Faculty of
Economic and
Management Sciences
Study Unit 2: Intangible
assets (IAS 38)
Gripping Gaap 2022/23 edition: Chapter 9 (Page 472)
Graded Questions 2022/23 edition: Chapter 9 (Page 89)
Presented by Mr. Ashley Pietersen
Study outcomes
After engaging with the materials and activities in
this study unit you should be able to:
• Explain and apply the scope of IAS 38 and SIC 32;
• Discuss the key concepts with regard to acquired intangible assets, research and
development costs and web site costs and apply these in a practical situation;
• initially recognise and measure intangible assets, research and development costs and
web site costs in the separate and consolidated financial statements;
• subsequently measure intangible assets, research and development costs and web site
costs in the separate and consolidated financial statements;
• account for the current and deferred tax implications of intangible assets, research and
development costs and web site costs in the separate and consolidated financial
statements;
• present and/or and disclose intangible assets, research and development costs and web
site costs in the separate and consolidated financial statements;
• discuss and evaluate the accounting treatment of intangible assets, research and
development costs and web site costs in the separate and consolidated financial
statements; and
• integrate any of the above learning outcomes with other learning outcomes in this module
as soon as the latter learning outcomes have been addressed.
Resource
Tangible assets Tangible assets Tangible assets Intangible assets
used in the held for sale in held for capital no physical
production of ordinary course of appreciation and substance
goods/services business /or rental income
IAS16 IAS2 IAS40 IAS38
Recognition criteria – Expected inflow of
economic benefits
Reliable measurement of cost
Scope of IAS 38
• IAS 38 is applied in the accounting of all intangible assets,
except:
• Intangible assets that are within the scope of other
standards.
• Financial assets (IAS 32).
• Exploration and evaluation assets (IFRS 6).
• Inventories (IAS 2)
• Non-current assets held for sale (IFRS 5)
• Deferred tax assets (IAS 12)
• Minerals, oil, natural gas and other similar non-
regenerative resources.
Scope of IAS 38
• Some intangible assets exist in a tangible form, e.g. computer
software stored on a CD. An entity has to exercise judgement
in establishing whether the tangible or intangible element is
more significant when deciding whether the asset is within
the scope of IAS 16 or within the scope of IAS 38. If, for
example, the software is an integral part of the hardware
without which the latter cannot function, it is PPE (e.g. a
computer’s operating system, e.g. MS Windows). In all other
instances, computer software is accounted for as intangible
assets.
Definitions NB for
theory…
• An intangible asset is an identifiable non-monetary
asset without physical substance
• Amortisation is the systematic allocation of the
depreciable amount of an intangible asset over its
useful life (what we call ‘depreciation’ for PPE)
• Research is original and planned investigation
undertaken with the prospect of gaining new
scientific or technical knowledge and
understanding.
• 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
More on the definition of intangible assets
• Various items may possibly be intangible assets
E.g. computer software, patents, copyrights, films, customer lists,
mortgage service rights, fishing licences, import quotas, franchises,
customer or supplier relationships, customer loyalty, market share and
marketing rights.
• It must however be tested whether they satisfy the
definition of an intangible asset.
More on the definition of intangible assets
• There are 4 elements of the definition that have to
be considered:
The definition of an asset (old def) must also be
Identifiability
satisfied
In order to be identifiable, an
Here it is especially the requirement of control
item must be separable (i.e.
by the entity and the probability of future
is capable of being separately
economic benefits that are important.
sold, transferred, licensed,
Intellectual capital (e.g. the knowledge of an
rented or exchanged), or it
entity’s key personnel), market share and client
must arise from contractual
or supplier relationships usually do not satisfy
or other legal rights.
the requirement of control, except if there are
Non-monetary asset legal rights that protect these items.
It may therefore not be
Without physical substance
debtors, cash or any other
The item has to be intangible.
financial asset.
Initial recognition
• Old framework recognition criteria must be
satisfied.
• IAS 38.20 explains that it is very unlikely that
subsequent costs would satisfy the recognition
criteria and therefore subsequent costs are
generally not capitalised.
