Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.
For the requirements reference must be made to International Financial Reporting Standards.

IAS 38 Intangible Assets

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.

An intangible asset is an identifiable non-monetary asset without physical substance.

Recognition and measurement

The recognition of an item as an intangible asset requires an entity to demonstrate that

the item meets:
(a) the definition of an intangible asset; and
(b) the recognition criteria.
This requirement applies to costs incurred initially to acquire or internally generate an
intangible asset and those incurred subsequently to add to, replace part of, or service
it.

An asset meets the identifiability criterion in the definition of an intangible asset when
it:
(a) is separable, ie is 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
(b) 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.

An intangible asset shall be recognised if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the
asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.

The probability recognition criterion is always considered to be satisfied for intangible

assets that are acquired separately or in a business combination.

An intangible asset shall be measured initially at cost.

The cost of a separately acquired intangible asset comprises:

(a) its purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing the asset for its intended use.
In accordance with IFRS 3 Business Combinations, if an intangible asset is acquired
in a business combination, the cost of that intangible asset is its fair value at the
acquisition date. The only circumstances in which it might not be possible to measure
reliably the fair value of an intangible asset acquired in a business combination are
when the intangible asset arises from legal or other contractual rights and either:
(a) is not separable; or
(b) is separable, but there is no history or evidence of exchange transactions for the
same or similar assets, and otherwise estimating fair value would be dependent on
immeasurable variables.

Internally generated intangible assets

Internally generated goodwill shall not be recognised as an asset.

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.

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:
(a) the technical feasibility of completing the intangible asset so that it will be
available for use or sale.
(b) its intention to complete the intangible asset and use or sell it.
(c) its ability to use or sell the intangible asset.
(d) 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.
(e) the availability of adequate technical, financial and other resources to complete
the development and to use or sell the intangible asset.
(f) its ability to measure reliably the expenditure attributable to the intangible asset
during its development.

Internally generated brands, mastheads, publishing titles, customer lists and items
similar in substance shall not be recognised as intangible assets.

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.

Expenditure on an intangible item shall be recognised as an expense when it is

incurred unless:
(a) it forms part of the cost of an intangible asset that meets the recognition criteria; or
(b) the item is acquired in a business combination and cannot be recognised as an
intangible asset. If this is the case, this expenditure (included in the cost of the
business combination) shall form part of the amount attributed to goodwill at the
acquisition date (see IFRS 3 Business Combinations).
Measurement after recognition

An entity shall choose either the cost model or the revaluation model 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.

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 determined by
reference to an active market. Revaluations shall be made with such regularity that at
the balance sheet date the carrying amount of the asset does not differ materially from
its fair value.

An active market is a market in which all the following conditions exist:

(a) the items traded in the market are homogeneous;
(b) willing buyers and sellers can normally be found at any time; and
(c) prices are available to the public.

If an intangible asset’s carrying amount is increased as a result of a revaluation, the

increase shall be credited directly to 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 debited
directly to equity under the heading of revaluation surplus to the extent of any credit
balance in the revaluation surplus in respect of that asset.

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.

Useful life is:

(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset
by an entity.

The useful life of an intangible asset that arises from contractual or other legal rights
shall not exceed the period of the contractual or other legal rights, but may be shorter
depending on the period over which the entity expects to use the asset. If the
contractual or other legal rights are conveyed for a limited term that can be renewed,
the useful life of the intangible asset shall include the renewal period(s) only if there is
evidence to support renewal by the entity without significant cost.

To determine whether an intangible asset is impaired, an entity applies IAS 36

Impairment of Assets.

Intangible assets with finite useful lives

The depreciable amount of an intangible asset with a finite useful life shall be
allocated on a systematic basis over its useful life. Depreciable amount is the cost of
an asset, or other amount substituted for cost, less its residual value. Amortisation
shall begin when the asset is available for use, ie when it is in the location and
condition necessary for it to be capable of operating in the manner intended by
management. Amortisation shall cease at the earlier of the date that the asset is
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 and the date that the asset is derecognised. The amortisation method used
shall reflect the pattern in which the asset's future economic benefits are expected to
be consumed by the entity. If that pattern cannot be determined reliably, the straight-
line method shall be used. The amortisation charge for each period shall be
recognised in profit or loss unless this or another Standard permits or requires it to be
included in the carrying amount of another asset.

The residual value of an intangible asset is the estimated amount that an entity would
currently obtain from disposal of the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in the condition expected at the end
of its useful life. The residual value of an intangible asset with a finite useful life
shall be assumed to be zero unless:
(a) there is a commitment by a third party to purchase the asset at the end of its useful
life; or
(b) there is an active market for the asset and:
(i) residual value can be determined by reference to that market; and
(ii) it is probable that such a market will exist at the end of the asset’s useful life.

The amortisation period and the amortisation method for an intangible asset with a
finite useful life shall be reviewed at least at each financial year-end. If the expected
useful life of the asset is different from previous estimates, the amortisation period
shall be changed accordingly. If there has been a change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the amortisation
method shall be changed to reflect the changed pattern. Such changes shall be
accounted for as changes in accounting estimates in accordance with IAS 8.

Intangible assets with indefinite useful lives

An intangible asset with an indefinite useful life shall not be amortised.

In accordance with IAS 36 Impairment of Assets, an entity is required to test an

intangible asset with an indefinite useful life for impairment by comparing its
recoverable amount with its carrying amount
(a) annually, and
 (b) whenever there is an indication that the intangible asset may be impaired.

The useful life of an intangible asset that is not being amortised shall be reviewed
each 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 shall be accounted for as a change in an
accounting estimate in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors.