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Accounting For Intangible Assets [IAS 38] With Case Examples

What are intangible assets?

❶Established since , Accounting-Financial-Tax.

Intangibles with a Determinable Life

History of IAS 38
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Accounting, Financial, Tax

Control needs to be looked at carefully. An entity may be able to identify skills in its workforce and to measure the costs of providing those skills to its staff via training.

However, the entity usually does not have control over the expected economic benefits arising from the skilled staff, as they can leave their employment. Even if the skills are protected in some way such that departing staff are not permitted to use them elsewhere, the entity has lost the future benefit of the skills imbued in the departing staff member.

Similarly, the purchase of customer lists or expenditure on advertising, while identifiable, does not provide control to an entity over the expected future benefits. Customers are not forced to buy from the entity and can go elsewhere. Future Economic Benefit — Future economic benefit may include revenue from the sale of products, services, or processes, but also includes cost savings or other benefits from use of an asset.

Use of intellectual property can reduce operating costs rather than produce revenue. An item may be recognized as an intangible asset when it meets the definition of an intangible asset [see above] and meets these recognition criteria:. Initially , intangible assets shall be measured at cost. The cost of separately acquired intangible assets comprises:. Directly attributable costs can include employee benefits, professional fees, and costs of testing. Costs of introducing new products or services, such as advertising, Costs of conducting new business, Administration costs, Costs incurred while an asset that is ready for use is awaiting deployment, Costs of redeployment of an asset, Initial operating losses incurred from operation.

In the corporate world, it is often noticed that entities spend huge sums of money on advertising campaigns to launch new products. Some multinational entities even hire famous performing artists or movie stars to act as brand ambassadors of the new products. Because the amounts spent on these advertising campaigns are so huge, these entities sincerely believe that the benefits from this promotion would last longer than a year and thus they are inclined to defer the costs of introducing new products over a period of two to three years.

When the financial statements of these entities have to be audited, this is usually a contentious issue. Assessing the fair value of an intangible asset in a business combination can be difficult ; obvious techniques are the use of comparable market transactions or quoted prices. Sometimes there may be a range of values to which probabilities can be assigned. Such uncertainty enters into the measurement of the asset rather than demonstrating an inability to measure the value.

If an intangible asset has a finite life, then it is presumed to have a reliably measurable fair value. In some circumstances , it may not be possible to reliably measure the fair value of an intangible asset in a business combination because it is inseparable or there is no history or evidence of exchange transactions for the asset, and any fair value estimates would be based on immeasurable variables. If an intangible asset is acquired in exchange for another asset, then the acquired asset is measured at its fair value unless the exchange lacks commercial substance or the fair value cannot be reliably measured, in which case the acquired asset should be measured at the carrying amount of the asset given up, where carrying amount is equal to cost less accumulated depreciation and impairment losses.

For impairment losses, reference should be made to IAS In this context, any compensation received for impairment or loss of an asset shall be included in the income statement. Lie Dharma Record Inc. The agreement with the singer allows the company to record and rerecord the singer for a period of five years. During the initial six-month period of the agreement, the singer is very sick and consequently cannot record.

The studio time that was blocked by the company had to be paid even during the period the singer could not sing. Which of the above items is a cost that can be capitalized as an intangible asset? With internally generated intangible assets, problems arise in identifying whether there is an identifiable asset that will generate future economic benefit and in reliably determining its cost. Goodwill — The Standard proscribes the recognition of internally generated goodwill as an asset.

The rationale behind this is that any expenditure incurred does not result in an asset that is an identifiable resource—it is not separable, nor does it arise from a contractual or other legal rights—or that is controlled by the entity.

In addition, any costs incurred are unlikely to be specifically identifiable as generating the goodwill. The position that the difference between a valuation of a business and the carrying amount of its individual assets and liabilities may be capitalized as goodwill falls down insofar as that difference cannot be categorized as the cost and therefore cannot be recognized as an asset.

Other Internally Generated Intangible Assets — The Standard sets out rules for the recognition of other internally generated intangible assets and broadly defines such expenditures as research and development.