Initial measurement
An intangible asset is initially measured at cost.
1. Cost of an intangible asset that was acquired
separately
• The cost of an intangible asset is determined in a very
similar way than that of PPE (refer IAS 16 already
covered)
2. Exchange of intangible assets
• The principles for the exchange of intangible assets are
similar to that of the exchange of PPE (see IAS 16
already covered)
Gripping Gaap: Section 3.3
Recognition as an expense
• All costs incurred that do not satisfy the recognition
criteria must be recognised as an expense in p/l.
If costs incurred on an intangible item
were previously recognised as an
expense, it may never in subsequent
periods be capitalised as an asset!
Subsequent measurement
• An entity may choose between the cost model
and the revaluation model. The principles are
almost exactly the same as those of PPE (see IAS
16 already covered), except that the term
“amortisation” is used in stead of “depreciation”
• It is however improbable that the entity will be
able to use the revaluation model because an
active market for intangible assets is very rare and
therefore fair value cannot be reliably determined
in many cases
Gripping Gaap: section 6
Useful life and amortisation
▪ An entity shall determine whether the intangible asset has
a finite or an indefinite useful life. An asset has an indefinite
useful life when there is no foreseeable limitation on the
period in which the asset is expected to generate cash
inflows for the entity.
• Assets with a finite useful life is amortised over shorter
of expected life or legal life (NB)
• Assets with an indefinite useful life are not amortised,
but tested for impairment each year (IAS 36).
It shall also be reassessed each year whether the useful life
of the asset has not changed to a finite useful life. If so, it is
accounted for as a change in estimate in terms of IAS 8.
Gripping Gaap: section 5
Residual value of intangible assets
✓The residual value of an intangible asset with a
finite useful life is assumed to be ZERO, except in
the following circumstances:
1. There is a commitment by a third party to purchase
the asset at the end of its useful life, or
2. There is an active market for the asset and the
residual value can be determined with reference to
this market and it is probable that such a market will
still exist at the end of the useful life of the intangible
asset.
Gripping Gaap: section 5.2.2
Derecognition (Retirement and disposal)
• The principles of derecognition of intangible assets
are exactly the same as those of PPE (refer to IAS
16 already covered)
Gripping Gaap: section 7
Impairment
• The principles of impairment of intangible assets
are exactly the same as set out in IAS36 (refer to
IAS 36 already covered)
Gripping Gaap: section 5.3
Internally-generated intangible assets (goodwill)
• Internally generated goodwill
• Internally generated goodwill may NOT be recognised
as an asset because it is not identifiable
• The only circumstance in which goodwill may be
recognised, is when arising from a business
combination (see IFRS 3)
Gripping Gaap: section 3.4.7
Internally-generated intangible assets (research &
development)
• Internally generated intangible assets (research and
development)
• The generation of the asset is divided into two phases,
namely the research phase and the development phase
1. Research phase
• Costs incurred in this phase shall not be capitalised as an
asset, but are expensed in p/l when they are incurred
• Examples of research activities are activities that are
aimed at obtaining new knowledge, the search for
applications of research results, the search for alternatives
for materials, devices, products, processes, systems or
services and the formulation of possible alternatives for the
above
Gripping Gaap: section [Link]
Internally-generated intangible assets (research &
development)
2. Development phase
• Development costs may be recognised as an intangible
asset if the entity can demonstrate ALL (6) of the following
(IAS38:57):
• The technical feasibility of completing the intangible asset so that it will
be available for use or sale.
• Its intention to complete the intangible asset and use or sell it.
• Its ability to use or sell the intangible asset.
• How the intangible asset will generate probable future economic
benefits (e.g. the existence of a market for the output of the intangible
asset or the intangible asset itself).
• The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
• Its ability to measure reliably the expenditure attributable to the
intangible asset during its development.
Internally-generated intangible assets (research &
development)
Internally-generated intangible assets (research &
development)
• Development phase (continued)
• Examples of development activities are the design and
testing of a prototype or model, the design of tools, jigs,
moulds and dies, the design, construction and operation of a
pilot plant and the design, construction and testing of a
chosen alternative for new or improved materials, devices,
products, processes, systems or services.
