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International Accounting Standards International Accounting Standards IAS 38 — Intangible Assets Qu

Standards

IAS 38 — Intangible Assets IAS 38

agend

IAS 38 outlines the accounting requirements for intangible assets, which are
Intan
non-monetary assets which are without physical substance and identifiable
(either being separable or arising from contractual or other legal rights). Deloi
Intangible assets meeting the relevant recognition criteria are initially mea-
sured at cost, subsequently measured at cost or using the revaluation model, Rate-
and amortised on a systematic basis over their useful lives (unless the asset Comp
has an indefinite useful life, in which case it is not amortised). IAS 38 was re-
vised in March 2004 and applies to intangible assets acquired in business
combinations occurring on or after 31 March 2004, or otherwise to other in-
tangible assets for annual periods beginning on or after 31 March 2004.
Rel

History of IAS 38 EFRAG

entiti

Date Development Comments Podca

Interp

February 1977 Exposure Draft E9 IASB

Accounting for Research gible
and Development
Activities ESMA
for ca
July 1978 IAS 9 (1978) Accounting Effective 1 January 1980
Stand
for Research and
intan
Development Activities
issued

S
August 1991 Exposure Draft E37
Research and
Development Costs
published
Rel
December 1993 IAS 9 (1993) Research Operative for annual fi- pub
and Development Costs nancial statements cov-
issued ering periods beginning Deloi
on or after 1 January IASB'
1995
Deloi
tative
June 1995 Exposure Draft E50
Intangible Assets IFRS i
published new S
 Deloi
August 1997 E50 was modified and tative
re-exposed as Exposure
Draft E59 Intangible EFRAG
Assets port 9

September 1998 IAS 38 Intangible Assets Operative for annual fi-

issued nancial statements cov- S
ering periods beginning
on or after 1 July 1998

31 March 2004 IAS 38 Intangible Assets Applies to intangible as-

Rel
issued sets acquired in business
combinations occurring Nove
on or after 31 March
2004, or otherwise to Octob
other intangible assets Grou
for annual periods begin-
Octob
ning on or after 31 March
Grou
2004
Comm
22 May 2008 Amended by Effective for annual peri- latory
Improvements to IFRSs ods beginning on or after
(advertising and promo- 1 January 2009 EFRAG
tional activities, units of IASB j
production method of
amortisation)
Rel
16 April 2009 Amended by Effective for annual peri-
Improvements to IFRSs ods beginning on or after Annu
(measurement of intan- 1 July 2009 11
gible assets in business
combinations) Annu
2020

12 December 2013 Amended by Annual Effective for annual peri- Annu

Improvements to IFRSs ods beginning on or after 2017
2010–2012 Cycle (pro- 1 July 2014
portionate restatement IAS 1
of accumulated depreci- liabili
ation under the revalua-
tion method) Annu
2015

12 May 2014 Amended by Effective for annual peri-

Clarification of ods beginning on or after
Acceptable Methods of 1 January 2016 Rel
Depreciation and
Amortisation IASB
(Amendments to IAS 16 proce
and IAS 38)
Intern
Stand
Related Interpretations
IFRIC 12 Service Concession Arrangements
 IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine
IAS 16 supersedes SIC-6 Costs of Modifying Existing Software
SIC-32 Intangible Assets – Website Costs

Amendments under consideration by

the IASB
Research project — Rate-regulated activities
Research project — Intangible assets

Summary of IAS 38
Objective
The objective of IAS 38 is to prescribe the accounting treatment for intangible as-
sets 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]

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), de-
ferred tax assets (IAS 12 Income Taxes), lease assets (IAS 17 Leases), assets
arising from employee benefits (IAS 19 Employee Benefits (2011)), and good-
will (IFRS 3 Business Combinations).

