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Recognition of intangible assets
An intangible asset is recognised when it meets
all of the following criteria [IAS38R.10,21]:
| a) |
it is identifiable; |
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| b) |
the entity has control over the asset; |
|
| c) |
it is probable that economic benefits will
flow to the entity; and |
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| d) |
the cost of the asset can be measured reliably. |
Expenditure incurred for the purposes of generating
future revenues does not, in itself, create an intangible
asset. An intangible asset is recognised if the
criteria listed above are met. Where the recognition
criteria are not met, costs incurred should be expensed
[IAS38R.10].
Identifiability
An intangible asset must be identifiable in order
to distinguish it from goodwill (goodwill being
the residual in a business combination). Intangible
assets are identifiable if they can be sold, transferred,
licensed, rented or exchanged separately or together
with a related contract, asset or liability. Intangible
assets are also identifiable if they arise from
contractual or other legal rights, regardless of
whether those rights are transferable or separable
[IAS38R.11] [IAS38R.12] .
Control
An entity controls an intangible asset if it has
the power to obtain the future economic benefits
that flow from it and to restrict others' access
to those benefits [IAS38R.13].
The ability to control may not necessarily be through
the exercise of legal rights but through secrecy,
for example, control of the benefits of know-how.
However, the absence of legal rights may make it
more difficult to demonstrate control [IAS38R.13].
Exchange transactions outside a business combination,
for the asset or similar assets can provide evidence
that the asset is controlled in the absence of legal
rights.
An entity may have a portfolio of customers with
which it has built a relationship and from which
it expects to obtain benefits. The relationship
and any accumulated information are internally generated
assets which do not meet the criteria for separate
recognition .
Customer relationships or a portfolio of customers
purchased outside a business combination would however
meet the definition of an intangible asset. The
purchase transaction provides evidence that the
customer relationship is separable [IAS38R.16] .
An entity is not considered to exercise sufficient
control over its workforce for the workforce to
be recognised as an intangible asset [IAS38R.15].
Legally enforceable non-compete contracts with key
staff may enable an entity to demonstrate that it
controls those staff .
Probable flow of economic benefits
The use of an intangible asset may provide benefits
in the form of increased revenues, reduced costs
or other benefits [IAS38R.17]. The recognition of
an intangible asset requires an entity to demonstrate
that the receipt of future economic benefits is
probable. If this cannot be demonstrated the costs
must be expensed .
The probability of future economic benefits should
be assessed using reasonable and supportable assumptions
based on management's best estimate of the relevant
future economic conditions [IAS38R.22].
The probability criterion is always deemed to be
met for separately acquired intangibles and for
those acquired as part of a business combination
[IAS38R.25] [IAS38R.33].
Initial measurement
Initial measurement - separately acquired
intangible assets
All intangible assets that meet the recognition
criteria should be measured at cost [IAS38R.24].
The cost of an intangible asset is the fair value
of the consideration given to acquire the asset
or the amount attributed to the asset if initially
recognised under another standard, for example IFRS
2, Share-based Payment [IAS38R.8]. The fair value
of consideration given to acquire an intangible
asset reflects management's expectations about the
future economic benefits to be obtained.
All costs necessary to prepare the asset for use
in the manner intended by management should be included
in the carrying amount of the asset. These costs
may include:
| a) |
Employee costs directly attributable
to the preparation and installation of the asset; |
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| b) |
The amount of any professional fees directly
related to the acquisition and preparation
of the asset for use; |
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| c) |
Costs of testing the asset to ensure that
that it is capable of operating in the manner
intended. |
Costs of installation and customisation of an intangible
asset, for example computer software, should be
capitalised provided the costs are necessary to
bring the asset to its required condition [IAS38R.27].
The accounting treatment should not differ whether
the customisation and installation is carried out
by a third party or by the entity's own employees.
All training costs, however, should be expensed
as incurred [IAS38R.15].
Initial measurement - Intangible assets acquired
as part of a business combination
The cost of intangible assets acquired through a
business combination is deemed to be their fair
value at the date of acquisition [IAS38R.33] [IFRS3.45].
The fair value of an intangible asset includes the
expectation of future benefits to be generated from
its use. An intangible asset is recognised separately
from goodwill if its fair value can be measured
reliably [IAS38R.33-34] .
IFRS 3 requires all intangible assets acquired
as part of a business combination, which meet the
recognition criteria, to be recorded at fair value.
