INTERMEDIATE ACCOUNTING IAS 38: INTANGIBLE ASSETS

IAS 38: Intangible Assets The objective of this Standard is to prescribe the accounting treatment for intangible assets. The attributes of intangible assets Identifiability Control Future economic benefits

Identifiability The definition of an intangible asset requires an intangible asset to be identifiable to distinguish it from goodwill.

An asset is identifiable if it either: Is separable, i.e. 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 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.

Control An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits.

Future economic benefits The future economic benefits flowing from an intangible asset may include revenue from the sale of products or services, 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.

Recognition An intangible asset shall be recognized if it meets the definition of an asset and if: It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and The cost of the asset can be measured reliably.

Initial measurement For the purpose on initial measurement intangible assets are classified into the following classes: Separate acquisition Acquisition as part of a business combination Acquisition by way of a government grant Exchanges of assets Internally generated goodwill Internally generated intangible assets

Separate acquisition The cost of a separately acquired intangible asset comprises: Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and Any directly attributable cost of preparing the asset for its intended use.

Acquisition as part of a business combination In accordance with IFRS 3 Business Combinations, if an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value at the acquisition date. The fair value of an intangible asset will reflect expectations about the probability that the expected future economic benefits embodied in the asset will flow to the entity.

Acquisition by way of a government grant In accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, an entity may choose to recognize both the intangible asset and the grant initially at fair value. If an entity chooses not to recognize the asset initially at fair value, the entity recognizes the asset initially at a nominal amount (the other treatment permitted by IAS 20) plus any expenditure that is directly attributable to preparing the asset for its intended use.

Exchanges of assets The cost of such an intangible asset is measured at fair value unless The exchange transaction lacks commercial substance or The fair value of neither the asset received nor the asset given up is reliably measurable.

Internally generated goodwill Internally generated goodwill shall not be recognized as an asset. In some cases, expenditure is incurred to generate future economic benefits, but it does not result in the creation of an intangible asset that meets the recognition criteria in this Standard. Such expenditure is often described as contributing to internally generated goodwill.

Internally generated goodwill Internally generated goodwill is not recognized as an asset because It is not an identifiable resource It is not controlled by the entity And cannot be measured reliably at cost

Internally generated intangible assets To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into: Research phase; and Development phase

Research phase No intangible asset arising from research (or from the research phase of an internal project) shall be recognized. Expenditure on research (or on the research phase of an internal project) shall be recognized as an expense when it is incurred.

Development phase An intangible asset arising from development (or from the development phase of an internal project) shall be recognized if, and only if, an entity can demonstrate all of the following: The technical feasibility of completing the intangible asset so that it will be available for use or sale. Its intention to complete the intangible asset and use or sell it. Its ability to use or sell the intangible asset.

Development phase How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

Development phase The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Measurement after recognition An entity shall choose either the cost model or the revaluation model as its accounting policy. If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same model, unless there is no active market for those assets.

Cost model After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortization and any impairment loss.

Revaluation model After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent impairment losses.

Revaluation model For the purpose of revaluations under this Standard, fair value shall be determined by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value.

Revaluation model The revaluation model does not allow: The revaluation of intangible assets that have not previously been recognized as assets; The initial recognition of intangible assets at amounts other than cost.

Useful life An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of production or similar units constituting, that useful life. An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

Intangible assets with indefinite useful lives An intangible asset with an indefinite useful life shall not be amortized. In accordance with IAS 36, an entity is required to test an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount with its carrying amount Annually, and Whenever there is an indication that the intangible asset may be impaired.

Retirements and disposals An intangible asset shall be derecognized: On disposal; or When no future economic benefits are expected +from its use or disposal.

Retirements and disposals The gain or loss arising from the derecognition of an intangible asset shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset. It shall be recognized in profit or loss when the asset is derecognized (unless IAS 17 requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.

Examples Required: Explain how the directors of Maryland limited should treat the items below in the financial statements for the year to 31 March 2012. Note: The values given by Joyland limited can be taken as being reliable measurements. You are not required to consider depreciation aspects.

Example 1 Maryland limited has developed and patented a new drug which has been approved for clinical use. The costs of developing the drug were $12 million. Based on early assessments of its sales success, a firm of specialist advisors, Joyland limited has estimated its market value at $20 million.

Example 2 Maryland limited’s manufacturing facilities have recently received a favourable inspection by government medical scientists. As a result of this the company has been granted an exclusive five-year licence to manufacture and distribute a new vaccine. Although the licence had no direct cost to Maryland limited , its directors feel its granting is a reflection of the company’s standing and have asked Joyland limited to value the licence. Accordingly they have placed a value of $10 million on it.

Example 3 In the current accounting period, Maryland limited has spent $3 million sending its staff on specialist training courses. Whilst these courses have been expensive, they have led to a marked improvement in production quality and staff now needs less supervision. This in turn has led to an increase in revenue and cost reductions. The directors of Maryland limited believe these benefits will continue for at least three years and wish to treat the training costs as an asset.

Example 4 In December 2011, Maryland limited paid $5 million for a television advertising campaign for its products that will run for 6 months from 1 January 2012 to 30 June 2012. The directors believe that increased sales as a result of the publicity will continue for two years from the start of the advertisements.

Example 5 Jupiter Company limited has incurred the following research and development costs over the past 3 years. Year Research costs $’000’ Development costs $’000’ 2008 200,000 300,000 2009 400,000 2010 240,000 360,000

CONT’ Example 5 Commencing from the start of year 2011, the firm was able to manufacture and sell the products arising from this project, still the directors are confident about the project being profitable. Further analysis indicates that the development costs have met criteria for capitalization. The project will last for five years with no residual value.

CONT’ Example 5 Required: Prepare the financial statements extracts for Jupiter company for each of the 8 years commencing from year 2008, assuming no further costs were incurred after the year 2010.