IAS 38: Intangible Assets
IAS 38: Intangible Assets
IAS 38: Intangible Assets outlines the accounting requirements for intangible assets. Intangible assets are non-monetary assets which are without any physical substance and identifiable. Intangible assets that meet the relevant recognition criteria are initially measured at cost and subsequently measured at a value or using a revaluation model, and amortised on a systematic basis over their useful lives. The primary objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with explicitly in another Standard. IAS 38 requires an entity to recognise an asset as intangible if, and only if, specified criteria are met. This article throws light on IAS 38: Intangible Assets.
Scope of IAS 38
The IAS 38 standard shall be applied in accounting for tangible assets, except in the following situations.
- When intangible assets are within the scope of a different standard.
- For financial assets, as defined in IAS 32 Financial Instruments: Presentation.
- For the recognition and the measurement of the exploration and evaluation assets.
- For expenditure on the development and the extraction of minerals, oil, natural gas and other similar non-regenerative resources.
When another standard prescribes the accounting for a specific type of an asset that is intangible, an entity applies that rule instead of this one. For a clear example, this Standard does not apply to the following.
- Intangible assets that are held by another entity for sale in the ordinary course of business.
- Deferred tax assets.
- Leases that are well within the scope of the IAS 17 Leases.
- Assets that arise from employee benefits.
- Financial assets as defined in the IAS 32 Financial Instruments. The IFRS 10 Consolidated Financial Statements cover the recognition and measurement of some financial assets as well as the IAS 27 Separate Financial Statements and the IAS 28 Investments in Associates and Joint Ventures.
- The goodwill that is acquired in a business combination.
- Deferred acquisition costs, and intangible assets that arise from an insurer’s contractual rights under insurance contracts that are in the scope of the IFRS 4 Insurance Contracts. IFRS 4 sets out certain disclosure requirements for those deferred acquisition costs but not for the mentioned intangible assets. Therefore, the disclosure requirements included this standard apply to those intangible assets.
- Non-current intangible assets that are classified as held for sale under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Assets included in a disposal group that is classified as held for sale are also a part of Non-current intangible assets.
An intangible asset is a non-monetary, identifiable item without any physical substance that is within the control of an entity and is capable of generating future economic benefits for the entity.
An asset is identifiable under the following conditions.
- When an asset is separable, that is when an asset is capable of being separated or divided from an entity and sold, transferred, licensed, exchanged or rented, either individually or together with a related contract, liability or identifiable asset, regardless of whether the entity intends to do so.
- When an asset arises from any contractual or other legal rights, regardless of whether those rights are transferable or separate from the entity or other rights and obligations.
An entity shall apply for annual periods at the beginning of or after 1st of January, 2006. For an earlier period, if the entity uses the IFRS 6 Exploration for and evaluation of mineral resources, those amendments shall be applied for that more prior period.
Measurement after recognition of assets
An entity has the option to choose either the cost model or the revaluation model as its policy for accounting. When an intangible asset is accounted for using the model of revaluation, all the other assets in its same class shall also be considered for using the same model, unless there is no active market for those assets.
An intangible asset is carried at its own cost less than any accumulated amortisation and any accumulated impairment losses after initial recognition.
After an initial recognition of an intangible asset, it shall be carried at an amount that is revalued. It is a revalued amount being its fair value at the date of revaluation less than any subsequently accumulated amortisation and any other subsequent accumulated impairment losses. Revaluations shall be carried out with a regularity that at the end of the period to report, the carrying amount of the intangible asset does not differ according to material from its fair value.
When a certain intangible asset is revalued, the carrying amount of the asset is adjusted to the revalued amount. The asset is treated in any of the following ways at the date of revaluation.
- The gross carrying amount shall be adjusted in a manner that stays consistent with the revaluation of the carrying amount of the said asset.
- The accumulated amortisation is eliminated against the total carrying amount of the asset, and the amount of the adjustment of accumulated depreciation forms a part of the increase or decrease in the carrying amount.
If an intangible asset in a particular class of revalued intangible assets cannot be revalued because there is no existing active market for the said asset, then the asset shall be carried at the cost less than any accumulated amortisation and impairment losses.
Revaluation changes should be accounted as mentioned below.
If the carrying amount of intangible asset is increased as a result of revaluation:
· The increase shall be recognised in another comprehensive income and accumulated in the equity under the heading revaluation surplus; or
· The increase shall be identified in the profit or loss to the extent that it reverses a decrease in the revaluation of the same asset previously recognised in the gain or loss.
If a carrying amount of an asset is decreased as a result of a revaluation:
· The decrease shall be recognised in the profit or loss; or
· The decline shall be known in another comprehensive income to the extent of any credit balance existing in the revaluation surplus concerning that of the asset. The reduction identified in other comprehensive income reduces the amount accumulated in the equity under the heading od the revaluation surplus.
An entity shall assess if the useful life of an intangible asset is finite or is indefinite. If finite, the length of, or the number of production or similar units constituting the useful life is assessed. An intangible asset shall be considered by the entity as an asset with an indefinite useful life when, based on the analysis of all of the factors that are relevant, there is no foreseeable limit to the term over which the asset is expected to generate the net cash inflows for the entity.
The useful life of an asset that arises from contractual or any other legal rights should not cross the period of the contractual or any other legal rights but may be shorter depending on the term over which the entity expects to use the said asset. If the contractual or any other constitutional rights are conveyed for a limited period that may be renewed, the useful life of the said intangible asset would include the renewal period(s) only if there is enough evidence to support the renewal by the entity without a significant cost. The useful life of an asset that is reacquired and recognised as an intangible asset in a business combination is the remaining contractual term of the contract in which the right was granted and shall not include renewal periods.
Determination of useful life of an asset
The following factors need to considered when determining the useful life of a certain intangible asset.
- The expected usage of an asset by an entity and if the asset could be managed efficiently by another management team.
- The typical product life cycle for an asset and the public information on estimates of the useful lives of similar assets that are similarly used.
- The technical, technological, commercial or any other types of obsolescence.
- The stability of the industry where an asset is assigned operates and changes according to the market demand for the services or products output from the certain asset.
- The expected actions by other competitors or potential competitors.
- The level of maintenance on expenditure required to obtain an expected future economic benefit from the certain asset and the entity’s ability and the intention to reach such a level.
- The period of control over an asset and the legal or similar limits on the use of an asset, such as the expiry dates of the related leases; and
- Whether a useful life of the asset is dependent on the useful lives of other assets of the entity.
Indefinite useful lives of Intangible Assets
An intangible asset with a certain indefinite useful life shall not be amortised. According to the IAS 36 Impairment of Assets, an entity is required to test a specific intangible asset with the indefinite useful life for impairment by differentiating between its recoverable amount with its carrying amount:
- Annually, and
- If there is an indication that the certain intangible asset may be impaired.
Review of the useful life assessment:
The useful life of a particular intangible asset that is not being amortised would be reviewed for each period to determine whether the events and circumstances continue to support an indefinite useful life assessment for that asset. If it does not, the change in the useful life assessment from indefinite to finite would be accounted for as the change in an accounting estimate as per the IAS 8 Account Policies, Changes in Estimates and Errors.