Internally generated intangible assets
It is sometimes difficult to assess whether an internally generated intangible
asset qualifies for recognition because of problems in:
identifying whether and when there is an identifiable asset that will
generate expected future economic benefits; and
determining the cost of the asset reliably. In some cases, the cost of
generating an intangible asset internally cannot be distinguished from the cost of maintaining or enhancing the entity's internally generated goodwill or of running day-to-day operations.
Therefore, in addition to complying with the general requirements for the recognition and initial measurement of an intangible asset, an entity applies the requirements and guidance in paragraphs 52-67 to all internally generated intangible assets.
To assess whether an internally generated intangible asset meets the criteria for
recognition, an entity classifies the generation of the asset into:
a research phase; and
a یevelopment phase.
Although the terms 'research' and 'development' are defined, the terms 'research phase' and 'development phase' have a broader meaning for the purpose of this Standard.
If an entity cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the entity treats the
expenditure on that project as if it were incurred in the research phase only.
Research phase
No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred.
In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred.
Examples of research activities are:
activities aimed at obtaining new knowledge;
the search for, evaluation and final selection of, applications of research
findings or other knowledge;
the search for alternatives for materials, devices, products, processes,
systems or services; and
the formulation, design, evaluation and final selection of possible
alternatives for new or improved materials, devices, products, processes, systems or services.
Development phase
An intangible asset arising from development (or from the development
phase of an internal project) shall be recognised if, and only if, an entity
can demonstrate all of the following:
the technical feasibility of completing the intangible asset so that
it will be available for use or sale.
its intention to complete the intangible asset and use or sell it.
its ability to use or sell the intangible asset.
how the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
the availability of adequate technical, financial and other
resources to complete the development and to use or sell the intangible asset.
its ability to measure reliably the expenditure attributable to the
intangible asset during its development.
In the development phase of an internal project, an entity can, in some instances, identify an intangible asset and demonstrate that the asset will generate probable future economic benefits. This is because the development phase of a project is further advanced than the research phase.
Examples of development activities are:
the design, construction and testing of pre-production or pre-use
prototypes and models;
the design of tools, jigs, moulds and dies involving new technology;
the design, construction and operation of a pilot plant that is not of a
scale economically feasible for commercial production; and
the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.
To demonstrate how an intangible asset will generate probable future economic benefits, an entity assesses the future economic benefits to be received from the asset using the principles in IAS 36 Impairment of Assets. If the asset will generate
economic benefits only in combination with other assets, the entity applies the concept of cash-generating units in IAS 36.
Availability of resources to complete, use and obtain the benefits from an intangible asset can be demonstrated by, for example, a business plan showing the technical, financial and other resources needed and the entity's ability to secure those resources. In some cases, an entity demonstrates the availability of external finance by obtaining a lender's indication of its willingness to fund the plan.
An entity's costing systems can often measure reliably the cost of generating an intangible asset internally, such as salary and other expenditure incurred in securing copyrights or licences or developing computer software.
Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets.
Expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets.
Cost of an internally generated intangible asset
The cost of an internally generated intangible asset for the purpose of paragraph 24 is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria in paragraphs 21, 22 and 57. Paragraph 71 prohibits reinstatement of expenditure previously recognised as an expense.
The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Examples of
directly attributable costs are:
costs of materials and services used or consumed in generating the
intangible asset;
costs of employee benefits (as defined in IAS 19) arising from the
generation of the intangible asset;
fees to register a legal right; and
amortisation of patents and licences that are used to generate the
intangible asset.
IAS 23 specifies criteria for the recognition of interest as an element of the cost
of an internally generated intangible asset.
The following are not components of the cost of an internally generated
intangible asset:
selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use;
identified inefficiencies and initial operating losses incurred before the
asset achieves planned performance; and
expenditure on training staff to operate the asset.
Example illustrating paragraph 65
An entity is developing a new production process. During 20X5, expenditure
incurred was CU1,000,(a) of which CU900 was incurred before 1 December
20X5 and CU100 was incurred between 1 December 20X5 and 31 December
20X5. The entity is able to demonstrate that, at 1 December 20X5, the
production process met the criteria for recognition as an intangible asset.