Key definitions
Intangible asset: an identifiable non-monetary asset without physical substance.
An asset is a resource that is controlled by the entity as a result of past events (for
example, purchase or self-creation) and from which future economic benefits (in-
flows of cash or other assets) are expected. [IAS 38.8] Thus, the three critical at-
tributes of an intangible asset are:

identifiability
control (power to obtain benefits from the asset)
future economic benefits (such as revenues or reduced future costs)

Identifiability: an intangible asset is identifiable when it: [IAS 38.12]

is separable (capable of being separated and sold, transferred, licensed,

rented, or exchanged, either individually or together with a related contract)
or
arises from contractual or other legal rights, regardless of whether those
rights are transferable or separable from the entity or from other rights and
obligations.
 Examples of intangible assets
patented technology, computer software, databases and trade secrets
trademarks, trade dress, newspaper mastheads, internet domains
video and audiovisual material (e.g. motion pictures, television
programmes)
customer lists
mortgage servicing rights
licensing, royalty and standstill agreements
import quotas
franchise agreements
customer and supplier relationships (including customer lists)
marketing rights

Intangibles can be acquired:

by separate purchase
as part of a business combination
by a government grant
by exchange of assets
by self-creation (internal generation)

Recognition
Recognition criteria. IAS 38 requires an entity to recognise an intangible asset,
whether purchased or self-created (at cost) if, and only if: [IAS 38.21]

it is probable that the future economic benefits that are attributable to the as-
set will flow to the entity; and
the cost of the asset can be measured reliably.

This requirement applies whether an intangible asset is acquired externally or gen-

erated internally. IAS 38 includes additional recognition criteria for internally gen-
erated intangible assets (see below).

The probability of future economic benefits must be based on reasonable and sup-
portable assumptions about conditions that will exist over the life of the asset. [IAS
38.22] The probability recognition criterion is always considered to be satisfied for
intangible assets that are acquired separately or in a business combination. [IAS
38.33]

If recognition criteria not met. If an intangible item does not meet both the defi-
nition of and the criteria for recognition as an intangible asset, IAS 38 requires the
expenditure on this item to be recognised as an expense when it is incurred. [IAS
38.68]

Business combinations. There is a presumption that the fair value (and therefore
the cost) of an intangible asset acquired in a business combination can be mea-
sured reliably. [IAS 38.35] An expenditure (included in the cost of acquisition) on an
intangible item that does not meet both the definition of and recognition criteria
for an intangible asset should form part of the amount attributed to the goodwill
recognised at the acquisition date.

Reinstatement. The Standard also prohibits an entity from subsequently reinstat-

ing as an intangible asset, at a later date, an expenditure that was originally
charged to expense. [IAS 38.71]

Initial recognition: research and development costs

 Charge all research cost to expense. [IAS 38.54]
Development costs are capitalised only after technical and commercial feasi-
bility of the asset for sale or use have been established. 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. [IAS 38.57]

If an entity cannot distinguish the research phase of an internal project to create

an intangible asset from the development phase, the entity treats the expenditure
for that project as if it were incurred in the research phase only.

Initial recognition: in-process research and development ac-

quired in a business combination
A research and development project acquired in a business combination is recog-
nised as an asset at cost, even if a component is research. Subsequent expenditure
on that project is accounted for as any other research and development cost (ex-
pensed except to the extent that the expenditure satisfies the criteria in IAS 38 for
recognising such expenditure as an intangible asset). [IAS 38.34]

Initial recognition: internally generated brands, mastheads, ti-

tles, lists
Brands, mastheads, publishing titles, customer lists and items similar in substance
that are internally generated should not be recognised as assets. [IAS 38.63]

Initial recognition: computer software

Purchased: capitalise
Operating system for hardware: include in hardware cost
Internally developed (whether for use or sale): charge to expense until tech-
nological feasibility, probable future benefits, intent and ability to use or sell
the software, resources to complete the software, and ability to measure cost.
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 38.48]

start-up, pre-opening, and pre-operating costs [IAS 38.69]
training cost [IAS 38.69]
advertising and promotional cost, including mail order catalogues [IAS 38.69]
relocation costs [IAS 38.69]

For this purpose, 'when incurred' means when the entity receives the related
goods or services. If the entity has made a prepayment for the above items, that
prepayment is recognised as an asset until the entity receives the related goods or
services. [IAS 38.70]

