1. Intangible Assets: IAS 38
Wiecek and Young
IFRS Primer
Chapter 15

2. Intangible Assets Related standards IAS 38 Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice

3. Related Standards FAS 142 Goodwill and other intangible assets
FAS 141 Business combinations
FAS 86 Accounting for the costs of computer software to be sold, leased, or otherwise marketed

4. Related Standards IFRS 3 Business combinations
IAS 36 Impairment of assets
IAS 17 Leases
IFRS 4 Insurance contracts
IFRS 5 Non-current assets held for sale and discontinued operations
IFRS 6 Exploration for and evaluation of mineral resources

5. IAS 38 - Overview Objective and scope Recognition and measurement
Acquired intangible assets
Internally generated intangibles
Measurement after recognition
Retirements and disposals
Disclosures

6. IAS 38 – Objective and Scope
Intangible asset:
“an identifiable non-monetary asset without physical substance”
Conditions
Must be identifiable
Will provide future economic benefits
Benefits are controlled by the entity

7. IAS 38 – Recognition and Measurement
Recognized as an intangible asset when:
It is likely that the expected future economic benefits will be realized, and
The cost of the asset can be reliably measured
Measured initially at cost

8. IAS 38 – Acquired Intangible Assets

9. IAS 38 – Acquired Intangible Assets
Acquired separately:
Cost includes purchase price, duties, non-refundable taxes, net of discounts and rebates + direct costs of preparing the asset and bringing it to an appropriate condition for its intended use.
Examples: franchises, patents, customer lists, trademarks

10. IAS 38 – Acquired Intangible Assets
Not included in cost:
Advertising, promotion, training associated with new products, locations, customers; administrative and other general overhead; early stage operating losses

11. IAS 38 – Acquired Intangible Assets
Intangibles acquired in an asset exchange:
Cost = fair value (FV) of what is given up, UNLESS
Transaction does not have commercial substance, or
The FV of neither the asset given up or the asset acquired can be reliably measured
If (a) or (b), cost = carrying amount of asset(s) given up

12. IAS 38 – Acquired Intangible Assets
Commercial substance exists if:
Future cash flows (amount, timing, risk) of asset received differ from those of asset given up; or
Entity-specific value has changed; and
The difference in (a) or (b) is significant when compared to the FVs of the assets exchanged.

13. IAS 38 – Acquired Intangible Assets
Acquired in a business combination:
Cost is its FV
Identifiable intangibles are recognized separately from goodwill
Best FV is quoted market prices in an active market – if not available, other methods are used

14. IAS 38 Internally Generated Intangibles
Internally generated goodwill is not recognized as an asset
Because no identifiable resource has been created that is controlled by the entity and that can be measured reliably at cost

15. IAS 38 Internally Generated Intangibles
To recognize an internally generated intangible, it must:
be an identifiable asset that will generate expected future economic benefits, and
have a cost that can be differentiated from ordinary operating costs and internally generated goodwill, and that can be measured reliably

16. IAS 38 Internally Generated Intangibles
Two phases of costs to generate an internally generated intangible:
Research phase – original and planned investigation to gain new scientific or technical knowledge: costs are expensed as incurred
Development phase – application of knowledge to a plan or design for the production of new materials, devices, products, processes, systems or services before commercial production: costs are expensed as incurred, UNLESS

17. IAS 38 Internally Generated Intangibles
Development costs are expensed as incurred unless all of the following can be demonstrated. If so, can capitalize as an intangible asset.
Technical feasibility of completing
Intention to complete, use or sell
Ability to use or sell
How it will generate future economic benefits
Availability of resources to complete and use or sell, and
Expenditures during development can be reliably measured, i.e., feasibility and economic viability of the asset must be established to support capitalization

18. IAS 38 Internally Generated Intangibles
The following cannot be internally developed intangible assets because the costs of these cannot be distinguished from those to develop a business in general:
Internally generated brands
Mastheads
Publishing titles
Customer lists
Others, similar in nature to these

19. IAS 38 Internally Generated Intangibles
Cost of an internally generated intangible asset:
Costs directly associated with making the asset ready for use in the manner intended by management. Examples: materials and services consumed, payroll costs, depreciation, amortization costs to generate the asset, legal fees to register
**No costs can be retroactively capitalized

20. IAS 38 Internally Generated Intangibles
In the past, a number of costs were recognized as prepaid or deferred and treated as intangibles. IAS 38 indicates: if no intangible asset is acquired that can be recognized, then expense the cost
For services, recognize as an expense when service is received
For goods, recognize when entity has the right to access the goods supplied

21. IAS 38 – Internally Generated Intangibles
A prepaid asset is recognized instead of an expense only when the payment for goods and services is made before the goods are available to the entity or services have been performed
Apply in all situations, e.g., pre-opening and pre-operating costs, training costs, advertising and promotional costs, relocation costs

22. IAS 38 – Internally Generated Intangibles
Example:
Ace Co. recognizes an account payable to a supplier for producing and delivering a mail-order catalog to be used over the following 12 months. What do you debit?
Debit an expense. The catalog does not meet the definition of an intangible asset, inventory or a prepaid expense.

