of the entity as a whole. [IAS 38.BC10]. Therefore, the search for intangible assets is not
restricted to rights that are separable.
However, preparers should not restrict their search for intangible assets to those
embodied in contractual or other legal rights, since the definition of identifiability
merely requires such rights to be capable of separation. Non-contractual rights are
required to be recognised as an intangible asset if the right could be sold, transferred,
licensed, rented or exchanged. In considering the responses to ED 3 – Business
Combinations – the Board observed that the existence of an exchange transaction for a
non-contractual relationship provides evidence both that the item is separable, and that
the entity is able to control the expected future economic benefits flowing from it,
meaning that the relationship should be recognised as an intangible asset. Only in the
absence of exchange transactions for the same or similar non-contractual customer
relationships would an entity be unable to demonstrate that such relationships are
separable or that it can control the expected future economic benefits flowing from
those relationships. [IAS 38.BC13].
2.1.2 Control
IAS 38 defines control as the power to obtain the future economic benefits generated
by the resource and the ability to restrict the access of others to those benefits. Control
normally results from legal rights, in the way that copyright, a restraint of trade
agreement or a legal duty on employees to maintain confidentiality protects the
economic benefits arising from market and technical knowledge. [IAS 38.13-14]. While it
will be more difficult to demonstrate control in the absence of legal rights, the standard
is clear that legal enforceability of a right is not a necessary condition for control,
because an entity may be able to control the future economic benefits in some other
way. [IAS 38.13]. The existence of exchange transactions for similar non-contractual rights
can provide sufficient evidence of control to require separate recognition as an asset.
[IAS 38.16]. Obviously, determining that this is the case in the absence of observable
contractual or other legal rights requires the exercise of judgement based on an
understanding of the specific facts and circumstances involved.
Intangible
assets
1219
For example, the standard acknowledges that an entity usually has insufficient control
over the future economic benefits arising from an assembled workforce (i.e. a team of
skilled workers, or specific management or technical talent) or from training for these
items to meet the definition of an intangible asset. [IAS 38.15]. There would have to be
other legal rights before control could be demonstrated.
Example 17.1: Demonstrating control over the future services of employees
Entity A acquires a pharmaceutical company. A critical factor in the entity’s decision to acquire the
company was the reputation of its team of research chemists, who are renowned in their field of expertise.
However, in the absence of any other legal rights it would not be possible to show that the entity can
control the economic benefits embodied in that team and its skills because any or all of those chemists
could leave. Therefore, it is most unlikely that Entity A could recognise an intangible asset in relation to
the acquiree’s team of research chemists.
Entity B acquires a football club. A critical factor in the entity’s decision to acquire the club was the reputation
of its players, many of whom are regularly selected to play for their country. A footballer cannot play for a
club unless he is registered with the relevant football authority. It is customary to see exchange transactions
involving players’ registrations. The payment to a player’s previous club in connection with the transfer of
the player’s registration enables the acquiring club to negotiate a playing contract with the footballer that
covers a number of seasons and prevents other clubs from using that player’s services. In these circumstances
Entity B would be able to demonstrate sufficient control to recognise the cost of obtaining the players’
registrations as an intangible asset.
In neither of the above examples is an asset being recognised for the assembled
workforce. In the case of the football team, the asset being recognised comprises
the economic benefits embodied in the players’ registrations, arising from
contractual rights. In particular, it is the ability to prevent other entities from using
that player’s services (i.e. restricting the access of others to those benefits), [IAS 38.13],
combined with the existence of exchange transactions involving similar players’
registrations, [IAS 38.16], that distinguishes this type of arrangement from a normal
contract of employment. In cases when the transfer fee is a stand-alone payment
and not part of a business combination, i.e. when an entity separately acquires the
intangible resource, it is much more likely that it can demonstrate that its purchase
meets the definition of an asset (see 4 below).