In determining fair value the identity of the purchaser
is unknown. No account should be taken of any potential
purchaser's specific circumstances; fair value is
not entity specific
.
The fair value of intangible assets acquired in
a business combination can normally be measured
reliably. Uncertainties involved in the fair value
estimates do not imply that is not possible to measure
fair value reliably. The probabilities of different
values for an intangible asset should be considered
in the measurement exercise [IAS38R.35].
Reliable measurement may not be possible where
several different valuation techniques give a wide
range of probable values. However if there is a
range of values but the variation is driven by different
possible outcomes, the value associated with the
expected outcome is a reliable measurement.
If an intangible asset acquired as part of a business
combination has a finite life there is a rebuttable
presumption that its fair value can be measured
reliably [IAS38R.35].
An intangible asset acquired in a business combination
might be separable but only in conjunction with
another tangible or intangible asset. If this is
the case, the group of assets is recognised as a
single asset separately from goodwill if the value
of the individual assets cannot be measured reliably
[IAS38R.36].
An asset's fair value should be determined as the
amount that would have been paid on an arm's length
basis, between knowledgeable and willing parties,
at the time of the acquisition [IAS38R.40].
Initial measurement - Valuation methods
The most reliable measure of fair value is quoted
market prices in an active market [IAS38R.39]. However,
few intangibles are traded on an active market.
The fair value of intangible assets can usually
be reliably measured despite the absence of an active
market or recent similar transactions by using valuation
techniques.
Best practice calls for the assessment of fair
value to be based on the results provided by several
methods. The most reliable method often depends
on the nature of the asset and the information available.
The following valuation methods may be applied
to intangible assets:
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Market comparison approach
- The market approach values the asset based
on comparison with sales of similar assets.
For example, if an asset were sold for 1.4 times
annual sales revenue, a similar asset could
be valued using a similar multiple. A robust
valuation will usually involve the use of several
multiples. |
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Excess operating profits method -
The asset's value is the present value of
the additional net profits generated through
the use of the asset which would not have
been attainable without the asset. |
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Premium pricing method - This method
is often used to value intangibles in the consumer
products sector, where branded products are
more expensive than an unbranded equivalent.
The present value of additional revenue over
the life of the brand, net of brand support
costs, provides a value for the brand. |
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Royalty savings method -
The royalty savings method is based on the principle
that if the business did not own the asset it
would have to licence it in order to obtain
the same benefits. The value of the asset is
calculated based on the present value of the
royalty stream that the business is saving by
owning the asset. |
Rarely, it may not be possible to arrive at a reliable
measurement of an intangible asset acquired in a
business combination when it arises from legal or
contractual rights but the asset is not separable
or, is separable but there is no history of similar
transactions. Any estimation of fair value would
be unreliable and the asset would remain subsumed
within goodwill [IAS38R.38] .
The balance of any excess of cost over the acquirer's
interest in the identifiable net assets after the
recognition of previously unrecognised intangible
assets is goodwill. Intangible assets that fail
to meet the recognition criteria but for which value
was given in the acquisition price, will be subsumed
within the goodwill arising on acquisition [IFRS3.52]
.
Initial measurement - Acquisition by way
of a government grant
An intangible asset may be acquired free of charge
or for a nominal amount by way of a government grant.
The entity may choose to recognise both the asset
and the grant at fair value or may choose to record
the asset at a nominal amount plus any costs incurred
in preparing the asset for use [IAS38R.44].
Initial measurement - Exchange of assets
An entity may acquire an asset through the exchange
of another asset rather than the payment of cash.
The initial measurement of an asset acquired through
an exchange transaction is at fair value, unless
fair value cannot be reliably measured or the transaction
does not have commercial substance [IAS38R.45].
Exchange transactions are expected to have commercial
substance as intangible assets are seldom identical.
Commercial substance is determined by analysing
the changes in the entity's cash flows from the
asset received as compared to those from the asset
given. The analysis should consider if the risks,
timing and amounts of cash flows are different after
the exchange [IAS38R.46] .
The fair value of the asset given up is used as
the cost base of the asset acquired unless the acquired
intangible asset has a more evident and robust fair
value, e.g. there have been recent market transactions
in similar assets. The fair value of the asset received
is used in such a case [IAS38R.47] .
Internally-generated intangible assets
Internally-generated goodwill is not recognised
as an intangible asset [IAS38R.48]. It is not an
identifiable resource that the entity controls for
which cost can be measured reliably [IAS38R.49].