It proscribes the recognition of internally generated brands, mastheads, publishing titles, customer lists, and similar items, because expenditure thereon, like expenditure on internally generated goodwill, cannot be distinguished from the cost of developing the business as a whole and is therefore not separately identifiable.

In order to determine whether an internally generated intangible asset qualifies for recognition, its generation is divided into a research phase and a development phase.

If the two phases cannot be distinguished, then the entire expenditure is classified as research. Expenditure on research or the research phase of an internal project is to be written off as an expense as and when incurred, as it is not possible to demonstrate that an asset exists that will generate future economic benefit. Development expenditure may be recognized as an intangible asset when, and only when, all of the following can be demonstrated:. Examples of activities that may fail to be recognized as intangible assets include:.

In order to implement the foregoing in practice, generally some form of business plan will be required to demonstrate the feasibility of a project, the availability of resources, and the future cash flows that can reasonably be expected to be derived there from.

Very often a project will commence with a research phase and after a time will evolve into the development phase. It will be necessary to determine at what point in time the project has so evolved, as expenditure up to that date will have to be recognized as an expense in the income statement and expenditure incurred after that date can be capitalized as an intangible asset.

The use of hindsight and the resultant claim to capitalize the entire expenditure is not permissible , as research expenditure must be expensed when incurred and the Standard does allow the reinstatement of previously written-off costs. One is not permitted accumulate costs in an account and then consider the nature of the entire project only when preparing the year-end financial statements. It was set up by an entrepreneur who is generally interested in the business of providing engineering and operational support services to aircraft manufacturers.

For this project, Lie Dharma Inc. The expenditures Lie Dharma Inc. What is the proper accounting treatment for the various costs incurred during 20X8? Treatment of various costs incurred during 20X8 depends on whether these costs can be capitalized or expensed as per IAS Although IAS 38 is clear that expenses incurred during the research phase should be expensed, it is important to note that not all development costs can be capitalized.

Unlike tangible fixed assets such as a building or machinery, intangibles are often developed internally without any direct measurable cost that can be capitalized.

When an intangible is purchased, however, or when costs can be directly traced to the development of the asset, the cost is recorded as an intangible asset on the balance sheet. Intangible assets are valued at their cost of acquisition.

A purchased intangible is valued based on the amount paid for the asset. Intangible assets with a determinable life are amortized over their useful lives. Amortization is a process of allocating the expense over a number of accounting periods to reflect the actual amount of the asset consumed each period. A patent, for example, has a legal life of 17 years, but its useful life may expire earlier if a new invention makes the patented technology obsolete.

Many intangible assets have indeterminable lives. A company has the following assets: It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3, hours?

Units-of-activity is an appropriate depreciation method to use when A. Are you sure you want to delete this answer? I have always been attracted to older men, although now, I am married to a man one year older then me I think women can have it easier when it comes to dating and the age range, and I do believe that there is a double standard most of the time.

Hey, I dont know the answers to these, but I am just wondering what kind of level of accounting this is? Related Questions Accounting, Double Check please help..? Double Check my asnwers? Check this double standard out?

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under IFRS, costs in the development phase of R & D costs are expensed once technological feasibility is achieved. IFRS permits some capitalization of internally generated intangible assets. under IFRS the costs associated with research and development are segregated into two components.

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Internally created intangibles are often not recorded on the balance sheet: most costs incurred to internally develop an intangible asset have to be expensed (including Research and Development costs), and only certain costs (e.g. legal costs) might be capitalized (e.g. debit Patent for .

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Research and development costs a. are intangible assets. b. may result in the development of a patent. c. are easily identified with specific projects. d. all of the above. Research and Development Accounting The basic problem with research and development expenditures is that the future benefits associated with these expenditures are sufficiently uncertain that it is difficult to record the expenditures as an asset.

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Classification of intangible assets based on useful life. Intangible assets are classified as: [IAS ] Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. Finite life: a limited period of benefit to the entity. Research and development costs no longer appear as intangible assets on the balance sheet. The Board applies the same line of reasoning to other costs associated with internally generated intangible assets, such as the internal costs of developing a patent.