Example 17.17:
Impairment of an intangible asset with an indefinite useful
life .......................................................................................................... 1269
Example 17.18:
Application of ‘net liability’ approach ........................................... 1280
Example 17.19:
Impact of purchased emission rights on the application of
‘net liability’ approach ....................................................................... 1281
1213
Chapter 17
Intangible assets
1 INTRODUCTION
1.1 Background
IAS 38 – Intangible Assets – is structured along similar lines as IAS 16 – Property, Plant
and Equipment.
Prior to IAS 38 accounting practice for intangible assets had largely developed on an
issue-by-issue basis, with the result being a variety of treatments for particular types of
intangible assets. There have been many topical issues over the years: research and
development (as long ago as the 1970s), brands and similar assets (particularly those arising
in business combinations), and assets and costs that are directly and indirectly related to
the internet and personal communications. In time, it became apparent that two different
types of intangible rights shared characteristics that made a single standard meaningful.
Firstly, there are internal costs incurred by entities from which they expect to benefit
in the future. The critical issue is identifying whether, when and how much of these
costs should be recognised as assets, and how much should be recognised immediately
as expenses. For example, there are many types of expenditure from which an entity
may expect to benefit in future, but it is not possible to identify an asset or the
relationship between the cost and future benefits is too tenuous to allow capitalisation.
Secondly, there are intangible rights acquired separately or as part of business
combinations. For intangible rights acquired in a business combination, a key issue is
whether the intangible rights are distinguishable from goodwill and should be recognised
separately. This has become more important as a consequence of goodwill not being
amortised, which means that entities must identify as separate intangible assets certain
rights, e.g. customer relationships that had historically been subsumed within goodwill.
Unlike IAS 16 whose scope is defined by its title (it applies to property, plant and equipment),
IAS 38 includes a definition of the assets to which it applies. However, this is so general (an
intangible asset is an identifiable non-monetary asset without physical substance) that the
standard must exclude certain assets and items of expenditure that would otherwise fall
within it. The definition could include assets generated by other standards, which are
therefore excluded from scope. Incidentally, this shows just how broad the definition could
be as the list of scope exemptions includes deferred tax assets, leases and assets arising from
1214 Chapter 17
employee benefits which are within scope of, respectively, IAS 12 – Income Taxes, IFRS 16
– Leases – and IAS 19 – Employee Benefits. [IAS 38.3]. Additional clarification comes from
the prohibition on recognising internally-generated goodwill. This means that expenditure
on brands and similar assets cannot be recognised as an intangible asset as it is not possible
to distinguish these costs from the costs of developing the business as a whole. [IAS 38.63, 64].
However, arguably the opposite approach is taken with the intangible assets identified in a
business combination where the standard encourages separate recognition through a broad
approach given to concepts such as separability. This remains a difficult and controversial
area, discussed at 5 below. The requirements of IFRS 3 – Business Combinations – are
discussed in Chapter 9.
This chapter addresses the specific provisions of IAS 38, with the requirements relating
to intangible assets acquired as part of a business combination being covered both at 5
below and in Chapter 9. IFRS 13 – Fair Value Measurement – includes the guidance
relating to the determination of fair values (see Chapter 14). Impairment of intangible
assets is addressed in IAS 36 – Impairment of Assets, covered in Chapter 20.
Other intangible assets are dealt with by specific accounting pronouncements. The amount
spent on the operation and development of websites led to the issue of SIC-32 – Intangible
Assets – Web Site Costs – that is discussed at 6.2.5 below. Although IAS 38 addresses
acquisition by way of government grant, this has not proved sufficient to address accounting
for various schemes designed to influence business behaviour, especially in environmental
areas. Emissions trading schemes give rise to intangible rights and the attempts to devise a
satisfactory accounting model for these and similar schemes are considered at 11.2 below.
Recent years have seen an increase in the use and trading of crypto-assets such as
Bitcoin and Ether. These may meet the relatively wide definition of intangible assets
and can be accounted for under IAS 38. Crypto-assets are discussed at 11.5 below.
1.2
Terms used in IAS 38
The following terms are used in IAS 38 with the meanings specified:
Term Definition
Intangible asset
An identifiable non-monetary asset without physical substance. [IAS 38.8].
Asset
An asset is a resource: [IAS 38.8]
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.