Many other internally-generated intangibles will
also fail to be recognised because it is difficult
to demonstrate that economic benefits will be generated
and because the cost of such items cannot be distinguished
from the cost of developing the business as a whole
[IAS38R.64] . IAS 38R specifically
prohibits the recognition of internally-generated
brands, mastheads, publishing titles, customer lists
and similar items [IAS38R.63].
Research and development
Costs incurred in the development of intangible
assets may meet the recognition criteria. An entity
needs to consider the research phase and the development
phase.
Research is original and planned investigation
undertaken with the prospect of gaining new scientific
or technical knowledge and understanding [IAS38R.8].
Development is the application of research findings
or other knowledge to a plan or design before the
commencement of commercial production or use [IAS38R.8].
Development is more closely related to the earnings
process than research.
The cost of research activities should not be recognised
as an intangible asset because it is not possible
to demonstrate that probable future economic benefits
will flow to the entity. Research costs should be
expensed as incurred [IAS38R.54-55].
The cost of development activities should be capitalised
when it is probable that the entity will obtain
economic benefits from the use of the asset and
the cost can be reliably measured. Otherwise, the
cost of development activities should be expensed
as incurred [IAS38R.57] .
The probability of the flow of economic benefits
in respect of an internally-developed intangible
asset requires management's intention to complete
the asset and its ability to commercially exploit
the asset [IAS38R.57]. An internally-developed intangible
asset should not be capitalised if management does
not intend to complete the asset and use it or sell
it [IAS38R.57(b)] .
An in-process research and development project
acquired as part of a business combination should
be recognised as a separate intangible asset where
[IAS38R.34] :
| a) |
the project meets the definition
of an asset; |
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| b) |
the project is identifiable; and |
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| c) |
the fair value of the project can be measured
reliably. |
Initial measurement - Internally-generated
intangible assets
The cost of internally-generated intangibles should
include all directly attributable costs incurred
in the creation of the asset from the date on which
the asset first met the recognition criteria [IAS38R.65].
All costs incurred prior to that date should be
expensed and should not be subsequently reinstated
[IAS38R.71] .
The costs recognised should include the costs of
materials and services used or consumed in generating
the asset, employment costs (including pension costs)
of those directly involved in creating the asset,
legal fees and registration fees. The cost should
only include absorption of relevant overheads when
they are directly attributable to the generation
and preparation of the asset. Overheads likely to
be included will be depreciation of relevant property,
plant and equipment and also amortisation of patents
and licences utilised in creating the asset [IAS38R.66-67]
.
Overhead costs relating to unproductive or inefficient
use of resources should be expensed as incurred.
General administrative costs not directly attributable
to the generation of the intangible asset should
also be expensed when incurred [IAS38R.67] .
The costs capitalised should include borrowing
costs where relevant [IAS38R.66] .
The cost of developing a web site should be capitalised
provided the recognition criteria are satisfied
[IAS38R.21-22] [IAS38R.57] [SIC32.9] .
Subsequent expenditure
The nature of an intangible asset is such that
there will seldom be an addition to or replacement
of any part of it. A legal right, licence or patent,
for example is complete and seldom modified to enhance
its standard of performance. Costs incurred to support
a brand or protect a patent are maintenance in nature.
They either maintain the future economic benefits
of the existing intangible asset, or cannot be distinguished
from expenditure incurred to develop the business
as a whole. Essential expenditure, to enable software
to continue to function as originally anticipated,
should also be expensed as incurred. Subsequent
expenditure on intangible assets is only capitalised
in rare circumstances [IAS38R.20] .
Subsequent expenditure on acquired IPR&D is
expensed as incurred until the project meets the
criteria for recognition. Once the criteria are
met all subsequent expenditure is capitalised [IAS38R.43].
Measurement subsequent to initial recognition
Management may choose between two options for subsequent
measurement, cost or revaluation. Under the cost
model the asset is carried at cost less accumulated
amortisation and accumulated impairment losses [IAS38R.74].
An intangible asset may be carried at a revalued
amount, being its fair value at the revaluation
date, less any accumulated amortisation and impairment
losses [IAS38R.75] .
Revaluation model
The revaluation model may only be used if the fair
value can be determined by reference to an active
market for the intangible asset [IAS38R.75]. The
definition of an active market is so narrow that
it is rare for an active market to exist for intangible
assets [IAS38R.8]. An active market does not usually
exist for brands, newspaper mastheads, music and
film publishing rights, patents or trademarks, because
each such asset is unique [IAS38R.78] .