Similarly, an entity would not usually be able to recognise an asset for an assembled
portfolio of customers or a market share. In the absence of legal rights to protect or
other ways to control the relationships with customers or the loyalty of its customers,
the entity usually has insufficient control over the expected economic benefits from
these items to meet the definition of an intangible asset. However, exchange
transactions, other than as part of a business combination, involving the same or similar
non-contractual customer relationships may provide evidence of control over the
expected future economic benefits in the absence of legal rights. In that case, those
customer relationships could meet the definition of an intangible asset. [IAS 38.16]. IFRS 3
includes a number of examples of customer-related intangible assets acquired in
business combinations that meet the definition of an intangible asset, which are
discussed in more detail at 5 below. [IFRS 3.IE23-31].
It is worth emphasising that intangible assets should only be recognised when they meet
both the definition of an intangible asset and the applicable recognition criteria in
1220 Chapter 17
IAS 38, [IAS 38.18], which are discussed at 3.1 below. All that is established in the
discussion above is whether the intangible right meets the definition of an asset.
The extract below illustrates the range of intangible assets that require recognition
under IAS 38.
Extract 17.1: RELX Group (2017)
Notes to the consolidated financial statements
for the year ended 31 December 2017 [extract]
16 Intangible assets [extract]
Accounting policy [extract]
Intangible assets acquired as part of business combinations comprise: market-related assets (e.g. trademarks, imprints,
brands); customer-related assets (e.g. subscription bases, customer lists, customer relationships); editorial content;
software and systems (e.g. application infrastructure, product delivery platforms, in-process research and
development); contract-based assets (e.g. publishing rights, exhibition rights, supply contracts); and other intangible
assets. Internally generated intangible assets typical
ly comprise software and systems development where an
identifiable asset is created that is probable to generate future economic benefits.
2.1.3
Future economic benefits
Future economic benefits include not only future revenues from the sale of products or
services but also cost savings or other benefits resulting from the use of the asset by the
entity. For example, the use of intellectual property in a production process may reduce
future production costs rather than increase future revenues. [IAS 38.17].
2.2
Is IAS 38 the appropriate IFRS?
An asset is defined generally and in IAS 38 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]. As
we have discussed earlier, this definition could include assets covered by another
standard which are therefore excluded from its scope (see 2 above). However, in some
circumstances it is not clear whether IAS 38 or another standard applies.
2.2.1
Whether to record a tangible or intangible asset
Before the advent of IAS 38 many entities used to account for assets without physical
substance in the same way as property, plant and equipment. Indeed, the standard notes
that intangible assets can be contained in or on a physical medium such as a compact
disc (in the case of computer software), legal documentation (in the case of a licence or
patent) or film, requiring an entity to exercise judgement in determining whether to
apply IAS 16 or IAS 38. [IAS 38.4]. For example:
Intangible
assets
1221
• software that is embedded in computer-controlled equipment that cannot operate
without it is an integral part of the related hardware and is treated as property,
plant and equipment; [IAS 38.4]
• application software that is being used on a computer is treated as an intangible
asset because it is generally easily replaced and is not an integral part of the related
hardware, whereas the operating system normally is integral to the computer and
is included in property, plant and equipment; [IAS 38.4]
• a database that is stored digitally is considered to be an intangible asset where the
value of the physical medium is wholly insignificant compared to that of the data
collection; and
• research and development expenditure may result in an asset with physical
substance (e.g. a prototype), but as the physical element is secondary to its intangible
component, the related knowledge, it is treated as an intangible asset. [IAS 38.5].
It is worthwhile noting that the ‘parts approach’ in IAS 16 requires an entity to account for
significant parts of an asset separately because they have a different economic life or are
often replaced, [IAS 16.44], (see Chapter 18). This raises ‘boundary’ problems between IAS 16
and IAS 38 when software and similar expenditure is involved. We believe that where
IAS 16 requires an entity to identify parts of an asset and account for them separately, the
entity needs to evaluate whether any intangible-type part is actually integral to the larger
asset or whether it is really a separate asset in its own right. The intangible part is more likely
to be an asset in its own right if it was developed separately or if it can be used independently
of the item of property, plant and equipment of which it apparently forms part.
This view is consistent with that taken in IFRS 3, when it asserts that related tangible
and intangible components of an asset with similar useful lives (meaning that IAS 16
would not require separate accounting of parts of an asset) can be combined into a single
asset for financial reporting purposes. [IFRS 3.B32(b)].
