1 International Accounting Standard 38 Intangible
Assets (IAS 38) replaces IAS 38 Intangible Assets (issued in 1998), and should
(a) on acquisition to the accounting for intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004.
(b) to all other intangible assets, for annual periods beginning on or after 31 March 2004. Earlier application is encouraged.
Reasons for revising IAS 38
2 The International Accounting Standards Board developed this revised IAS 38 as part of its project on business combinations. The project’s objective is to improve the quality of, and seek international convergence on, the accounting for business combinations and the subsequent accounting for goodwill and intangible assets acquired in business combinations.
3 The project has two phases. The first phase resulted in the Board issuing simultaneously IFRS 3 Business Combinations and revised versions of IAS 38 and IAS 36 Impairment of Assets. The Board’s deliberations during the first phase of the project focused primarily on:
(a) the method of accounting for business combinations;
(b) the initial measurement of the identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination;
(c) the recognition of provisions for terminating or reducing the activities of an acquiree;
(d) the treatment of any excess of the acquirer’s interest in the fair values of identifiable net assets acquired in a business combination over the cost of the combination; and
(e) the accounting for goodwill and intangible assets acquired in a business combination.
4 Therefore, the Board’s intention while revising IAS 38 was to reflect only those changes related to its decisions in the Business Combinations project, and not to reconsider all of the requirements in IAS 38. The changes that have been made in the Standard are primarily concerned with clarifying the notion of
‘identifiability’ as it relates to intangible assets, the useful life and amortisation of intangible assets, and the accounting for in-process research and development projects acquired in business combinations.
Summary of main changes
Definition of an intangible asset
5 The previous version of IAS 38 defined an intangible asset as an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. The requirement for the asset to be held for use in the production or supply of goods or services, for rental to others, or for administrative purposes has been removed from the definition of an intangible asset.
6 The previous version of IAS 38 did not define ‘identifiability’, but stated that an intangible asset could be distinguished clearly from goodwill if the asset was separable, but that separability was not a necessary condition for identifiability. The Standard states that an asset meets the identifiability criterion in the definition of an intangible asset when it:
(a) is separable, ie 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.
Criteria for initial recognition
7 The previous version of IAS 38 required an intangible asset to be recognised if, and only if, it was probable that the expected future economic benefits attributable to the asset would flow to the entity, and its cost could be measured reliably. These recognition criteria have been included in the Standard. However, additional guidance has been included to clarify that:
(a) the probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination.
(b) the fair value of an intangible asset acquired in a business combination can be measured with sufficient reliability to be recognised separately from goodwill.
8 Under the previous version of IAS 38, the treatment of subsequent expenditure on an in-process research and development project acquired in a business combination and recognised as an asset separately from goodwill was unclear. The Standard requires such expenditure to be:
(a) recognised as an expense when incurred if it is research expenditure;
(b) recognised as an expense when incurred if it is development expenditure that does not satisfy the criteria in IAS 38 for recognising such expenditure as an intangible asset; and
(c) recognised as an intangible asset if it is development expenditure that satisfies the criteria in IAS 38 for recognising such expenditure as an intangible asset.
9 The previous version of IAS 38 was based on the assumption that the useful life of an intangible asset is always finite, and included a rebuttable presumption that the useful life cannot exceed twenty years from the date the asset is available for use. That rebuttable presumption has been removed. The Standard requires an intangible asset to be regarded 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.
10 The previous version of IAS 38 required that if control over the future economic benefits from an intangible asset was achieved through legal rights granted for a finite period, the useful life of the intangible asset could not exceed the period of those rights, unless the rights were renewable and renewal was virtually certain. The Standard requires that:
(a) the useful life of an intangible asset arising from contractual or other legal rights should not exceed the period of those rights, but may be shorter depending on the period over which the asset is expected to be used by the entity; and
(b) if the rights are conveyed for a limited term that can be renewed, the useful life should include the renewal period(s) only if there is evidence to support renewal by the entity without significant cost.
Intangible assets with indefinite useful lives
11 The Standard requires that:
(a) an intangible asset with an indefinite useful life should not be amortised.
(b) the useful life of such an asset should be reviewed each reporting 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 should be accounted for as a change in an accounting estimate.
Impairment testing intangible assets with finite useful lives
12 The previous version of IAS 38 required the recoverable amount of an intangible asset that was amortised over a period exceeding twenty years from the date it was available for use to be estimated at least at each financial year-end, even if there was no indication that the asset was impaired. This requirement has been removed. Therefore, an entity needs to determine the recoverable amount of an intangible asset with a finite useful life that is amortised over a period exceeding twenty years from the date it is available for use only when, in accordance with IAS 36, there is an indication that the asset may be impaired.
13 If an intangible asset is assessed as having an indefinite useful life, the Standard requires an entity to disclose the carrying amount of that asset and the reasons supporting the indefinite useful life assessment.