Recognition and Cost of Intangible Assets (IAS 38)

An intangible asset is recognised when it meets all of the criteria below (IAS 38.18,21):

  • identifiability,
  • probability of future economic benefits,
  • control over the future economic benefits,
  • reliable measurement of cost.

An intangible asset is recognised at cost (IAS 38.24). IAS 38 provides application guidance for separate acquisition of intangible assets and acquisition as part of a business combination.

An asset is identifiable if it either is:

Paragraph IAS 38.25 states that the probability recognition criterion is always considered to be satisfied for separately acquired intangible assets.

The general concept of control is discussed in the Conceptual Framework for Financial Reporting. The most common specific application of the control criterion in intangible assets relates to training expenditures and employees expertise, which normally cannot be recognised as assets because of insufficient control over the expected future economic benefits (IAS 38.15).

As mentioned earlier, IAS 38 provides application guidance for separate acquisition of intangible assets (IAS 38.25-32) and acquisition as part of a business combination (IAS 38.33-37).

The cost of a separately acquired intangible asset can usually be measured reliably (IAS 38.26). Most requirements relating to elements of cost of a separately acquired intangible asset mirror those included in IAS 16. Requirements specific to intangible assets only are discussed below.

Separate acquisition of intangible assets is not to be confused with acquisition of services that are used by the entity do develop an intangible asset internally. In such a case, the requirements for internally generated intangible assets apply.

Paragraph IAS 38.70 explains that prepayments can be recognised as assets even if the goods or services to be received will be recognised as an expense. Such an asset represents the right to receive goods or services. See the example below and paragraphs IAS 38.BC46A-BC46I for more IASB’s discussion.

Note that IFRS 15 covers capitalisation of costs to obtain and fulfil a contract with a customer.

Example: Prepayment on advertising services

On 1 May, Entity A ordered promotional catalogues of its products for a new commercial period for a total cost of $1m. On the same day, it paid and advance of $0.3m to the printing house. The catalogues are delivered to Entity A on 1 August and they are sent to customers on 1 September.

On 1 May, Entity A recognised a prepayment of $0.3m as an asset. It represents the right to receive catalogues or refund in case the printing house fails to perform. On 1 August Entity A recognises expenses in P&L amounting to $1m as the catalogues are delivered. It does not matter when they will be delivered to customers at a later date (IAS 38.69A).

All expenditures on promotional or advertising activities are in the scope of IAS 38. Such expenditures are always recognised immediately in P&L as revenue expense. This is true also when the entity acquires a tangible asset (IAS 38.5, 69(c)). See this IFRIC September 2017 agenda decision about a pharmaceutical entity that acquires goods (such as refrigerators, air conditioners and watches) to distribute to doctors as part of its promotional activities.

Software as a Service (SaaS) solutions cannot be recognised as intangible assets because in SaaS model, the customer does not have the power to obtain the future economic benefits flowing from the software itself and to restrict others’ access to those benefits. Read more in IFRIC agenda decision. See also the accounting for configuration or customisation costs in SaaS arrangements (plus this useful decision tree by PWC).

IAS 38 has more stringent requirements concerning capitalisation of subsequent expenditure on intangible assets. Paragraph IAS 38.20 states: ‘most subsequent expenditures are likely to maintain the expected future economic benefits embodied in an existing intangible asset rather than meet the definition of an intangible asset and the recognition criteria in IAS 38. In addition, it is often difficult to attribute subsequent expenditure directly to a particular intangible asset rather than to the business as a whole. Therefore, only rarely will subsequent expenditure—expenditure incurred after the initial recognition of an acquired intangible asset or after completion of an internally generated intangible asset—be recognised in the carrying amount of an asset. In particular, subsequent expenditure on brands, mastheads, publishing titles, customer lists and items similar in substance (whether externally acquired or internally generated) is always recognised in profit or loss as incurred. This is because such expenditure cannot be distinguished from expenditure to develop the business as a whole.’

