INTANGIBLE ASSET
BAS 38
Definition of intangible assets
✔ BAS 38 defines intangible assets as “an identifiable non-monetary asset without physical substance”.
✔ A non-monetary asset refers to an asset that a company holds that does not have a precise value and is not
easily convertible to cash or cash equivalents.
✔ Monetary assets are money held in the form of cash and assets to be received in fixed or determinable
amounts of money.
Intangible asset has three characteristics:
i. Intangible asset is controlled by the entity.
ii. Intangible asset does not have physical substance unlike property, plant and equipment.
iii. Intangible asset is identifiable.
Identifiable
An intangible asset is identifiable when it:
1. is separable – so, you can actually separate the asset and sell it, transfer it, license it or do any other
action.
2. arises from the legal rights – either from contract, legislation etc. In this case, the asset does not need to
be separable.
Examples of intangible assets
✔ Software license,
✔ licensing rights such as to operate TV/radio,
✔ Patent
✔ Copy rights
✔ Brands
✔ Trademarks
✔ Franchise agreements
✔ Video and audiovisual materials (e.g. motion pictures, television rights),
✔ Royalty
✔ Database
✔ Right to use players such as football players.
Intangible asset or expense?
1. Operating system
✔ Operating system of computer such as Windows 2016 is not considered as intangible asset because
windows is an integral part of the computer and without windows operating system, computer cannot
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run. Therefore, windows operating system as part of computer is recognized as property, plant and
equipment.
2. Accounting software such as Tally ERP, MYOB and QuickBooks must be recognized as intangible assets
as they meet the definition as well as recognition criteria of intangible assets. However, we must know
that we recognize license to use these software as intangible asset and not the software itself, because the
computer can operate without these accounting software.
3. Advertisement
✔ Though advertisement can create future economic benefits, its benefits cannot be separated from rest
of the business (or sell it to others). Therefore, cost incurred on advertisement cannot be recognized
as intangible asset. It must be recognized as an expense in the statement of income.
4. Human resources
✔ An organization cannot capitalize costs incurred to recruit or develop employees as the organization
cannot control them.
✔ However, in the football club, the case may be different from employees in the organization.
✔ The contracts with individual players might legally bind the player to stay with the same club for a
number of years. That way, we would be able to demonstrate control and recognize the player as an
intangible asset.
✔ Again, remember that an intangible asset is the ‘right to use’ the player and not the player itself.
5. Customer list
✔ Customers list is a list of customers who have remained loyal and repeatedly subscribed to the goods
or services of the entity for a long period of time.
✔ Customer list cannot be treated as intangible asset as the cost of customer list cannot be measured
and customers cannot be controlled by the entity.
6. Brands, mastheads, and publishing titles
✔ Internally developed brand, mastheads, and publishing titles cannot be recognized as intangible asset
because cost of creating such items cannot be estimated reliably.
✔ Costs incurred on these activities are treated as expense in the statement of income and not capitalized.
✔ However, when brand, mastheads, and publishing titles are purchased, it can be recognized as
intangible asset.
Goodwill vs Intangible assets
✔ Goodwill is not an intangible asset because it is not identifiable.
✔ Goodwill is recognised as of the acquisition date measured as the excess of consideration paid over
net of the identifiable assets acquired and the liabilities assumed on the date of acquisition.
✔ Since goodwill cannot be separated/identified from other assets, it is recognised only in a business
combination.
✔ Goodwill is separately presented in statement of financial position if it is purchased.
✔ Internally developed goodwill cannot be capitalized/recognized in the financial statement.
✔ Goodwill is not accounted under BAS38 Intangible Assets. It is accounted under BFRS3 Business
Combination.
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✔ Value of the Business = Asset - Liabilities
✔ Value of Goodwill = Fair value of Business – Value of business
Acquisition and initial measurement of intangible assets
✔ The initial measurement of an intangible asset depends on how you acquired the asset.
How acquired? How initially measured?
Separate acquisition Cost [Refer notes below]
Acquisition as a part of a business Fair value at the acquisition date
combination,
Acquisition as a government grant, Fair value or Nominal value + directly
attributable expenditure
Exchanges of assets Fair value, if not possible then carrying amount
of asset given up.
Internally generated assets (including Directly attributable costs incurred after the asset
goodwill). first meet 6 recognition criteria [PIRATE]
✔ The cost of a separately acquired intangible asset comprises:
i) its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates; and
ii) any directly attributable cost of preparing the asset for its intended use.
