International Accounting Standard 38
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 38 Intangible Assets, which had originally been issued by the International Accounting Standards Committee in September 1998. That standard had replaced IAS 9 Research and Development Costs, which had been issued in 1993, which itself replaced an earlier version called
Accounting for Research and Development Activities that had been issued in July 1978.
The IASB revised IAS 38 in March 2004 as part of the first phase of its Business Combinations
project. In January 2008 the IASB amended IAS 38 again as part of the second phase of its Business Combinations project.
Other IFRSs have made minor consequential amendments to IAS 38. They include
Improvement to IFRSs (issued April 2009), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May 2011), IFRS 13 Fair Value Measurement (issued May 2011) and Annual Improvements to IFRSs 2010-2012 Cycle (issued December 2013).
INTERNATIONAL ACCOUNTING STANDARD 38
Future economic benefits
RECOGNITION AND MEASUREMENT
Acquisition as part of a business combination
Intangible asset acquired in a business combination
Subsequent expenditure on an acquired in-process research and development
Acquisition by way of a government grant
Exchanges of assets
Internally generated goodwill
Internally generated intangible assets
Cost of an internally generated intangible asset
RECOGNITION OF AN EXPENSE
Past expenses not to be recognised as an asset
MEASUREMENT AFTER RECOGNITION
INTANGIBLE ASSETS WITH FINITE USEFUL LIVES
Amortisation period and amortisation method
Review of amortisation period and amortisation method INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES
Review of useful life assessment
RECOVERABILITY OF THE CARRYING AMOUNT—IMPAIRMENT LOSSES
RETIREMENTS AND DISPOSALS
Intangible assets measured after recognition using the revaluation model
Research and development expenditure
TRANSITIONAL PROVISIONS AND EFFECTIVE DATE
Exchanges of similar assets
WITHDRAWAL OF IAS 38 (ISSUED 1998)
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
APPROVAL BY THE BOARD OF IAS 38 ISSUED IN MARCH 2004
BASIS FOR CONCLUSIONS
Assessing the useful lives of intangible assets
International Accounting Standard 38 Intangible Assets (IAS 38) is set out in paragraphs 1-133. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 38 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial ReportingStandards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
International Accounting Standard 38 Intangible Assets (IAS 38) replaces IAS 38
Intangible Assets (issued in 1998), and should be applied:
on acquisition to the accounting for intangible assets acquired in
business combinations for which the agreement date is on or after 31 March 2004.
to all other intangible assets, for annual periods beginning on or after
31 March 2004.
Earlier application is encouraged.
Reasons for revising IAS 38
The International Accounting Standards Board developed this revised IAS 38 as part of its project on business combinations. The project's objective is to improve the quality of, and seek international convergence on, the accounting for business combinations and the subsequent accounting for goodwill and intangible assets acquired in business combinations.
The project has two phases. The first phase resulted in the Board issuing simultaneously IFRS 3 Business Combinations and revised versions of IAS 38 and IAS 36 Impairment of Assets. The Board's deliberations during the first phase of the
project focused primarily on:
the method of accounting for business combinations;
the initial measurement of the identifiable assets acquired and liabilities
and contingent liabilities assumed in a business combination;
the recognition of provisions for terminating or reducing the activities of
the treatment of any excess of the acquirer's interest in the fair values of
identifiable net assets acquired in a business combination over the cost
of the combination; and
the accounting for goodwill and intangible assets acquired in a business combination.
Therefore, the Board's intention while revising IAS 38 was to reflect only those changes related to its decisions in the Business Combinations project, and not to
reconsider all of the requirements in IAS 38. The changes that have been made in the Standard are primarily concerned with clarifying the notion of 'identifiability' as it relates to intangible assets, the useful life and amortisation of intangible assets, and the accounting for in-process research and development projects acquired in business combinations.
Summary of main changes
Definition of an intangible asset
The previous version of IAS 38 defined an intangible asset as an identifiable
non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. The requirement for the asset to be held for use in the production or supply of goods or services, for rental to others, or for administrative purposes has been removed from the definition of an intangible asset.
The previous version of IAS 38 did not define 'identifiability', but stated that an intangible asset could be distinguished clearly from goodwill if the asset was separable, but that separability was not a necessary condition for identifiability. The Standard states that an asset meets the identifiability criterion in the
definition of an intangible asset when it:
is separable, ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or
together with a related contract, asset or liability; or
arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
Criteria for initial recognition
The previous version of IAS 38 required an intangible asset to be recognised if,
and only if, it was probable that the expected future economic benefits attributable to the asset would flow to the entity, and its cost could be measured reliably. These recognition criteria have been included in the Standard.
However, additional guidance has been included to clarify that:
the probability recognition criterion is always considered to be satisfied
for intangible assets that are acquired separately or in a business combination.
the fair value of an intangible asset acquired in a business combination
can be measured with sufficient reliability to be recognised separately from goodwill.
Under the previous version of IAS 38, the treatment of subsequent expenditure
on an in-process research and development project acquired in a business combination and recognised as an asset separately from goodwill was unclear.