2.2.2
Classification of programme and other broadcast rights as inventory
or intangible assets
The appropriate classification of broadcast rights depends on the particular facts and
circumstances as they apply to an entity. However, it is possible for an entity to conclude that
some of its broadcast rights are intangible assets while others should be treated as inventory.
Programme and other broadcast rights meet the definition of intangible assets because
they are identifiable non-monetary assets without physical substance. IAS 38
specifically includes within its scope rights under licensing agreements for items such as
motion picture films and video recordings. [IAS 38.6]. In addition, a broadcast right meets
the other criteria for recognition as an intangible asset, being identifiable, as it arises
from contractual rights [IAS 38.12(b)] and controlled by the entity. [IAS 38.13].
1222 Chapter 17
Rights to programmes held exclusively for sale to other parties also meet the definition
of inventory and are therefore within the scope of IAS 2. [IAS 38.3]. It is possible to argue
that programmes held with a view to broadcasting them to an audience are comparable
to ‘materials or supplies to be consumed in the production process or in the rendering
of services’, [IAS 2.6], which would mean that they could also be treated as inventory.
Equally, it can be argued that such programme rights are intangible assets as they are
used in the production or supply of services but not necessarily consumed because they
can be used again.
Therefore, it is possible for entities to choose whether programme or other broadcast
rights are classified as intangible assets or as inventory. However, the classification of
income, expenses and cash flows in respect of those rights should be consistent with the
manner of their classification in the statement of financial position.
Accordingly, where a broadcast right is classified as an intangible asset:
• it is classified in the statement of financial position as current or non-current
according to the entity’s operating cycle (see 10.2 below);
• the intangible asset is amortised, with amortisation included in the statement of
profit or loss within the depreciation and amortisation expense, or within a
functional expense category (such as cost of sales);
• in the cash flow statement, payments for the acquisition of intangible broadcast
rights are classified as an investing activity (if the asset is classified as non-current
on acquisition) or as an operating activity if the asset is classified as current; and
• rights are measured at a revalued amount only if the criteria in IAS 38 are met
(see 8.2 below). Otherwise the asset is carried at cost less accumulated
amortisation and impairments. Any impairment of the asset is determined in
accordance with IAS 36.
Where a broadcast right is classified as inventory:
• it is classified in the statement of financial position as a current asset either as part
of inventory or as a separate category;
• the entity recognises an expense in cost of sales as the right is consumed;
• payments for the acquisition of inventory are classified as operating activities in
the statement of cash flows; and
• rights are carried at the lower of cost and net realisable value.
&n
bsp; Both of these classifications are found in practice. Vivendi accounts for its film and
television rights catalogues as intangible assets (see Extract 17.3 at 3.1.1 below). ITV on
the other hand, presents its programme rights as current assets under the caption
‘Programme rights and other inventory’.
Intangible
assets
1223
Extract 17.2: ITV plc (2017)
Notes to the financial statements [extract]
Section 3: Operating Assets and Liabilities [extract]
3.1. Working capital [extract]
3.1.1 Programme rights, other inventory and commitments [extract]
Broadcast programme rights [extract]
Acquired programme rights (which include films) and sports rights are purchased for the primary purpose of broadcasting
on the ITV family of channels, including VOD and SVOD platforms. These are recognised within current assets as
payments are made or when the rights are ready for broadcast. The Group generally expenses these rights through
operating costs over a number of transmissions reflecting the pattern and value in which the right is consumed.
Commissions, which primarily comprise programmes purchased based on editorial specification and over which the
Group has some control, are recognised in current assets as payments are made and are generally expensed to
operating costs in full on first transmission. Where a commission is repeated on any platform, incremental costs
associated with the broadcast are included in operating costs.
[...]
The Broadcast programme rights and other inventory at the year end are shown in the table below:
2017 2016
£m £m
Acquired programme rights
179
157
Commissions
86
69
Sports rights
58
27
323
253
3
RECOGNITION AND MEASUREMENT
3.1 Recognition
An item that meets the definition of an intangible asset (see 2.1 above) should only be
recognised if, at the time of initial recognition of the expenditure:
(a) it is probable that the expected future economic benefits that are attributable to
the asset will flow to the entity; and
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 241