Intangible assets (IAS 38)

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No physical substance but has value to the business.

patents
brand names
licences

Intangible assets: three factors to consider

1 Separate acquisition/purchase

Capitalise at cost plus any directly attributable costs (e.g. legal fees, testing costs). Amortisation is charged over the useful life of the asset, starting when it is available for use.

2 Research and development

2.1 Research

Research expenditure is charged immediately to profit or loss in the year in which it is incurred.

2.2 Development

Development expenditure must be capitalised when it meets all the criteria.

Sell/use
Commercially viable
Technically feasible
Resources to complete
Measure cost reliably (expense)
Probable future economic benefits (overall)

3 Internally generated

Internally generate brands, mastheads cannot be capitalised as their cost cannot be separated from the overall cost of developing the business.

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Look at what the spending buys before capitalising it. A brand bought from someone else is an intangible asset and is amortised; spending that promotes the business — advertising and marketing of the brand — is not enhancing an asset and is an expense of the period, whatever heading it has been posted to in the trial balance. Reversing an incorrect capitalisation increases the expense, so check the direction of the adjustment as well.

Practice question

Consider the following statements under IAS 38 Intangible Assets:

1. Capitalised development expenditure must be amortised over a period not exceeding five years.

2. Capitalised development expenditure is presented as a non-current asset.

3. Research expenditure must be recognised as an intangible asset if specified recognition criteria are met.

Which statement or statements are correct?

2 only2 and 3 only1 only1 and 3 only

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Example 2 – Intangibles (2)

Booker is involved in developing new products and has spent $15 million on acquiring a patent to aid in this development. The initial investigative phase of the project cost an additional $6 million, whereby it was determined that the future feasibility of the product was guaranteed.

Subsequent expenditure incurred on the product was $8 million, of which $5 million was spent on the functioning prototype and the remainder on getting the product into a safe and saleable condition.

A further $1 million was spent on marketing and $0.5 million on training sales staff on how to demonstrate the use of the product.

At the reporting date the product had not yet been completed.

Explain how Booker should account for the expenditure in its financial statements.

The purchase of the patent should be capitalised at $15 million and amortised over its useful life.

The $6 million spent on the investigative phase is essentially research and should be expensed through profit or loss as incurred.

The $8 million subsequently spent after completion of the research phase is development expenditure and is capitalised as an intangible non-current asset on the statement of financial position.

It is not yet amortised as the project is not yet complete but an impairment review should be carried out to see if the asset has lost value.

The $1.5 million spent on marketing and training should both be expensed through profit or loss immediately.

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Example 3 – Intangibles (3)

GSK is a large pharmaceutical business involved in the research and development of viable new drugs. It commenced initial investigation into the viability of a new drug on 1 February 20X5 at a cost of $40,000 per month. On 1 August 20X5 GSK were able to demonstrate the commercial viability of the new drug and intend to sell it on the open market once fully complete.

Costs subsequent to 1 August 20X5 remained at $40,000 per month. At 31 December 20X5, GSK’s reporting date, the drug was not yet complete but it is believed that by mid-20X6 the drug will be available for sale.

The finance director is confident of the success of the drug’s sales that he wishes to revalue the intangible at the reporting date, using a discounted future cash flow model to establish the fair value.

Explain the treatment of the above costs in GSK’s financial statements for the year-ended 31 December 20X5.

The initial investigation into the viability of the new drug is research and is expensed through profit or loss at $40,000 per month. A total of $240,000 ($40,000 x 6 months) will be expensed from 1 February 20X5 to 1 August 20X5 (6 months).

The commercial viability of the new drug and subsequent costs constitute as development costs as probable future economic benefits can be identified and there is a market for the drug. The costs are capitalised as an intangible non-current asset on the statement of financial position. A total of $200,000 ($40,000 x 5 months) is capitalised from 1 August 20X5 to 31 December 20X5 (5 months).

The intangible is not amortised as it would have an indefinite life, so annual impairment reviews are performed instead, to see if the asset has fallen in value.

The finance director cannot revalue the intangible as there is no active market, however the discounted future cash flows would indicate that the intangible is not impaired.

4 Revaluation of intangible assets

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Intangible assets can only be revalued if there is an active market, which is rarely seen except for examples such as production quotas or fishing licences. This is because an active market is one where identical items are traded with such regularity that they generate a price that can be used to determine the fair value.

If there is an active market then the intangible will be revalued to fair value and amortised over its remaining useful life.

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Example 4 – Intangibles

Sudley bought a new brand name on 1 July 20X0 for $20m. The estimated useful life of the brand name was ten years. a brand specialist valued the brand at a fair value of $22m on 1 July 20X2.

A training course was also run by Sudley on 1 July 20X2 for all staff to train them on how to use a new accounting software. This training cost Sudley $500,000.

Sudley expects the employees to remain with them for on average a period of four years.

Calculate the total amount to be recognised as an expense in the statement of profit or loss for the year ended 30 June 20X3?

Brand = $2,000,000 ($20m/10 years) = amortisation

NOTE: The brand is not revalued to fair value as there is not an active market.

Training course = $500,000

Total expense = $2,500,000

Answer the questions one at a time. Your progress is saved so you can leave and come back.

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