23. IAS 38 – Measurement after Recognition
Choice: cost model (CM) or revaluation model (RM)
Decision is made for each class of intangible assets so all in same class use the same model

24. IAS 38 – Measurement after Recognition
Cost model
Most widely used
Asset is carried at cost less accumulated amortization and accumulated impairment losses

25. IAS 38 – Measurement after Recognition
Revaluation model
Asset is carried at its fair value at the date of the revaluation less any subsequent accumulated amortization and accumulated impairment losses
Cannot use retroactively to recognize intangible assets not previously recognized
Applied the same as for property, plant and equipment assets

26. IAS 38 – Measurement after Recognition
RM – key aspects
When revalued, carrying amount adjusted either by adjusting asset and accumulated amortization proportionately or eliminating the accumulated amortization and bringing the asset to its revalued amount
Increase in carrying amount: credit to OCI and into revaluation surplus account; unless offset to previous loss charged to P&L when the increase can offset a prior loss.

27. IAS 38 – Measurement after Recognition
RM – key aspects
Decrease in carrying amount is applied first to any revaluation surplus in equity (through OCI); any excess to P&L
When asset derecognized, transfer any revaluation surplus directly to retained earnings; or can transfer revaluation surplus to R/E as asset is used.

28. IAS 38 – Measurement after Recognition
Useful life:
Finite (like PP&E) or indefinite
Indefinite means there is no foreseeable limit to the period the asset is expected to generate net cash inflows
If finite – amortize. Usually no residual value. Apply IAS 36 for impairments.
If indefinite – do not amortize. Apply IAS 36 for impairments.

29. IAS 38 – Retirement and Disposals
Gain or loss on derecognition
Difference between carrying amount and net proceeds on disposal
Recognize in P&L

30. IAS 38 - Disclosures General
Separately between internally generated and those purchased
Accounting policies and methods used
Reconciliations between opening and ending balances
Additional details about those judged to have indefinite lives

31. IAS 38 - Disclosures Intangible assets using RM
For each class, the date of the revaluation, carrying amounts, carrying amounts if cost method had been used, methods and assumptions used to determine FV, reconciliations of revaluation surplus amounts, restrictions on distribution of revaluation surplus amounts

32. Current GAAP Comparisons
Pages 58 and 59 of 164 of
Pages 13 and 14 of 49 of

33. IFRS Financial Statement Disclosures
The Nestlé Group
Valuation methods and definitions:
- pages 22 and 23 of 118
Intangible Assets note:
- pages 42 and 43 of 118

34. Looking Ahead
Inconsistent treatment accorded intangible assets generated internally and those acquired is recognized
No project currently on the IASB agenda
Research continues in this area
No changes expected in the short to medium term

35. End-of-Chapter Practice
15-1 The following is a list of expenditures made by Zorro Corp. (ZC) during its year ended May 31, 2008.
1. December 2007: cost of annual update on payroll software.
2. November 2007: training costs incurred for new product line.
3. December 2007: rent prepayment (six months paid in advance).
4. June 2007: payment for exclusive rights for national sports figure endorsement of ZC products for two years.
5. May 2008: payment for production of special advertisements to be run on television during world championship games in July 2008.
Instructions
Indicate whether ZC should report a related intangible asset on its May 31, 2008 balance sheet for each expenditure described above. Explain your answer in each case.

36. End-of-Chapter Practice
15-2 Three intangibles acquired by Hamm Ltd. (HL) in the current year are described below. HL, a progressive company with a variety of divisions and subsidiaries, has applied fair value measures on its balance sheet wherever permitted.
Intangible #1 is a license granted by the federal government to HL that allows the company to provide essential services to a key military installation overseas. The license expires every five years, but is renewable indefinitely at little cost. Because of the profitability associated with this license, HL fully expects to renew it continually. The license is very marketable and will generate cash flows indefinitely.
Intangible 2 is a non-competition covenant acquired by HL when the company bought out a major owner-managed competitor. The seller signed a contract in which she agreed not to set up or work for another business that is in direct or indirect competition with HL. The projected cash flows resulting from this agreement are expected to continue for at least 25 years.
Intangible 3 are medical files. One of HL’s subsidiary companies owns several medical clinics. A recent purchase of a retiring doctor’s practice required a significant payment for the practice’s medical files and clients. HL considers that this base will benefit the business for as long as it exists, providing cash flows indefinitely.
Instructions
(a) Does each intangible as described above qualify to be recognized as an intangible asset? Explain briefly.
(b) Identify the appropriate method of accounting for each intangible described above after acquisition, and explain the decisions you have made.

37. End-of-Chapter Practice
15-3 The following research and development costs were incurred by Ordo Inc. (OI) during its most recent fiscal year.
Equipment acquired for use in various R&D projects (six year life)$ 90
Depreciation on the equipment above 5
Quality control costs during production, including routine
product testing
Costs of efforts to refine, enrich, or otherwise improve the
qualities of an existing product
Evaluation of potential new products
Costs of operating a lab to improve an existing formula 34
Materials cost for use in pre-production pilot plant 9
Instructions
For each cost described above, indicate whether it should be capitalized as an intangible asset or whether it should be expensed. Explain briefly.

38. End-of-Chapter Practice
15-4 In this chapter, flag icons identify areas where there are GAAP differences between IFRS requirements and national standards.
Instructions
Access the website(s) identified on the inside back cover of this book, and prepare a concise summary of the differences that are flagged throughout the chapter material.

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