Apart from tangible assets(assets that have a physical substance) that a company owns, the company may own other assets without a physical substance. Examples of such assets are trademarks, logos, brand name, goodwill. Even though these assets do not have a physical substance, they are very essential to the company. A brand name may be considered as a powerful asset of a company. Brands such as Apple, Nike, Rolex are worth in millions of dollars. For example, in 2019, Apple brand was worth $205.5 billion. Assets without a physical substance are known as intangible assets.
IAS 38 defines intangible assets as " an identifiable, non-monetary assets without physical substance.
According to IAS 38, intangible assets should be recognized as an assets if they satisfy the following criteria:
1. Future economic benefit: The asset should be able to bring in future economic benefit such as revenue from sales of goods and services. For example, intellectual property, copyright are able to bring in economic benefit to the company.
2. Control: The entity must have the power to obtain the future economic benefits flowing from the intangible assets. If the entity cannot control the future economic benefit flowing to the entity, the expenditure incurred should be expensed. For example, expenditure on staff training improves such skills, which improves productivity and therefore likely to generate higher future economic benefit. However, entities don't have control over staff because a staff member may choose to resign at anytime and the entity cannot do anything about it
3. Non-monetary: Monetary assets are defined as "money held and assets to be received in fixed or determinable amounts of money". Items such as cash, bank deposit, trade receivables are not intangible assets but rather financial assets.
4. Identifiable: Identifiable means the intangible assets should be separable. Separable is the quality of the assets being separated from the entity and sold, transferred, licensed, rented, or exchanged.
Cost of Intangible Assets
1. the purchase price, including any import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and
2. any directly attributable expenditure on preparing the asset for it intended use. e.g professional fees for legal services, cost of testing.
If the asset is to be paid at a future date, the amount to be paid in the future is discounted to the present value. The difference between the amount to be paid and the present value amount is treated as interest.
Internally Generated Intangible Assets
IAS 38 states that internally generated intangible assets shall not be recognised as an assets. It should be expensed. IAS 38 does not recognize the following as internally-generated items as intangible assets
1. goodwill
2. brands
3. customer list
However, if these were purchased from an external source, it would be recognized as an intangible assets.
Research and Development Cost
Research cost should be expensed. However, development cost should be capitalized if the following criteria can be met:
1. it is technically feasible to complete the development project
2. the company intends to complete the development of the asset for use or sale
3. future economic benefit can be generated
4. resources are available to complete the project
5. the development expenditure can be measured reliably
Example 1
During the year to 31 March 2018, a company incurred the following expenditure with regard to the development of a new production process:
$000
1 April to 31 October 2017 230
1 November to 31 March 2018 410
The criteria for the recognition of an internally generated asset were satisfied as from 1 November 2017. Explain the accounting treatment of the development costs.
Solution
The $230,000 must be written off as an expense. The $410,000 must be capitalized and recognized as an intangible asset in the statement of financial position.
Great blog and really helpful
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