IAS 38 outlines the accounting treatment for intangible assets, which are assets that:
- lack physical substance,
- are non-monetary, and
- identifiable.
IAS 38 applies to all intangible assets not specifically addressed by other IFRSs. Excluded assets, such as deferred tax assets and goodwill, are detailed in IAS 38.2-3.
The scope of IAS 38 encompasses expenditures that do not lead to the recognition of an intangible asset under other IFRSs. These include expenses related to items like software, patents, films, customer lists and relationships, licenses, marketing rights, advertising, and training. It is crucial to note, however, that not every expenditure within IAS 38’s scope qualifies for asset recognition.
Unlike PP&E in the scope of IAS 16, intangible assets are not restricted to specific purposes such as use in production, supply of goods or services, rental to others, or administrative functions to fall within the scope of IAS 38 (IAS 38.BC4-5).
Rights held by a lessee under licensing agreements for certain items, like films, manuscripts, patents, and copyrights, also fall under IAS 38. These are specifically excluded from IFRS 16’s scope (IFRS 16.3(e), IAS 38.6).
Assets with tangible and intangible components
Some intangible assets are associated with a physical substance. For instance, software might be pre-installed on a computer or stored on an external drive. Determining whether such assets should be accounted for under IAS 38 or IAS 16 requires judgement, focusing on which element (tangible or intangible) is more significant. Generally, if the intangible asset is not an integral part of the related hardware, it’s accounted for separately under IAS 38 (IAS 38.4).
Examples of intangible assets accounted for under IAS 38, despite their physical association, include software installable on any hardware and documentation for patents or prototypes. Conversely, assets like pre-installed software essential for a tangible asset’s operation are accounted for under IAS 16.
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Distinguishing between intangible assets and inventory
Distinguishing between an intangible asset as defined in IAS 38 and inventory within IAS 2’s scope can be challenging. The key consideration is whether the asset is ‘a supply to be consumed in the production process or in the rendering of services.’ Unlike IAS 16, which confines its scope to assets used over multiple periods, IAS 38 does not have this scope restriction. Consequently, any intangible asset not consumed after a single use qualifies as an intangible asset under IAS 38. Its amortisation is then presented alongside the depreciation of PP&E. This distinction can be particularly nuanced for assets like copyright material rights. It’s also important to note that even assets classified as current may fall under IAS 38.
Example: Content rights
Consider Stream Sphere, a company that acquires broadcasting rights for the movie ‘The Accountant’ on its VOD platform for six months. It pays a fixed fee to the movie’s distributor and can broadcast to an unlimited number of customers, as long as the charge per customer is not less than $5. Stream Sphere should recognise this right as an intangible asset under IAS 38, classify it as a current asset, and amortise it over six months, with the expense recognised alongside the depreciation of PP&E. This right is not classified as inventory.
Furthermore, all spending on advertising and promotional activities, including tangible items that might seem like inventory (e.g., promotional catalogues or promotional samples), falls under the scope of IAS 38 and should be expensed upon receipt.
Subsequent measurement
IAS 38 offers two measurement options for intangible assets: the cost model or the revaluation model (IAS 38.72-73). The cost model involves carrying an intangible asset at its cost minus any accumulated amortisation and impairment losses (IAS 38.74). The revaluation model, on the other hand, involves carrying the asset at its fair value (revalued amount) less any accumulated amortisation and impairment losses. Since IAS 38 mandates that fair value should be based on an active market, the cost model is more commonly used than the revaluation model.
Derecognition
The retirement and disposal of intangible assets are detailed in IAS 38.112-117, mirroring the requirements for PP&E in IAS 16.
Disclosure
The disclosure requirements for intangible assets are outlined in IAS 38.118-128. In addition to requirements akin to those for PP&E, IAS 38.122(a) also mandates an explanation when an asset is deemed to have an indefinite useful life. Additionally, IAS 38.128(b) encourages the disclosure of significant intangible assets controlled by the entity but not recognised as assets because they do not meet the recognition criteria.
More about IAS 38
See other pages relating to IAS 38:
IAS 38: Recognition and Cost of Intangible Assets
IAS 16 and IAS 38: Depreciation and Amortisation of Property, Plant and Equipment and Intangible Assets
IAS 16 and IAS 38: Revaluation Model for Property Plant and Equipment and Intangible Assets