Examples of intangible grants acquired by entity by way of a government grant
● Import license,
● Airport lending rights
● License to operate television or newspapers
● Import quotas
● Rights to have access to certain restricted public resources such as mining.
Internally generated intangible assets
Expenditure incurred in developing Internally generated intangible asset are categorised in TWO phases:
1. Research phase
– Research is investigation that you undertake to acquire some information knowledge or
understanding.
– It should be treated as expense when incurred because at a research phase of the project, the entity
cannot demonstrate that an intangible asset exists that will generate future economic benefits.
– All the costs incurred during research phase should be EXPENSED in the income statement.
For example
- You are evaluating different alternatives for your new software product.
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- you are examining the competing products on the market, studying their features and trying to find
their weaknesses in order to design better product.
- feasibility studies, evaluating whether the project is viable or not.
Development phase
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.
Examples
- Construction of model
- Prototype
- Pilot testing of system, process, product and devices
An entity can recognize/capitalise intangible asset arising from development phase if, and only if, an entity can
demonstate all of the following criteria [PIRATE]
– Probable future economic benefits,
– Intention to complete and use or sell the asset,
– Resources adequate and available to complete and use or sell the asset,
– Ability to use or sell the asset,
– Technical feasibility,
– Expenditures can be reliably measured.
Measurement after initial recognition
1. Cost model
⮚ Carrying amount = Cost – (accumulated amortization + accumulated impairment loss)
2. Revaluation model
⮚ Carrying amount = Fair value – (accumulated amortization + accumulated impairment loss)
The accounting of an intangible asset is based on its useful life. Useful life of an intangible asset can be
1. Finite useful life
2. Indefinite useful life
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Finite useful life Indefinite useful life
Finite useful life indicates that the The indefinite useful life of the
intangible asset has a limited intangible asset means that there is
period for which the entity can no foreseeable limit to the period
expect to derive the economic over which the asset is expected to
benefits. generate cash inflows for the
entity.
Intangible assets with the finite An intangible asset with the
useful life is amortised over its indefinite useful life is not
useful life. amortised.
Eg. licensing rights, franchise Eg. brands, trademarks and
agreements, and technological perpetual franchise agreements.
patent rights.
Impairment Loss
⮚ Impairment test for indefinite intangible asset is conducted every year to see whether there
is any drastic fall in value or not.
⮚ Impairment test for finite intangible asset need not be conducted unless there are any
indications of impairments.
⮚ The intangible assets is said to be impaired, if carrying amount of the item exceeds
recoverable amount
⮚ Entities must ensure that carrying amount of their intangible assets (property, plant and
equipment and investment property) should not exceed the recoverable amount.
⮚ The recoverable amount of intangible asset is the higher of its fair value less costs of
disposal and its value in use.
⮚ Recoverable amount = Fair value – costs of disposal and value in use.
⮚ Impairment Loss = Recoverable amount – carrying amount.
⮚ If the asset is impaired, it is carried at recoverable amount in statement of financial
statement.
Amortisation
⮚ Amortisation is the systematic allocation of cost of intangible asset over its useful life.
⮚ Amortization begins when the asset is available for use or sale.
⮚ The amortization is recognized as expense in the statement of income.
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⮚ The methods of amortization include
a. straight line method (SLM)
b. diminishing balance method/written down value method (WDV) and
c. the units of production method.
⮚ Useful life of the intangible assets must be measured every year.
⮚ The amortization method of the asset must be reviewed at least at each financial year-end.
⮚ Amortisation of an intangible asset with a finite useful life does not cease when the
intangible asset is no longer used, unless the asset has been fully amortised or is classified
as held for sale which is then accounted in accordance with BFRS5.
Entry
Amortization A/c Dr.
To Intangible asset A/c
(Being amortization charged)
Residual value of an intangible asset
The residual value of an intangible asset with a finite useful life is assumed to be zero, unless:
i) there is a commitment by a third party to purchase the asset at the end of its useful life;
ii) there is an active market for the asset and residual value can be determined by reference to that
market; and
iii) it is probable that such a market will exist at the end of the asset’s useful life.
Derecognition of an intangible asset
An intangible asset must be derecognized when
i. no future economic benefits are expected from its use or
ii. when the asset is disposed off.
⮚ The gain or loss on disposal must be recognized in the statement of income.
⮚ Gain/Loss on disposal = Proceed from disposal - CA
ENTRY
Loss on disposal A/c/Income statement Dr.