The Standard requires such expenditure to be:
recognised as an expense when incurred if it is research expenditure;
recognised as an expense when incurred if it is development expenditure
that does not satisfy the criteria in IAS 38 for recognising such
expenditure as an intangible asset; and
recognised as an intangible asset if it is development expenditure that
satisfies the criteria in IAS 38 for recognising such expenditure as an intangible asset.
The previous version of IAS 38 was based on the assumption that the useful life
of an intangible asset is always finite, and included a rebuttable presumption that the useful life cannot exceed twenty years from the date the asset is available for use. That rebuttable presumption has been removed. The Standard requires an intangible asset to be regarded as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
The previous version of IAS 38 required that if control over the future economic benefits from an intangible asset was achieved through legal rights granted for a finite period, the useful life of the intangible asset could not exceed the period of those rights, unless the rights were renewable and renewal was virtually
certain. The Standard requires that:
the useful life of an intangible asset arising from contractual or other legal rights should not exceed the period of those rights, but may be shorter depending on the period over which the asset is expected to be
used by the entity; and
if the rights are conveyed for a limited term that can be renewed, the
useful life should include the renewal period(s) only if there is evidence to support renewal by the entity without significant cost.
Intangible assets with indefinite useful lives
The Standard requires that:
an intangible asset with an indefinite useful life should not be amortised.
the useful life of such an asset should be reviewed each reporting period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate.
Impairment testing intangible assets with finite useful
The previous version of IAS 38 required the recoverable amount of an intangible
asset that was amortised over a period exceeding twenty years from the date it was available for use to be estimated at least at each financial year-end, even if there was no indication that the asset was impaired. This requirement has been removed. Therefore, an entity needs to determine the recoverable amount of an intangible asset with a finite useful life that is amortised over a period exceeding twenty years from the date it is available for use only when, in accordance with IAS 36, there is an indication that the asset may be impaired.
If an intangible asset is assessed as having an indefinite useful life, the Standard
requires an entity to disclose the carrying amount of that asset and the reasons supporting the indefinite useful life assessment.
International Accounting Standard 38
The objective of this Standard is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Standard. This Standard requires an entity to recognise an intangible asset if, and only if, specified criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires specified disclosures about intangible assets.
This Standard shall be applied in accounting for intangible assets, except:
intangible assets that are within the scope of another Standard;
financial assets, as defined in IAS 32 Financial Instruments:
the recognition and measurement of exploration and evaluation
assets (see IFRS 6 Exploration for and Evaluation of Mineral
expenditure on the development and extraction of minerals, oil, natural gas and similar non-regenerative resources.
If another Standard prescribes the accounting for a specific type of intangible
asset, an entity applies that Standard instead of this Standard. For example, this
Standard does not apply to:
intangible assets held by an entity for sale in the ordinary course of business (see IAS 2 Inventories and IAS 11 Construction Contracts).
deferred tax assets (see IAS 12 Income Taxes).
leases that are within the scope of IAS 17 Leases.
assets arising from employee benefits (see IAS 19 Employee Benefits).
financial assets as defined in IAS 32. The recognition and measurement
of some financial assets are covered by IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures.
goodwill acquired in a business combination (see IFRS 3 Business
deferred acquisition costs, and intangible assets, arising from an
insurer's contractual rights under insurance contracts within the scope of IFRS 4 Insurance Contracts. IFRS 4 sets out specific disclosure
requirements for those deferred acquisition costs but not for those intangible assets. Therefore, the disclosure requirements in this Standard apply to those intangible assets.
non-current intangible assets classified as held for sale (or included in a
disposal group that is classified as held for sale) in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
Some intangible assets may be contained in or on a physical substance such as a
compact disc (in the case of computer software), legal documentation (in the case of a licence or patent) or film. In determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 Property, Plant and Equipment or as an intangible asset under this Standard,
an entity uses judgement to assess which element is more significant. For example, computer software for a computer-controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. The same applies to the operating system of a computer. When the software is not an integral part of the related hardware, computer software is treated as an intangible asset.
This Standard applies to, among other things, expenditure on advertising,
training, start-up, research and development activities. Research and
development activities are directed to the development of knowledge. Therefore, although these activities may result in an asset with physical substance (eg a prototype), the physical element of the asset is secondary to its intangible component, ie the knowledge embodied in it.
In the case of a finance lease, the underlying asset may be either tangible or
intangible. After initial recognition, a lessee accounts for an intangible asset held under a finance lease in accordance with this Standard. Rights under licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights are excluded from the scope of IAS 17 and are within the scope of this Standard.
Exclusions from the scope of a Standard may occur if activities or transactions
are so specialised that they give rise to accounting issues that may need to be dealt with in a different way. Such issues arise in the accounting for expenditure on the exploration for, or development and extraction of, oil, gas and mineral deposits in extractive industries and in the case of insurance contracts. Therefore, this Standard does not apply to expenditure on such activities and contracts. However, this Standard applies to other intangible assets used (such as computer software), and other expenditure incurred (such as start-up costs), in extractive industries or by insurers.
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