Monetary assets
Money held and assets to be received in fixed or determinable amounts of
money. [IAS 38.8].
Identifiable
An asset is identifiable if it either: [IAS 38.12]
(a) is separable, i.e. capable of being separated or divided from the entity
and sold, transferred, licensed, rented or exchanged, either
individually or together with a related contract, identifiable asset or
liability, regardless of whether the entity intends to do so; or
(b) 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.
Intangible
assets
1215
Control
The power to obtain the future economic benefits flowing from the underlying
resource and to restrict the access of others to those benefits. [IAS 38.13].
Cost
The amount of cash or cash equivalents paid or the fair value of other
consideration given to acquire an asset at the time of its acquisition or
construction, or, when applicable, the amount attributed to that asset when
initially recognised in accordance with the specific requirements of other
IFRSs, e.g. IFRS 2 – Share-based Payment. [IAS 38.8].
Carrying amount
The amount at which the asset is recognised in the statement of financial
position after deducting any accumulated amortisation and accumulated
impairment losses thereon. [IAS 38.8].
Amortisation
The systematic allocation of the depreciable amount of an intan
gible asset
over its useful life. [IAS 38.8].
Depreciable amount
The cost of an asset, or other amount substituted for cost, less its residual
value. [IAS 38.8].
Residual value
The estimated amount that the entity would currently obtain from disposal
of the intangible asset, after deducting the estimated costs of disposal, if the
intangible asset were already of the age and in the condition expected at the
end of its useful life. [IAS 38.8].
Useful life
(a) the period over which an asset is expected to be available for use by
an entity; or
(b) the number of production or similar units expected to be obtained from
the asset by an entity. [IAS 38.8].
Impairment loss
The amount by which the carrying amount of the asset exceeds its
recoverable amount. [IAS 38.8].
Research
Original and planned investigation undertaken with the prospect of gaining
new scientific or technical knowledge and understanding. [IAS 38.8].
Development
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. [IAS 38.8].
Entity-specific value
The present value of the cash flows an entity expects to arise from the
continuing use of an asset and from its disposal at the end of its useful life
or expects to incur when settling a liability. [IAS 38.8].
Fair value
The price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement
date. (See Chapter 14). [IAS 38.8].
Active market
A market in which transactions for the asset or liability take place with
sufficient frequency and volume to provide pricing information on an
ongoing basis. [IFRS 13 Appendix A].
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2
OBJECTIVE AND SCOPE OF IAS 38
The objective of IAS 38 is to prescribe the accounting treatment for intangible assets
that are not specifically dealt with in another standard. [IAS 38.1].
IAS 38 does not apply to accounting for:
(a) intangible assets that are within the scope of another standard;
(b) financial assets, as defined in IAS 32 – Financial Instruments: Presentation;
(c) the recognition and measurement of exploration and evaluation assets within the
scope of IFRS 6 – Exploration for and Evaluation of Mineral Resources; and
(d) expenditure on the development and extraction of, minerals, oil, natural gas and
similar non-regenerative resources. [IAS 38.2].
Examples of specific types of intangible asset that fall within the scope of another
standard include: [IAS 38.3]
(a) intangible assets held by an entity for sale in the ordinary course of business, to
which IAS 2 – Inventories – applies (see Chapters 22);
(b) deferred tax assets, which are governed by IAS 12 (see Chapter 29);
(c) leases of intangible assets accounted for in accordance with IFRS 16 (see
Chapter 24). Rights under licensing agreements for such items as motion picture
films, video recordings, plays, manuscripts, patents and copyrights that are outside
the scope of IFRS 16 [IFRS 16.3] are within the scope of IAS 38; [IAS 38.6]
(d) assets arising from employee benefits, for which IAS 19 is relevant (see Chapter 31);
(e) financial assets as defined in IAS 32. The recognition and measurement of some
financial assets are covered by IFRS 10 – Consolidated Financial Statements,
IAS 27 – Separate Financial Statements – and IAS 28 – Investments in Associates
and Joint Ventures (see Chapters 6, 8, 11 and 40 to 50);
(f) goodwill acquired in a business combination, which is determined under IFRS 3
(see Chapter 9);
(g) deferred acquisition costs, and intangible assets, arising from an insurer’s
contractual rights under insurance contracts within the scope of IFRS 4 –
Insurance Contracts, or IFRS 17 – Insurance Contracts – if applied. IFRS 4 sets out
specific disclosure requirements for those deferred acquisition costs but not for
those intangible assets. Therefore, the disclosure requirements in this standard
apply to those intangible assets (see Chapter 51);
(h) non-current intangible assets classified as held for sale, or included in a disposal
group that is classified as held for sale, in accordance with IFRS 5 – Non-current
Assets Held for Sale and Discontinued Operations (see Chapter 4); and
(i) assets arising from contracts with customers that are recognised in accordance
with IFRS 15 – Revenue from Contracts with Customers.
