Intangible assets - IAS38
1. Definition
2. Research and Development
3. Amortization
4. Disclosure
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Copyright: Faculty of Accounting- Academy of
Finance 1
1. Definition
An intangible asset is an identifiable non-monetary asset
without physical substance.
Intangible Assets examples:
Goodwill (IFRS 3 )
Concession, patents, license, trademarks
Customer list
Development expenditure.
Tangible fixed asset Intangible fixed asset
Have physical substance No physical substance
Expenditure incurred to purchase May be purchased or internally
or manufacture generated
Depreciation reflects consumption Amortisation reflects
of the asset consumption of the asset
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Finance 2
2. Research and development expenditure
To determine whether an internally generated intangible
asset meets the criteria for recognition, IAS 38 requires that an
entity classifies expenditure as: Research expenditure – written
off to P/L as incurred, or Development expenditure –
compulsory capitalisation if specified criteria have been met.
Research is original and Development is the application of
planned investigation research findings or other knowledge
undertaken with the prospect to a plan or design for the
of gaining new scientific or production of new or substantially
technical knowledge and improved materials, devices,
understanding products, processes, systems or
services prior to the commencement
3 of commercial production or use.
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Research expenditure
Results: Should be recognized
Activities aimed at obtaining new as an expense when
knowledge. incurred (SOPL)
The search for applications of
research findings or other
knowledge.
The search for product or process
alternatives Dr Research expense
The formulation and design of Cr Bank, A.P, …
possible new or improved product or
process alternatives
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Finance 4
Development expenditure
The design, construction and testing of pre- production 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.
The design, construction and testing of a chosen alternative for
new/improved materials
If (and only if) all 6 criteria are met, Development
expenditure is recognized as an intangible asset (SOFP)
If certain criteria are met, Development expenditure is
5 recognized as an expense (SOFP)
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Recognition criteria to capital development expenditure
To capitalize development cost, entity must demonstrate:
P - How the intangible asset will generate Probable future
economic benefits
I - Its Intention to complete the intangible asset and use or sell it
R - The availability of adequate technical, financial and other
Resources to complete the development and to use or sell the
intangible asset
A - Its Ability to use or sell the intangible asset
T - The Technical feasibility of completing the intangible asset
so that it will be available for use or sale
E - Its ability to measure reliably the Expenditure attributable to
the
6 intangible asset during itsdevelopmen
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3. Amortization
Amotization is the systematic allocation of the depreciable
amount of an intangible asset over its useful life.
amortized over its useful life, start
Finite useful life when the asset is available for use
Dr Amortization expense (SPL)
Cr Accumulate amortization
(SOFP)
Indefinite useful life No amortization, only subject to
review impairment annually.
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4. Disclosure
Accounting policies for intangible assets that have been adopted.
For each class of intangible assets (including development costs),
disclosure is required of the following:
- The method of amortisation used
- The useful life of the assets or the amortisation rate used
- The gross carrying amount, the accumulated amortisation and the
accumulated impairment losses as at the beginning and the end of the
period
- The carrying amount of internally generated intangible assets
- The line item(s) of the statement of profit or loss in which any
amortisation of intangible assets is included
A reconciliation of the carrying amount of intangible assets at the
beginning and at the end of the period. The reconciliation should show
the movement on intangible assets, including: Additions ; Disposals ;
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Reductions in carrying amount, Amortisation, Any other movements
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