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Toggle navigation. Navigation Standards. Navigation International Accounting Standards. Quick Article Links. Overview IAS 38 Intangible Assets outlines the accounting requirements for intangible assets, which are non-monetary assets which are without physical substance and identifiable either being separable or arising from contractual or other legal rights.
Key definitions Intangible asset: an identifiable non-monetary asset without physical substance. Examples of intangible assets patented technology, computer software, databases and trade secrets trademarks, trade dress, newspaper mastheads, internet domains video and audiovisual material e. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits.
Initial recognition: in-process research and development acquired in a business combination A research and development project acquired in a business combination is recognised as an asset at cost, even if a component is research. Amortisation: over useful life, based on pattern of benefits straight-line is the default.
Initial recognition: certain other defined types of costs The following items must be charged to expense when incurred: internally generated goodwill [IAS Finite life: a limited period of benefit to the entity. Measurement subsequent to acquisition: intangible assets with finite lives The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life: [IAS If the pattern cannot be determined reliably, amortise by the straight-line method.
The amortisation charge is recognised in profit or loss unless another IFRS requires that it be included in the cost of another asset. The amortisation period should be reviewed at least annually.
However, there are limited circumstances when the presumption can be overcome: The intangible asset is expressed as a measure of revenue; and it can be demonstrated that revenue and the consumption of economic benefits of the intangible asset are highly correlated. Examples where revenue based amortisation may be appropriate IAS 38 notes that in the circumstance in which the predominant limiting factor that is inherent in an intangible asset is the achievement of a revenue threshold, the revenue to be generated can be an appropriate basis for amortisation of the asset.
The standard provides the following examples where revenue to be generated might be an appropriate basis for amortisation: [IAS Common misconceptions include the belief that training costs can be capitalised. Even though these may bring future benefit to the business, these costs cannot be separated from the entity and the company retains no legal or contractual right to these.
This is because staff have a right to leave the company at any point, subject to their notice period, so the company cannot restrict the access of this economic benefit to others. In addition to this, internally generated brands are specifically prohibited from being recognised. This has created a problem where some of the major assets in modern businesses can go unrecognised.
These are development costs, where entities incur costs in order to develop new product lines or production methods. These can be capitalised from the point where six development criteria are met. In practice, an auditor will look at these criteria and determine if these have been met on the project.
The principle of the six criteria is that an asset can only be recognised when a project has cleared hurdles such as regulatory testing, and the entity can demonstrate a willingness and ability to complete the project. If the six criteria are met, then the entity can recognise an asset at cost.
A key principle here is that costs can only be recognised as an asset from the point all six are met, up to the date that the project is complete. Any costs incurred before the criteria are met are expensed to the statement of profit or loss as they are incurred. Similarly, any costs associated with research into a new product will be incurred much earlier than the six criteria being met, so these would also be expensed.
Even though assets can be recognised for development costs, this is another area of criticism from the financial reporting community. These assets can only be recognised towards the end of the process, when the six criteria are met. This means that any asset recognised is still likely to be at a significantly lower value than the actual expected economic benefit to be realised from the asset itself.
According to the principles of IFRS 3 Business Combinations, an intangible asset acquired as part of a business combination must be recognised at fair value.
This is because for the group they are not internally generated but have actually been purchased as part of the subsidiary. Therefore, they are recognised at fair value in the consolidated financial statements, despite being unrecognised in the individual financial statements. On 1 April 20X5 problems were discovered in the trials and approval was not given from the medical regulator for use of the pharmaceuticals.
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