IAS 38 excludes insurance contracts and expenditure on the exploration for, or development
and extraction of oil, gas and mineral deposits in extractive industries from its scope because
activities or transactions in these areas are so specialised that they give rise to accounting
issues that need to be dealt with in a different way. However, the standard does apply to
Intangible
assets
1217
other intangible assets used in extractive industries or by insurers (such as computer
software), and other expenditure incurred by them (such as start-up costs). [IAS 38.7].
Finally, the standard makes it clear that it applies to expenditures on advertising,
training, start-up and research and development activities. [IAS 38.5].
2.1
What is an intangible asset?
IAS 38 defines an asset as ‘a resource controlled by an entity as a result of past events;
and from which future economic benefits are expected to flow to the entity’. [IAS 38.8].
Intangible assets form a sub-section of this group and are further defined as ‘an
identifiable non-monetary asset without physical substance’. [IAS 38.8]. The IASB
considers that the essential characteristics of intangible assets are that they are:
• controlled by the entity;
• will give rise to future economic benefits for the entity;
• lack physical substance; and
• are identifiable.
An item with these characteristics is classified as an intangible asset regardless of the
reason why an entity might hold that asset. [IAS 38.BC5]. There is one exception: intangible
assets held for sale (either in the ordinary course of business or as part of a disposal
group) and accounted for under IAS 2 or IFRS 5 are specifically excluded from the scope
of IAS 38. [IAS 38.3].
Businesses frequently incur expenditure on all sorts of intangible resources such as
scientific or technical knowledge, design and implementation of new processes or
systems, licences, intellectual property, market knowledge, trademarks, brand names
and publishing titles. Examples that fall under these headings include computer
software, patents, copyrights, motion picture films, customer lists, mortgage servicing
rights, fishing licences, import quotas, franchises, customer or supplier relationships,
customer loyalty, market share and marketing rights. [IAS 38.9].
Although these items are mentioned by the standard, not all of them will meet the
standard’s eligibility criteria for recognition as an intangible asset, which requires
identifiability, control over a resource and the existence of future economic benefits.
Expenditure on items that do not meet all three criteria will be expensed when incurred,
unless they have arisen in the context of a business combination as discussed at 5 below.
[IAS 38.10].
2.1.1 Identifiability
IAS 38’s requirement that an intangible asset must be ‘identifiable’ was introduced to try
to distinguish it from internally generated goodwill (which, outside a business
combination, should not be recognised as an asset [IAS 38.48]), but also to emphasise that,
especially in the context of a business combination, there will be previously unrecorded
items that should be recognised in the financial statements as intangible assets
separately from goodwill. [IAS 38.BC7, BC8].
IFRS 3 defines goodwill as ‘representing the future economic benefits arising from other
assets acquired in a business combination that are not individually identified and
1218 Chapter 17
separately recognised.’ [IFRS 3 Appendix A]. For example, future economic benefits may
result from synergy between the identifiable assets acquired or from assets that,
individually, do not qualify for recognition in the financial statements. [IAS 38.11].
IAS 38 states that an intangible asset is identifiable when it either: [IAS 38.12]
(a) is separable, meaning that it is capable of being separated or divided from the entity
and sold, transferred, licensed, rented or exchanged, either individually or together
with a related contract, identifiable asset or liability, regardless of whether the
entity intends to do so; or
(b) 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.
The explicit requirement to recognise assets arising from contractual rights alone
confirms the IASB’s position that the existence of contractual or legal rights is a
characteristic that distinguishes an intangible asset from goodwill, even if those rights
are not readily separable from the entity as a whole. The Board cites as an example of
such an intangible asset a licence that, under local law, is not transferable except by sale
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 240