IAS 38—Intangible Assets: Definition, Recognition Guidelines

IAS 38 STATES the ‘accounting criteria‘ for intangible assets, which are non-monetary assets that are without physical substance and identifiable (EITHER being separable or arising from contractual or other legal rights).

IAS 38 – Intangible Assets

An Intangible Asset is
(a) Identifiable;
(b) Non-Monetary Asset; AND
(c) Without Physical Substance

An ‘Intangible Asset’ is identifiable if:

  • It is separable (i.e. it can be sold, transferred, exchanged, licensed or rented to another party); or
  • It arises from contractual or other legal rights.
(a) Computer Software
(b) Patent
(c) Copyright
(d) Customer List
(e) License
(f) Franchise
(g) Marketing Right
(h) Customer/Supplier Relationship
ias 38

IAS 38 – Recognition Criteria

An intangible should be Recognized if:

  • It is probable that future economic benefits attributable to the asset will flow to the entity; AND
  • The cost of the asset can be measured reliably.

IAS 38 – Measurement At Initial Recognition

1. Separate Acquisition

Recognize at cost, which includes:
– Purchase price including non-refundable taxes and duties LESS trade discount and refundable taxes and duties;
– Directly attributable costs to prepare the asset for its intended use.
Capitalization of cost ceases when the asset is in useful condition.

2. Acquired in Business Combination

Recognize at the fair value (FV) at the acquisition date.
Recognize separately from goodwill (even if the acquiree had not recognized it).

3. Government Grant

Initially Recognized at either:

  • Fair value; OR
  • Nominal value plus direct expenses to prepare for use.
Examples Include:
(a) License to Operate National Lottery
(b) Radio Station

4. Exchange of Assets

Recognize acquired asset at its fair value.
If fair value is NOT available, recognize at book value of assets given up.

5. Internally Generated Goodwill

NEVER recognize it as an asset.

Examples Include:
(a) Customers Lists
(b) Internally Generated Brands

6. Internally Generated Intangibles (Other Than Goodwill)

6.1 Research Phase

Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

[Expenditure on ‘Research Phase’ is expensed out.]

6.2 Development Phase

Application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production of use.

Expenditure on Development Phase is Capitalized if All Criteria Are Met:
(i) Technical feasibility to complete the asset
(ii) Intention to complete
(iii) Ability to sell/use the asset
(iv) Adequate technical, financial and other resources available to complete
(v) Probable future economic benefits
(vi) Expenditure is reliably measurable

[Expenditure incurred prior to the criteria being met may NOT be capitalized retrospectively.]

IAS 38 – Subsequent Recognition

1. Cost Model

After initial recognition, intangible asset can be Recognized at LOWER of:

  • Historical cost; OR
  • Recoverable amount.

2. Revaluation Model

After initial recognition, ‘Revaluation Model‘ can be adopted only if an active market exists for the type of asset.

Intangible asset shall be revalued as per the same rules prescribed for the revaluation of PPE.

Amortization of Intangible Assets

1. Finite Life

An intangible asset with a finite life should be amortized over its expected useful life.
Residual value should be assumed to be NIL unless in rare circumstances when an active market exists or there is a commitment by third party to purchase the asset at the end of its useful life.
Amortization begins when the asset is available for use.
Amortization method should reflect the pattern in which future economic benefits are expected to be consumed.
Rebut-table presumption that revenue-based amortization is NOT appropriate.
Change in amortization method and useful life is change in accounting estimate and its effect is applied prospectively.

2. Indefinite Life

An intangible asset with indefinite useful life should NOT be amortized but should be reviewed for Impairment on annual basis when indicators of impairment exist.

[There must also be ‘Annual Review‘ of whether the indefinite life assessment is still appropriate.]


IAS 38 was REVISED in March 2004 and applies to ‘Intangible Assets’ acquired in business combinations occurring on or after 31 March 2004. It specifies the ‘accounting criteria‘ for intangible assets, which are non-monetary assets that are without physical substance and identifiable (either being separable or arising from contractual or other legal rights).

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