The asset is carried at its fair value at the time
of the revaluation [IAS38R.75]. An entire class
of assets should be revalued simultaneously [IAS38R.73].
Intangible assets are always recognised initially
at cost. The capitalised cost of an internally-developed
intangible will only include those costs incurred
after the capitalisation criteria were met. Consequently
only part of the cost of an internally developed
intangible asset is normally recognised. However,
when the revaluation model is applied, the whole
of the fair value of the intangible asset is recognised.
Revaluations may also be applied to an intangible
asset acquired by way of government grant and previously
recognised at a nominal amount [IAS38R.77].
When an active market no longer exists for a revalued
asset, its carrying amount should be its revalued
amount at the date of the last revaluation (made
with reference to the active market), less any subsequent
accumulated amortisation and impairment losses [IAS38R.82].
When an active market no longer exists, the revalued
asset might be impaired and should be tested in
accordance with IAS 36 [IAS38R.83]. If an active
market is subsequently re-established, the revaluation
model should be applied from that date [IAS38R.84].
Revaluations should be made as frequently as necessary
to ensure that the carrying amount and the asset's
fair value are not materially different at the balance
sheet date [IAS38R.75].
The surplus or deficit arising on revaluation should
be recognised either in the income statement or
directly in reserves in accordance with the following
table [IAS38R.85-86]:
| |
Surplus |
Deficit |
| First revaluation |
Credit to equity (Revaluation
surplus reserve) |
Charge to income statement |
| Subsequent revaluation |
Credit to equity (Revaluation
surplus reserve) unless the surplus reverses
a previous deficit, then credit to income statement. |
Charge to income statement unless
the deficit reverses a previous surplus, then
charge to equity. |
An impairment loss is treated as a revaluation
decrease [IAS36R.60]. The reversal of an impairment
loss of a revalued asset should be treated as a
revaluation increase [IAS36R.119].
Useful life
Useful life for an intangible asset is the period
over which the entity expects to obtain economic
benefit from its use. Most intangible assets have
a finite useful life; assets that do not are described
as having an indefinite (not infinite) useful life
(Amortisation - What is amortisation?).
An intangible asset may be attributed an indefinite
useful life when there is no foreseeable limit to
the period over which cash flows will be generated.
Few intangible assets are likely to meet this criterion
. The most common asset which has
the potential to do so is a trademark or brand.
A trademark has an indefinite legal life but this
does not mean that it has the capacity to generate
cash flows indefinitely. Long established brands
in the food and drink sectors are examples of assets
which may demonstrate the capacity to generate cash
flows for the foreseeable future .
In contrast, brands that are driven by technology
or individual reputation (such as sports or entertainment
personalities) are unlikely to demonstrate this
.
Management will consider the following factors
when determining the useful life of an intangible
asset [IAS38R.90]:
| a) |
expected uses for
the asset and the ability to use the asset efficiently; |
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| b) |
estimates of useful lives of similar assets; |
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| c) |
the strategy for obtaining
maximum economic benefit from the asset; |
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| d) |
rates of technical, technological
or commercial obsolescence in the industry; |
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| e) |
the stability of the industry
and economy in which the asset will be deployed; |
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| f) |
expected actions by competitors
and potential competitors; |
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| g) |
the willingness and ability
of the entity to commit resources to maintain
the performance of the asset; |
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| h) |
the period of the entity's
control over the asset and any legal or other
restriction on its ability to use the asset; |
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| i) |
whether the useful life of
the asset is based on the useful life of any
of the entity's other assets. |
The useful life of intangible assets that are based
on a contractual or other legal right cannot exceed
the period covered by the contract except where
there is evidence that the contract will be renewed
or extended without significant cost [IAS38R.94].
The useful life of a patent is limited to the period
over which the patent can be effectively protected
.
The useful life of customer related intangibles
is established by the average period of customer
retention.
Amortisation
Consumption of the economic benefits of a finite
lived intangible asset is reflected by an amortisation
charge. The cost of the asset is amortised to reduce
its carrying value to its residual value (usually
zero) over its useful life (Amortisation
- Useful life). Several amortisation
methods are available e.g. reducing balance, straight
line and units of production. The method selected
should most appropriately reflect the pattern in
which the entity consumes the asset's economic benefits
[IAS38R.97]. It is rare that an amortisation method
yielding a lower amount of depreciation than the
straight line method will be acceptable [IAS38R.98]
.