As mentioned earlier, IAS 38 provides application guidance for separate acquisition of intangible assets (IAS 38.25-32) and acquisition as part of a business combination (IAS 38.33-37).

The cost of an asset acquired as a part of a business combination is its fair value at the acquisition date, which results from IFRS 3 requirements. More on recognition of intangible assets acquired as part of a business combination can be found in IFRS 3.

Paragraphs IAS 38.45-47 cover exchange of assets. These requirements mirror those of IAS 16.

IAS 38 provides a framework for recognition of internally generated intangible assets that helps identifying whether and when there is an identifiable asset that will generate expected future economic benefits and determining the cost of the asset reliably. To facilitate this process, IAS 38 classifies the generation of the asset into a research phase and a development phase (IAS 38.51-52).

As noted earlier, intangible assets can be generated internally with input from external parties. The mere fact that a service contributing to an intangible asset is acquired from a third party does not automatically warrant capitalisation of such expenditure – it needs to be assessed against the general criteria for capitalisation of internally generated intangible assets.

Research is defined (IAS 38.8) as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Examples of research activities are given in paragraph IAS 38.56 and include obtaining new knowledge or searching for alternative solutions.

Expenditures on research or on research phase of an internal project must be expensed in P&L as incurred as an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits (IAS 38.54-55).

Development is defined (IAS 38.8) as the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use. Examples of development activities are given in paragraph IAS 38.59 and include design, construction and testing of prototypes or pilots.

Expenditures on development or on development phase of an internal project are recognised as intangible assets if, and only if, an entity can demonstrate all of the following (IAS 38.57):

  1. the technical feasibility of completing the intangible asset so that it will be available for use or sale,
  2. its intention to complete the intangible asset and use or sell it,
  3. its ability to use or sell the intangible asset,
  4. how the intangible asset will generate probable future economic benefits,
  5. the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset,
  6. its ability to measure reliably the expenditure attributable to the intangible asset during its development.

The above criteria are not easily translated into intangible assets generated by entities for their internal use, e.g. software for internal purposes. Unfortunately, IAS 38 does not provide any specific guidance for such intangible assets. An exception relates to website costs that are covered by SIC-32 and it might be useful to look into SIC-32 to look for analogies to other intangible assets generated for internal purposes. In general, the planning phase should be treated as research phase under IAS 38 and expensed in P&L.

Interpretation SIC-32 Website Costs provides specific guidance on expenditure on an internally generated website. This interpretation maps the typical phases of website development to IAS 38 classification into research and development phase. This interpretation is accompanied by a useful illustrative example.

Internally generated goodwill, brands, customer lists and similar items cannot be recognised as an asset as expenditure on them cannot be distinguished from the cost of developing the business as a whole (IAS 38.48-50, 63-64).

The cost of internally generated intangible asset includes expenditure incurred from the date when all the criteria for recognition of intangible asset are met, including distinction between research and development costs (IAS 38.65). As said before, most requirements relating to elements of cost of a separately acquired intangible asset mirror those included in IAS 16.

Expenditure on an intangible item that was initially recognised as an expense in P&L cannot be recognised as a part of the cost of an intangible asset at a later date (IAS 18.71). Such a transfer from P&L to assets would mean that it is a correction of error and it should be accounted for under IAS 8, subject to materiality.

When an expenditure on an intangible item does not meet the recognition criteria of IAS 38, it should be expensed in P&L as incurred unless it forms part of the goodwill recognised under IFRS 3 (IAS 38.68). In other words, such expenses cannot be spread over time in P&L even if they are incurred to provide future economic benefits to an entity. Examples of expenditures that are expensed in P&L are given in paragraph IAS 38.69:

  • start-up costs,
  • expenditure on training activities,
  • expenditure on advertising and promotional activities,
  • expenditure on relocating or reorganising part or all of an entity.

Expense is recognised when goods or services are received (or more precisely, as IAS 38 puts it: when the entity has a right to access those goods/services), not when entity uses them to deliver another service.

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

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