Initial measurement
Intangible assets are initially measured at cost. [IAS 38.24]

Measurement subsequent to acquisition: cost model and revalu-

ation models allowed
An entity must choose either the cost model or the revaluation model for each
class of intangible asset. [IAS 38.72]
Cost model. After initial recognition intangible assets should be carried at cost less
accumulated amortisation and impairment losses. [IAS 38.74]

Revaluation model. Intangible assets may be carried at a revalued amount (based

on fair value) less any subsequent amortisation and impairment losses only if fair
value can be determined by reference to an active market. [IAS 38.75] Such active
markets are expected to be uncommon for intangible assets. [IAS 38.78] Examples
where they might exist:

production quotas
fishing licences
taxi licences

Under the revaluation model, revaluation increases are recognised in other com-
prehensive income and accumulated in the "revaluation surplus" within equity ex-
cept to the extent that they reverse a revaluation decrease previously recognised in
profit and loss. If the revalued intangible has a finite life and is, therefore, being
amortised (see below) the revalued amount is amortised. [IAS 38.85]

Classification of intangible assets based on useful life

Intangible assets are classified as: [IAS 38.88]

Indefinite life: no foreseeable limit to the period over which the asset is ex-
pected to generate net cash inflows for the entity.
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 38.97]

The amortisation method should reflect the pattern of benefits.

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 re-
quires that it be included in the cost of another asset.
The amortisation period should be reviewed at least annually. [IAS 38.104]

Expected future reductions in selling prices could be indicative of a higher rate of

consumption of the future economic benefits embodied in an asset. [IAS 18.92]

The standard contains a rebuttable presumption that a revenue-based amortisa-

tion method for intangible assets is inappropriate. However, there are limited cir-
cumstances 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 bene-
fits of the intangible asset are highly correlated. [IAS 38.98A]

Note: The guidance on expected future reductions in selling prices and the clarification regarding the rev-
enue-based depreciation method were introduced by Clarification of Acceptable Methods of Depreciation
and Amortisation, which applies to annual periods beginning on or after 1 January 2016.

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 thresh-
old, 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 38.98C]
A concession to explore and extract gold from a gold mine which is lim-
ited to a fixed amount of revenue generated from the extraction of gold
A right to operate a toll road that is based on a fixed amount of revenue
generation from cumulative tolls charged.

The asset should also be assessed for impairment in accordance with IAS 36. [IAS
38.111]

Measurement subsequent to acquisition: intangible assets with

indefinite useful lives
An intangible asset with an indefinite useful life should not be amortised. [IAS
38.107]

Its useful life should be reviewed each reporting period to determine whether
events and circumstances continue to support an indefinite useful life assessment
for that asset. If they do not, the change in the useful life assessment from indefi-
nite to finite should be accounted for as a change in an accounting estimate. [IAS
38.109]

The asset should also be assessed for impairment in accordance with IAS 36. [IAS
38.111]

Subsequent expenditure
Due to the nature of intangible assets, subsequent expenditure will only rarely
meet the criteria for being recognised in the carrying amount of an asset. [IAS
38.20] Subsequent expenditure on brands, mastheads, publishing titles, customer
lists and similar items must always be recognised in profit or loss as incurred. [IAS
38.63]

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 pe-
riod 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 govern-
ment 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 ex-
pense in the current period [IAS 38.126]

Related items

Other

 International Accounting Standards

Projects

 IAS 16/IAS 38 — Acceptable methods of depreciation and amortisation

 Emission rights

 Pollutant pricing mechanisms (formerly Emissions trading schemes)

 IAS 38 — Compliance costs for 'REACH'

 IAS 38 — Items not added to the agenda  Intangible assets

 Rate-regulated activities — Comprehensive project

 Annual improvements — 2010-2012 cycle

 Rate-regulated activities — Interim standard

 Business combinations – Phase I

 Annual improvements — 2006-2008 cycle

 Annual improvements — 2007-2009 cycle

Standards

 IAS 38 — Intangible Assets

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