• The costs of the development phase are all the costs
incurred from the time that all the recognition criteria are
satisfied and include, amongst others, the costs of materials
and services used in the generation of the intangible asset,
the costs of employee benefits (labour costs), fees paid to
register a legal title over the asset and amortisation of
patents and licences used to generate the intangible asset. It
however excludes administrative overheads, initial operating
losses and the costs of training staff.
Internally-generated intangible assets (research &
development)
Development phase (continued)
▪ Important: costs that have already been recognised as
an expense in the past may never in subsequent
periods be capitalised!
Internally generated brands,
If an entity is not able to mastheads, publishing titles,
distinguish between customer lists and items
research and similar in substance shall not
development, all costs are be recognised as intangible
treated as research costs. assets.
Research and development
research production
development
expense expense
Can only
Can’t
capitalise
prove Start
if 6
future amortising
criteria
economic develop-
are
benefits ment asset
met…else
will flow
expense
Research and development
• Ford Ltd, a motor manufacturer, has a research division that
worked on the following:
• Project I - The design of a steering mechanism that does not
operate like the conventional steering wheel, but react to
impulses from driver's fingers. Vehicle manufacturers are very
sceptical about this project.
• Project II – The design of a welding apparatus that is controlled
electronically rather than mechanically. Several large plants have
enquired about this development and are very enthusiastic. This
projects meets all the recognition criteria for intangible assets
since the beginning of year.
• The department head spent 15% of his time on Project I and
10% on Project II.
• R200 000 was spent on Project II in the prior year before
recognition criteria was met
Research and development
General Project I Project II
Material and services R 128 000 R 935 000 R 620 000
Labour
* Direct labour R 0 R 630 000 R 320 000
* Departmental Head R 400 000 R0 R0
* Administrative Personnel R 725 000 R0 R0
Overheads
* Direct R 0 R 340 000 R 410 000
* Indirect R 270 000 R 110 000 R 60 000
Required:
• What amount must be capitalised for development
costs for both the projects?
• PROJECT I
• Activity is classified as research and all costs are recognised
as expenses
• PROJECT II
• CAPITALISE: Material and Services, Direct Labour, Direct +
indirect Overheads, 10% of time of departmental head
• (R620 + R320 + R410 + R60 + 10% (R400)) = R1 450 000
• R200 000 cannot be capitalised now, only costs incurred from
date intangible asset qualified as intangible asset
Website costs- SIC 32
• This interpretation provides detailed guidance on
when you can capitalise website development
costs
• Generally it would be expensed, except if you
can demonstrate how it can create probable
future economic benefits (e.g. if customers can
place orders on your website)
Gripping Gaap: section [Link]
SIC 32 Website costs
Two types of websites
1. website designed for internal access:
e.g. entity’s intranet where employees obtain
information on company policies, customer details,
etc. – internally generated, can’t capitalise
2. website for external access:
e.g. World Wide Web (www) that can be used to
market entity’s product, etc. – capitalise if
requirements are met
SIC 32 Website costs
• If websites main purpose is advertising = expense
all development costs
• If website can take orders = can capitalise
development costs if 6 criteria have been met
Disclosure
Accounting policy
• Cost model vs revaluation model
• Finite or infinite (reasons)
• Amortisation details (period, method, rate)
• Split internally generated and acquired in another
manner
✓ See the section in
Statement of Financial Position Gripping GAAP for a
• Gross…Net detailed example.
✓ This is the last part of the
• Reconciliation topic – but is very
• Title restrictions important, tested often.
Don’t neglect this part of the
• Pledges as security topic!!!
Gripping Gaap: section 9
Disclosure
Statement of Financial Position (continued)
• If material nature of intangible asset
• Details of revaluation (same as PPE)
Statement of Comprehensive Income
• Amortisation
• Research and development costs expensed
Other disclosure
• Contractual commitments
Classwork
• Refer to question pack
Homework
• Efundi quiz