The recoverable amount of the know-how embodied in the process (including
future cash outflows to complete the process before it is available for use) is estimated to be CU500.
At the end of 20X5, the production process is recognised as an intangible asset at a cost
of CU100 (expenditure incurred since the date when the recognition criteria were met,
ie 1 December 20X5). The CU900 expenditure incurred before 1 December 20X5 is
recognised as an expense because the recognition criteria were not met until 1 December
20X5. This expenditure does not form part of the cost of the production process recognised in the statement of financial position.
During 20X6, expenditure incurred is CU2,000. At the end of 20X6, the
recoverable amount of the know-how embodied in the process (including
future cash outflows to complete the process before it is available for use) is estimated to be CU1,900.
At the end of 20X6, the cost of the production process is CU2,100 (CU100 expenditure
recognised at the end of 20X5 plus CU2,000 expenditure recognised in 20X6). The entity
recognises an impairment loss of CU200 to adjust the carrying amount of the process
before impairment loss (CU2,100) to its recoverable amount (CU1,900). This impairment
loss will be reversed in a subsequent period if the requirements for the reversal of an impairment loss in IAS 36 are met.
(a) In this Standard, monetary amounts are denominated in 'currency units (CU)'.
Recognition of an expense
Expenditure on an intangible item shall be recognised as an expense
when it is incurred unless:
it forms part of the cost of an intangible asset that meets the
recognition criteria (see paragraphs 18-67); or
the item is acquired in a business combination and cannot be
recognised as an intangible asset. If this is the case, it forms part of the amount recognised as goodwill at the acquisition date (see IFRS 3).
In some cases, expenditure is incurred to provide future economic benefits to an entity, but no intangible asset or other asset is acquired or created that can be recognised. In the case of the supply of goods, the entity recognises such expenditure as an expense when it has a right to access those goods. In the case of the supply of services, the entity recognises the expenditure as an expense when it receives the services. For example, expenditure on research is recognised as an expense when it is incurred (see paragraph 54), except when it
is acquired as part of a business combination. Other examples of expenditure
that is recognised as an expense when it is incurred include:
expenditure on start-up activities (ie start-up costs), unless this
expenditure is included in the cost of an item of property, plant and equipment in accordance with IAS 16. Start-up costs may consist of establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or business (ie pre-opening costs) or expenditures for starting new operations or launching new products or processes (ie pre-operating costs).
expenditure on training activities.
expenditure on advertising and promotional activities (including mail order catalogues).
expenditure on relocating or reorganising part or all of an entity.
An entity has a right to access goods when it owns them. Similarly, it has a right to access goods when they have been constructed by a supplier in accordance with the terms of a supply contract and the entity could demand delivery of them in return for payment. Services are received when they are performed by a supplier in accordance with a contract to deliver them to the entity and not when the entity uses them to deliver another service, for example, to deliver an advertisement to customers.
Paragraph 68 does not preclude an entity from recognising a prepayment as an asset when payment for goods has been made in advance of the entity obtaining a right to access those goods. Similarly, paragraph 68 does not preclude an entity from recognising a prepayment as an asset when payment for services has been made in advance of the entity receiving those services.
Past expenses not to be recognised as an asset
Expenditure on an intangible item that was initially recognised as an
expense shall not be recognised as part of the cost of an intangible asset at a later date.
Measurement after recognition
An entity shall choose either the cost model in paragraph 74 or the revaluation model in paragraph 75 as its accounting policy. If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same model, unless there is no active market for those assets.
A class of intangible assets is a grouping of assets of a similar nature and use in an entity's operations. The items within a class of intangible assets are revalued simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial statements representing a mixture of costs and values as at different dates.
Cost model
After initial recognition, an intangible asset shall be carried at its cost
less any accumulated amortisation and any accumulated impairment losses.
Revaluation model
After initial recognition, an intangible asset shall be carried at a revalued
amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be measured by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value.
the revaluation model does not allow:
the revaluation of intangible assets that have not previously been
recognised as assets; or
the initial recognition of intangible assets at amounts other than cost.
the revaluation model is applied after an asset has been initially recognised at cost. However, if only part of the cost of an intangible asset is recognised as an asset because the asset did not meet the criteria for recognition until part of the way through the process (see paragraph 65), the revaluation model may be applied to the whole of that asset. Also, the revaluation model may be applied to an intangible asset that was received by way of a government grant and recognised at a nominal amount (see paragraph 44).