The residual value of a finite lived intangible
asset is zero unless either there is a commitment
by a third party to purchase the asset or there
is an active market for the asset (as defined in
IAS38R.8) that is expected to still exist at the
end of the asset's useful life [IAS38R.100].
Intangible assets that are used under licence or
contract, such as software, should be amortised
over the shorter of the expected useful life of
the asset and the length of the licence. An intangible
asset's exclusive reliance on another asset, for
example reliance of software on hardware, should
be considered when determining an asset's useful
life for amortisation purposes. The renewal period
of a licence or other contract-based intangible
asset is included in the useful life if there is
evidence to support the renewal without significant
cost [IAS38R.94] .
The amortisation period and method must be reviewed
at least at each year end and appropriate adjustments
made if either is no longer relevant [IAS38R.104].
Indefinite lived intangibles are not amortised
but should be tested for impairment at least annually
and whenever there is an indication of impairment.
[IAS38R.108]. The useful life of an indefinite lived
intangible asset must be reviewed each year to determine
whether an indefinite life is still appropriate.
The consumption of a revalued asset with a finite
useful life is reflected through an amortisation
charge. An element of the revaluation surplus may
be transferred to retained earnings in each period,
being that part of the amortisation charge in respect
of the revaluation uplift on the asset. Thus, the
revaluation surplus is systematically realised over
the estimated remaining life of the asset. When
the asset is sold or scrapped, the balance in the
revaluation reserve in respect of that asset is
transferred to retained earnings [IAS38R.87].
Impairment
An asset's carrying amount may not be economically
recovered from future business activity. Use of
the asset may continue but may be insufficient to
recover the current carrying value in the future.
Wherever indicators of impairment exist, a review
for impairment should be carried out [IAS36R.8-9].
Where impairment is identified, a write-down of
the carrying value to the recoverable amount should
be charged as an immediate expense in the income
statement. However, to the extent that it reverses
previous revaluation uplift, it should be charged
directly against the revaluation surplus [IAS36R.60]
.
Impairment reviews must be carried out each year
for intangible assets with indefinite useful lives
and for intangible assets that are not yet available
for use [IAS36R.10].
Reversal of impairment losses should be recognised
under certain restricted circumstances .
Retirements and disposals
When an intangible asset is disposed of, it is
eliminated from the balance sheet. This is also
required when an asset is permanently withdrawn
from use and has no future economic value [IAS38R.112].
Any gain or loss arising, being the difference between
any disposal proceeds and the carrying amount, is
recognised in the income statement [IAS38R.113].
An inter-reserve transfer is made for any element
of the revaluation reserve relating to the asset
to transfer the balance to retained earnings [IAS38R.87].
Intangible assets are classified as held for sale
when their carrying amount is expected to be recovered
through a sale transaction rather than through their
continued use [IFRS5.6].
In order to qualify for recognition the asset must
be:
| a) |
available for immediate sale
in its present condition; and |
|
| b) |
sale must be highly probable. |
High probability can be evidenced where the appropriate
level of management commitment to the sale has been
obtained, an active programme to locate a buyer
has begun and where the sale is expected to be completed
within one year.
The decision to sell an intangible asset is an
indicator that the asset may be impaired. Impairment
losses should be recognised to the extent that the
carrying value of the asset exceeds its fair value
less costs to sell
Disclosure
Disclosure requirements are more extensive in IAS
38R than in its predecessor standard, reflecting
the expectation that more intangible assets will
be recognised in entities' balance sheets.
The specific disclosure requirements are given
in IAS 38R.118 to IAS 38R.128 [IAS38R.118] [IAS38R.128].
These are generally in line with the comparable
disclosures required for property, plant and equipment,
with a number of significant additions, set out
below:
| a) |
whether the useful lives are
indefinite or finite; if finite, their useful
lives and amortisation methods used; |
|
| b) |
the reasons why any assets are considered
to have indefinite useful lives; |
|
| c) |
information on any individual intangible
asset that is material to the financial statements
of the entity as a whole; |
|
| d) |
for intangible assets acquired by way of
government grant and initially recognised at
fair value, disclosure of initial value, current
carrying value and whether the assets are carried
under the cost or revaluation model for subsequent
measurement; and |
|
| e) |
the amount of research and development
costs expensed in the period. |
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