IFRS 1: Internally generated intangible assets

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marea
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IFRS 1: Internally generated intangible assets

Post by marea »

Under IFRS 1 as under IAS 38, it is not permitted to reconstruct the costs of internally generated IA retrospectively. However, the standard also says "If an internally generated intangible asset qualifies for recognition at the date of transition, it is recognised in the entity’s opening IFRS statement of financial position even if the related expenditure had been expensed under previous GAAP" (IFRS 1, IG 47).

My understanding is that internally generated IA can be recognised (provided that criteria for the recohnition are met) only from the transition date onwards i.e. only costs incurred after the transition date could be capitalised. This would mean that in the opening statement of financial position the company will not be able to capitalise costs of such IA even if recognition criteria were met before the transition => use of hindsight is not permitted.

Is my understanding correct?
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exIFRS
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Re: IFRS 1: Internally generated intangible assets

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I think you have to read IFRS 1. IG47 in tandem with IG46, which states:
"In accordance with paragraphs 65 and 71 of IAS 38, an entity capitalises the costs of creating internally generated intangible assets prospectively from the date when the recognition criteria are met. IAS 38 does not permit an entity to use hindsight to conclude retrospectively that these recognition criteria are met. Therefore, even if an entity concludes retrospectively that a future inflow of economic benefits from an internally generated intangible asset is probable and the entity is able to reconstruct the costs reliably, IAS 38 prohibits it from capitalising the costs incurred before the date when the entity both:
(a) concludes, based on an assessment made and documented at the date of that conclusion, that it is probable that future economic benefits from the asset will flow to the entity; and
(b) has a reliable system for accumulating the costs of internally generated intangible assets when, or shortly after, they are incurred."
So I believe based on IG47 you can retrospectively recognise internally generated intangible asset costs that had been previously expensed under old GAAP, hence the statement "an entity recognises the asset in its opening IFRS statement of financial position even if it had recognised the related expenditure as an expense in accordance with previous GAAP". But only if the criteria outlined in IG46 are met, which seems unlikely in most circumstances. I.e even as you were expensing under GAAP, you still documented that you thought the IFRS criteria were met, and kept detailed information on costs incurred.
marea
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Re: IFRS 1: Internally generated intangible assets

Post by marea »

Thank you exIFRS.

Maybe it just happens to me, but sometimes I find it difficult to understand the logic of the standard correctly (maybe because I am not a native speaker, and I still have a lot to learn....). By looking at IFRS 1. IG46, what confuses me is that the standard says: "....based on an assessment made and documented at the date of that conclusion....." which should be before the transition date, so it implies hindsight IMHO, and at the same time "IAS 38 does not permit an entity to use hindsight to conclude retrospectively that these recognition criteria are met". This sounds like a contradictory combination, doesn´t it? Probably, as you´ve also mentioned, that is why it would be highly unlikely to recognise an internally generated intangible asset when adopting IFRS for the first time.
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exIFRS
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Re: IFRS 1: Internally generated intangible assets

Post by exIFRS »

I agree, I don't necessarily think the drafting is easy here. If I had a client (or country) on a long transition to IFRS I think then you might advise that this is something they should do (ie document internally generated intangible assets). So it wouldn't be retrospective as such, but it requires foresight (see what I did there :-) ) in preparation for adoption of the standard. But in reality for most organisations, why bother, it just increases your amortisation expense going forward and reduces profits.
JRSB
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Re: IFRS 1: Internally generated intangible assets

Post by JRSB »

I encountered this on a transition situation and yes it was possible based on a distinction having been made between "R" and "D" for other purposes.
marea
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Re: IFRS 1: Internally generated intangible assets

Post by marea »

@ exIFRS I agree with you.
@ JRSB thank you for your input. I always appreciate hearing what happens in practice.
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