It is uncommon for an active market to exist for an intangible asset, although this may happen. For example, in some jurisdictions, an active market may exist for freely transferable taxi licences, fishing licences or production quotas. However, an active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique. Also, although intangible assets are bought and sold, contracts are negotiated between individual buyers and sellers, and transactions are relatively infrequent. For these reasons, the price paid for one asset may not provide sufficient evidence of the fair value of another. Moreover, prices are often not available to the public.
The frequency of revaluations depends on the volatility of the fair values of the intangible assets being revalued. If the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is necessary. Some intangible assets may experience significant and volatile movements in fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for intangible assets with only insignificant movements in fair value.
When an intangible asset is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is
treated in one of the following ways:
the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. For example, the gross carrying amount may be restated by reference to observable market data or it may be restated proportionately to the change in the carrying amount. The accumulated amortisation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into
account accumulated impairment losses; or
the accumulated amortisation is eliminated against the gross carrying
amount of the asset.
The amount of the adjustment of accumulated amortisation forms part of the
increase or decrease in the carrying amount that is accounted for in accordance with paragraphs 85 and 86.
If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset, the asset shall be carried at its cost less any accumulated amortisation and impairment losses.
If the fair value of a revalued intangible asset can no longer be measured by reference to an active market, the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the active market less any subsequent accumulated amortisation and any subsequent accumulated impairment losses.
The fact that an active market no longer exists for a revalued intangible asset may indicate that the asset may be impaired and that it needs to be tested in accordance with IAS 36.
If the fair value of the asset can be measured by reference to an active market at a subsequent measurement date, the revaluation model is applied from that date.
If an intangible asset's carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.
If an intangible asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.
The cumulative revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realised. The whole surplus may be realised on the retirement or disposal of the asset. However, some of the surplus may be realised as the asset is used by the entity; in such a case, the
amount of the surplus realised is the difference between amortisation based on the revalued carrying amount of the asset and amortisation that would have been recognised based on the asset's historical cost. The transfer from
revaluation surplus to retained earnings is not made through profit or loss.
Useful life
An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of production or similar units constituting, that useful life. An intangible asset shall be regarded by the entity 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 accounting for an intangible asset is based on its useful life. An intangible asset with a finite useful life is amortised (see paragraphs 97-106), and an intangible asset with an indefinite useful life is not (see paragraphs 107-110). The Illustrative Examples accompanying this Standard illustrate the determination of useful life for different intangible assets, and the subsequent accounting for those assets based on the useful life determinations.
Many factors are considered in determining the useful life of an intangible asset,
including:
the expected usage of the asset by the entity and whether the asset could
be managed efficiently by another management team;
typical product life cycles for the asset and public information on
estimates of useful lives of similar assets that are used in a similar way;
technical, technological, commercial or other types of obsolescence;
the stability of the industry in which the asset operates and changes in
the market demand for the products or services output from the asset;
expected actions by competitors or potential competitors;
the level of maintenance expenditure required to obtain the expected
future economic benefits from the asset and the entity's ability and
intention to reach such a level;
the period of control over the asset and legal or similar limits on the use
of the asset, such as the expiry dates of related leases; and
whether the useful life of the asset is dependent on the useful life of other assets of the entity.
The term 'indefinite' does not mean 'infinite'. The useful life of an intangible asset reflects only that level of future maintenance expenditure required to maintain the asset at its standard of performance assessed at the time of estimating the asset's useful life, and the entity's ability and intention to reach such a level. A conclusion that the useful life of an intangible asset is indefinite should not depend on planned future expenditure in excess of that required to maintain the asset at that standard of performance.
Given the history of rapid changes in technology, computer software and many other intangible assets are susceptible to technological obsolescence. Therefore, it is likely that their useful life is short.
The useful life of an intangible asset may be very long or even indefinite. Uncertainty justifies estimating the useful life of an intangible asset on a prudent basis, but it does not justify choosing a life that is unrealistically short.
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