To Intangible asset A/c
(Being loss on disposal recognized)
Intangible asset A/c Dr.
To Gain on disposal A/c/ Income Statement
(Being gain on disposal recognized)
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Accounting for Government Grants
Government grants Government Assistance
Government grants are assistance by government in Government assistance is action by government
the form of transfers of resources to an entity in designed to provide an economic benefit specific
return for past or future compliance with certain to an entity or range of entities qualifying under
conditions relating to the operating activities of the certain criteria.
entity.
Value of government grants can be measured Value of government assistance cannot be
reliably. measured reliably.
Transfer of assets takes place. Transfer of assets does not take place.
This form of benefits received from the government This form of benefits received from the
is recognized as deferred income or asset. government is not recognized as deferred income
or asset. It is disclosed as notes in the financial
statements of the entity.
All government grants are government assistance. All government assistance are not government
grants.
Examples Examples
Sky hydrant water filter machine provided to Technical and marketing support provided to the
Pakshikha Central School entity
Recognition criteria of government grants
A government grant is not recognised until there is reasonable assurance that:
i) the entity will comply with the conditions attaching to it, and
ii) the grant will be received.
NOTE
Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to the grant have
been or will be fulfilled.
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Treatment of government grants
Accounting for government grants depend on the purpose of the grants received/ Types of government grants.
i. Acquisition of assets
⮚ These types of grants are called grants related to assets.
⮚ These are government grants whose primary condition is that an entity qualifying for them should
purchase, construct or otherwise acquire longterm assets.
⮚ Subsidiary conditions may also be attached restricting the type or location of the assets or the
periods during which they are to be acquired or held.
ii. Reimbursement of cost/related to expenditure
⮚ These types of grants are called grants related to income.
⮚ They are government grants other than those related to assets.
Two methods/approaches of accounting grants related to assets
1. Deferred income approach
⮚ Under this approach, government grants received is treated as liability (Deferred income).
⮚ Government grant received is credited to deferred income (this means that an income has been
received in advance).
⮚ Government grant is amortised over the useful life of the asset in order to match grant income
with the relevant cost.
⮚ In the case of property, plant and equipment, the relevant cost here is the depreciation charges.
⮚ Deferred government grants/income will appear in statement of financial position.
⮚ Income from government grants will appear in statement of income.
ENTRIES
Cash/Bank A/c Dr.
To Deferred Income A/c [SoFP]
(Being government grant received and treated as deferred income)
Deferred Income A/c Dr.
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To Income from Government grants A/c [SoI] [Refer formula]
(Being deferred income recognized as income)
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
𝐺𝑟𝑎𝑛𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 [𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛] =
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡
2. Deduct from asset/Asset approach
⮚ In this method, we calculate carrying amount of the asset by deducting the grants received from
the cost of asset acquired.
⮚ Carrying amount = Cost of asset – Government grants
⮚ This means, the recognition of grants in statement of income is automatically reflected in
depreciation charges.
ENTRIES
Cash/bank A/c
To PPE-water solution facilities [SoFP]
(Being PPE purchased)
Depreciation A/c [SoI]
To PPE- water solution facilities
(Being PPE depreciated)
Two methods/approaches of accounting grants related to reimbursement of cost
1. Past costs
⮚ Grant received to reimburse/compensate the expenses already incurred in the past by the entity.
⮚ The grants received will be immediately recognized as expense in the year when the grant is
received.
ENTRIES
Cash/Bank A/c
To Deferred Grant Income
(Being grant received and treated as deferred income)
Deferred Income A/c
To Grant income/Income statement A/c
(Being deferred income treated as income)
2. Present or future costs
⮚ Grant received to reimburse/compensate the expenses to be incurred in present and future.
⮚ Grant received will be treated as deferred income [liability].
⮚ The entity will recognize the income from grant in the periods when relevant expenses are incurred.
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ENTRIES
Cash/Bank A/c
To Deferred Grant Income
(Being grant received and treated as deferred income)
Deferred Income A/c
To Grant income A/c [Refer formula]
(Being deferred income treated as income)
𝑇𝑜𝑡𝑎𝑙 𝑆𝑝𝑒𝑛𝑡
𝐺𝑟𝑎𝑛𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝑋 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑔𝑟𝑎𝑛𝑡 𝑟𝑒𝑐𝑖𝑒𝑣𝑒𝑑
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑗𝑒𝑐𝑡/𝑎𝑠𝑠𝑒𝑡
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