Chapter 5 - Intangible assets Flashcards
What international accounting standards are we concerned with in this chapter?
- IAS38 - Intangible Assets
- IAS36 - Impairment of Assets
Briefly outline what IAS38 establishes
IAS 38 Intangible Assets establishes the accounting treatment for intangible assets that are not covered by other standards
According to IAS38, what is the definition of intangible assets
Identifiable non-monetary asset without physical substance
What is meant by ‘identifiable’ in the definition of an intangible asset in IAS38?
An intangible asset is identifiable if it meets at least one of the two following criteria
* It is separable - it can be sold, transferred, exchanged, licensed or rented to another party on its own rather than as part of the business.
* It arises from contractual or other legal rights
According to IAS38, what is the recognition criteria for intangible assets?
Items should be recognised as intangible assets when it is probable that:
* future economic benefits will flow to the entity
* cost can be measured reliably
According to IAS38, how should the value of intangible assets be initially measured?
The cost, being purchase price plus any directly attributable costs
According to IAS38, what expenditure related to intangible assets can be included in the initial measurement of its value?
- Purchase price – Including import duties, non-refundable taxes, and after deducting any trade discounts.
- Testing costs – Expenses incurred to ensure the asset functions properly, minus any revenue from selling test outputs.
- Professional fees – Such as legal fees, engineering, and architecture costs necessary for asset acquisition.
- Employee costs – Wages directly attributable to bringing the asset to its working condition.
According to IAS38, how should the value of intangible assets be subsequently measured?
It gives a choice of either:
* Cost model - initial cost less accumulated amortisation and impairment losses
* Revaluation model - fair value less accumulated amortisation and impairment losses, but only where there is an active market for the asset. As there is not usually an active market for most intangible assets, the revaluation model will not usually be appropriate.
What does IAS38 specify regarding amortisation of intangible assets be treated?
- If asset has a finite useful life, amortise over useful life commencing when it becomes available for use (not necessarily when purchased). Residual values are assumed to be nil
- If asset has an indefinite life it should not be amortised but annually reviewed for impairment
What does IAS38 specify regarding impairment of intangible assets be treated?
IAS38 refers to IAS36 – Impairment of Assets for guidance on impairment. Where the recoverable amount has fallen below the carrying amount the asset has become impaired. As few intangibles are revalued it is usually charged in full to the profit or loss - similiar treatment as per IAS36 for PPE
What are the common items that are commonly identified as intangible assets incorrectly?
- advertising
- training
- marketing
- relocation and reorganisation costs
- Internally generated intangibles, including goodwill, brand names, mast heads, customer lists and publishing titles
These all should be expensed and never capitalised
When is goodwill allowed to be capitalised as an intangible asset?
Purchased goodwill on acquisition of an incorporated business is recognised in the consolidated statement of financial position as an intangible asset.
According to IAS38, how should research and development costs be treated?
Research costs are expensed, while development costs may be capitalized as an intangibe asset if specific criteria are met.
According to IAS38, what criteria must be met for expenditure to be recognised as development costs
To capitalize development costs under IAS 38, an entity must meet the following PIRATE criteria:
* P – Probable future economic benefits: The intangible asset must be expected to generate future economic benefits, such as through sales or internal use.
* I – Intention to complete and use/sell: The entity must demonstrate its commitment to completing the development and using or selling the intangible asset.
* R – Resources availability: The entity must have sufficient technical, financial, and other resources to complete and market or use the intangible asset.
* A – Ability to use or sell: The entity must have the capability to utilize or sell the asset once development is complete.
* T – Technical feasibility: It must be technically feasible to complete the intangible asset so that it becomes usable or marketable.
* E – Expenditure can be reliably measured: The costs incurred during development must be reliably measurable for capitalization.
If all PIRATE criteria are met, the development costs MUST be capitalized from the date the criteria is met; otherwise, they must be expensed as incurred
If the criteria for development costs are met, can you go back and retrospectively capitalise previously expensed costs?
No, you can only capitlaise costs incurred from the date that the criteria was met, any expenditure prior to this is classed as research costs and remains in the P&L
Under IAS38, what are the required dislosure necessary for intangible assets?
Find these in the IAS handbook - don’t memorise just know where to find them
What are the main issues with IAS38 and how is the IASB looking to address these?
Many companies now derive more value from intangible assets like brand, market position, and intellectual property than from physical assets. However, much of this value isn’t reflected in financial statements, as only assets meeting the strict criteria of IAS 38 can be recognised.
IAS 38 also limits recognition of internally generated intangibles, like development costs, which means key assets—such as software—often remain unreported.
This has sparked debate on whether IAS 38, issued over 20 years ago, is outdated and fails to capture the importance of intangible assets in today’s digital economy. In response to this, the IASB initiated a comprehensive review of accounting for intangible assets in April 2024.
The review will evaluate whether the requirements of IAS 38 are still relevant and accurately reflect modern business models or if revisions are needed. As part of the project, the IASB will also explore how this work aligns with the ISSB’s efforts on IFRS Sustainability Disclosure Standards, including the ISSB’s project on human capital.
What is a digital asset?
A digital asset is anything that is stored digitally and is uniquely identifiable that organisations can use to realise value. An example of this is cryptocurrency (e.g. Bitcoin).
How should digital assets like cryptocurrencies be accounted for according to IFRS?
Accounting for cryptocurrencies under IFRS standards, as stated by the IFRS Interpretations
Committee, most closely meets the IAS 38 definition of an intangible asset. Unless, however,
cryptocurrency is held for sale in the ordinary course of business, as such would be accounted for under IAS 2 Inventories.
Outline the key differences between UK GAAP and IFRS for intangible assets
