not frequently used.

The policy should be applied to the whole of a class of intangible asset and not merely to individual assets within a class, unless there is no active market for an individual asset. A policy of revaluation may be more onerous and involve more complex record keeping than using the cost model

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 07 August 2009

The cost model require that, after initial recognition, intangible assets should be carried at cost less accumulated amortisation and impairment losses. The revaluation model requires that, subsequent to initial recognition, intangible assets should be carried at fair value, determined by reference to an active market.

Revaluation should be carried out with sufficient regularity that the carrying amount of the asset does not differ materially from that which would be determined using fair value at the balance sheet date.

Intangible assets with finite useful lives should be amortised over their useful life.

The residual value of an intangible asset will normally be assumed to be nil unless certain criteria are met. These include where an active market exists and is likely to exist at the end of the useful life of the asset to the entity, or where there is a commitment by a third party to buy the asset at the end of its useful life.

Where an intangible asset is revalued, subsequent amortisation is based on the revalued amount. An intangible asset that has been identified as having an indefinite life should not be amortised. Instead the asset is reviewed for Impairment.