IAS 38 Intangible asset

Understanding IAS 38: Intangible Assets

IAS 38 Intangible Assets is a crucial standard within the International Financial Reporting Standards (IFRS) framework, outlining the accounting treatment for intangible assets, except those covered by other specific standards. This standard is vital for ensuring consistent and transparent reporting of intangible assets, providing guidelines for their recognition, measurement, and disclosure.

What Are Intangible Assets?

Intangible assets are non-monetary assets without physical substance. They are identifiable and provide future economic benefits. Examples include patents, copyrights, trademarks, and goodwill.

Recognition and Measurement

Initial Recognition

An intangible asset is recognized if, and only if:

1. It is probable that future economic benefits attributable to the asset will flow to the entity.

2. The cost of the asset can be measured reliably.

Measurement at Initial Recognition

Intangible assets are initially measured at cost. The cost of a separately acquired intangible asset comprises:

• Purchase price (including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates)

• Any directly attributable cost of preparing the asset for its intended use.

For intangible assets acquired in a business combination, the cost is their fair value at the acquisition date.

Subsequent Measurement

After initial recognition, an entity can choose either the cost model or the revaluation model for measuring intangible assets:

Cost Model: The asset is carried at its cost less any accumulated amortization and impairment losses.

Revaluation Model: The asset is carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent amortization and impairment losses, provided that fair value can be determined by reference to an active market.

Amortization

Amortization is the systematic allocation of the depreciable amount of an intangible asset over its useful life. The depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

Amortization Formula:

Amortization Expense=Cost−Residual ValueUseful Life

Amortization should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If such a pattern cannot be determined reliably, a straight-line method of amortization is used.

Useful Life

Intangible assets can have either finite or indefinite useful lives.

Finite Useful Life: The asset is amortized over its useful life and reviewed for impairment when there is an indication that the asset may be impaired.

Indefinite Useful Life: The asset is not amortized but tested for impairment annually and whenever there is an indication that the asset may be impaired.

Impairment

An intangible asset is impaired if its carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value in use. Impairment losses are recognized in the income statement.

Important Considerations

1. Internally Generated Intangible Assets: Not all internally generated intangible assets are recognized. Research costs are expensed as incurred, while development costs can be capitalized if certain criteria are met.

2. Disclosures: Entities must disclose information about intangible assets, including the amortization methods used, useful lives, carrying amounts, and any impairment losses.

3. Subsequent Expenditure: Expenditure on an intangible item after its purchase or completion is recognized as an expense unless it meets the definition of an intangible asset and the recognition criteria.

Key Takeaways

• Ensure that the recognition criteria for intangible assets are strictly met.

• Choose an appropriate measurement model (cost or revaluation) and apply it consistently.

• Review the useful life of intangible assets regularly and adjust amortization methods as needed.

• Conduct annual impairment tests for intangible assets with indefinite useful lives and whenever there are indicators of impairment for those with finite useful lives.

• Disclose all relevant information to provide transparency and aid users of financial statements in making informed decisions.

Understanding and applying IAS 38 helps entities accurately represent their intangible assets' value, providing clearer insight into their financial health and operational efficiency.

For further details, refer to the full text of IAS 38 Intangible Assets​