IAS 38 prescribes accounting treatment for all intangible assets that are not specifically covered elsewhere in IFRS. Examples of intangible assets that are not within the scope of IAS 38 are given in paragraphs IAS 38.2-3 (e.g. deferred tax assets, financial assets).
Any expenditure that does not result in recognition of an intangible asset within the scope of other IFRS is within the scope of IAS 38. Examples of expenditures that are within the scope of IAS 38 are as follows:
- motion picture films,
- customer lists, customer contracts and related customer relationships,
- marketing rights,
Obviously, not all expenditures that are within the scope of IAS 38 should be recognised as assets.
Rights held by a lessee under licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights are within the scope of IAS 38 and are excluded from the scope of IFRS 16 (IAS 38.6; IFRS 16.3(e)).
Assets incorporating both tangible and intangible elements
Some intangible assets are contained in or on a physical substance. For example, computer software can be pre-installed on a computer or can be written on external drive and available for installation on any device. Judgement is needed to tell whether such intangible assets should be accounted for under IAS 38 or IAS 16. The general rule is that if an intangible asset is not an integral part of the related hardware, it should be accounted for separately under IAS 38 (IAS 38.4).
Examples of intangible assets to be accounted for under IAS 38 despite being contained in or on a physical substance are as follows:
- software that can be installed on any hardware,
- documentation for a patent or a prototype.
Examples of intangible assets to be accounted for under IAS 16 as a part of tangible assets are as follows:
- pre-installed software that a tangible asset cannot operate without.
Intangible assets vs. inventory
It isn’t always easy to decide whether an intangible asset is within the scope of IAS 2 or IAS 38, i.e. whether it is ‘a supply to be consumed in the production process or in the rendering of services’. Unlike IAS 16, IAS 38 does not limit its scope to assets that are expected to be used during more than one period. Therefore, any intangible asset that will not be ‘consumed’ after one use, can be treated as an intangible asset within the scope of IAS 38 with its amortisation presented below EBITDA together with depreciation of PP&E. Such a distinction is often hard to make for assets such as rights to copyright material. Note also that assets that are classified as current can be within the scope of IAS 38.
Entity A acquires a right to broadcast a movie ‘The Accountant’ via its VOD system for 6 months. It paid a fixed fee to the distributor of the movie and it can broadcast the movie to as many customers as it wishes, provided that the price charged to a customer will not be lower than $5.
Entity A recognises the right to the movie as an intangible asset under IAS 38, presents within current assets and amortises over 6 months with amortisation expense included below EBITDA. This right is not considered to be an inventory.
All expenditure on advertising and promotional activities, including tangible supplies which may seem as inventory (e.g. promotional catalogues), are in the scope of IAS 38 are expensed when received. See also this example.
IAS 38 allows a policy choice when measuring intangible assets – cost model or revaluation model (IAS 38.72-73). Under cost model, an intangible asset is carried at cost less any accumulated amortisation and any accumulated impairment losses (IAS 38.74). Under the revaluation model, an intangible asset is carried at its fair value (i.e. revalued amount) less any accumulated amortisation and any accumulated impairment losses. IAS 38 requires that the fair value of an intangible asset should be measured by reference to an active market, therefore cost model is by far more popular than the revaluation model.
Retirements and disposals of intangible assets are covered in paragraphs IAS 38.112-117. They mirror requirements for PP&E set out in IAS 16.
Disclosure requirements are set out in paragraphs IAS 38.118-128. Next to requirements similar to those required for PP&E, IAS 38 requires also explanation of assessment that an asset has indefinite useful life (IAS 38.122(a)) and encourages to disclose significant intangible assets controlled by the entity but not recognised as assets because they did not meet the recognition criteria of IAS 38 (IAS 38.128(b)).
More about IAS 38
See other pages relating to IAS 38:
IAS 38 Intangible Assets: Scope, Definitions and Disclosure
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