IAS 38 : Intangible Assets Part 1 Flashcards

Question

What is an intangible asset? : Control 7 It is worth emphasising that intangible assets should only be recognised when they meet both the definition of an intangible asset and the applicable recognition criteria in IAS 38, [IAS 38.18], which are discussed below. All that is established in the discussion above is whether the intangible right meets the definition of an asset.

Answer 1

It is worth emphasising that intangible assets should only be recognised when they meet both the definition of an intangible asset and the applicable recognition criteria in IAS 38, [IAS 38.18], which are discussed below. All that is established in the discussion above is whether the intangible right meets the definition of an asset.

Answer 2

Future economic benefits include not only future revenues from the sale of products or services but also cost savings or other benefits resulting from the use of the asset by the entity. For example, the use of intellectual property in a production process may reduce future production costs rather than increase future revenues. [IAS 38.17].

Answer 3

An asset is defined generally and in IAS 38 as ‘a resource controlled by an entity as a result of past events; and from which future economic benefits are expected to flow to the entity’. [IAS 38.8]. Intangible assets form a sub-section of this group and are further defined as ‘an identifiable non-monetary asset without physical substance’. [IAS 38.8]. As we have discussed earlier, this definition could include assets covered by another standard which are therefore excluded from its scope . However, in some circumstances it is not clear whether IAS 38 or another standard applies.

Answer 4

Is IAS 38 the appropriate IFRS? - Whether to record a tangible or intangible asset 1b * software that is embedded in computer-controlled equipment that cannot operate without it is an integral part of the related hardware and is treated as property, plant and equipment; [IAS 38.4] * research and development expenditure may result in an asset with physical substance (e.g. a prototype), but as the physical element is secondary to its intangible component, the related knowledge, it is treated as an intangible asset. [IAS 38.5].

Answer 5

• a database that is stored digitally is considered to be an intangible asset where the value of the physical medium is wholly insignificant compared to that of the data collection; and • application software that is being used on a computer is treated as an intangible asset because it is generally easily replaced and is not an integral part of the related hardware, whereas the operating system normally is integral to the computer and is included in property, plant and equipment; [IAS 38.4]

Answer 6

It is worthwhile noting that the ‘parts approach’ in IAS 16 requires an entity to account for significant parts of an asset separately because they have a different economic life or are often replaced, [IAS 16.44]. This raises ‘boundary’ problems between IAS 16 and IAS 38 when software and similar expenditure is involved.

Answer 7

We believe that where IAS 16 requires an entity to identify parts of an asset and account for them separately, the entity needs to evaluate whether any intangible-type part is actually integral to the larger asset or whether it is really a separate asset in its own right. The intangible part is more likely to be an asset in its own right if it was developed separately or if it can be used independently of the item of property, plant and equipment of which it apparently forms part.

Answer 8

This view is consistent with that taken in IFRS 3, when it asserts that related tangible and intangible components of an asset with similar useful lives (meaning that IAS 16 would not require separate accounting of parts of an asset) can be combined into a single asset for financial reporting purposes. [IFRS 3.B32(b)].

Answer 9

The appropriate classification of broadcast rights depends on the particular facts and circumstances as they apply to an entity. However, it is possible for an entity to conclude that some of its broadcast rights are intangible assets while others should be treated as inventory.

Answer 10

Programme and other broadcast rights meet the definition of intangible assets because they are identifiable non-monetary assets without physical substance. IAS 38 specifically includes within its scope rights under licensing agreements for items such as motion picture films and video recordings. [IAS 38.6]. In addition, a broadcast right meets the other criteria for recognition as an intangible asset, being identifiable, as it arises from contractual rights [IAS 38.12(b)] and controlled by the entity. [IAS 38.13].

Answer 11

Rights to programmes held exclusively for sale to other parties also meet the definition of inventory and are therefore within the scope of IAS 2. [IAS 38.3]. It is possible to argue that programmes held with a view to broadcasting them to an audience are comparable to ‘materials or supplies to be consumed in the production process or in the rendering of services’, [IAS 2.6], which would mean that they could also be treated as inventory. Equally, it can be argued that such programme rights are intangible assets as they are used in the production or supply of services but not necessarily consumed because they can be used again.

Answer 12

Therefore, it is possible for entities to choose whether programme or other broadcast rights are classified as intangible assets or as inventory. However, the classification of income, expenses and cash flows in respect of those rights should be consistent with the manner of their classification in the statement of financial position.

Answer 13

Accordingly, where a broadcast right is classified as an intangible asset: • it is classified in the statement of financial position as current or non-current according to the entity’s operating cycle (see 10.2 below); • the intangible asset is amortised, with amortisation included in the statement of profit or loss within the depreciation and amortisation expense, or within a functional expense category (such as cost of sales);

Answer 14

* in the cash flow statement, payments for the acquisition of intangible broadcast rights are classified as an investing activity (if the asset is classified as non-current on acquisition) or as an operating activity if the asset is classified as current; and * rights are measured at a revalued amount only if the criteria in IAS 38 are met. Otherwise the asset is carried at cost less accumulated amortisation and impairments. Any impairment of the asset is determined in accordance with IAS 36.

Answer 15

Where a broadcast right is classified as inventory: • it is classified in the statement of financial position as a current asset either as part of inventory or as a separate category; • the entity recognises an expense in cost of sales as the right is consumed; • payments for the acquisition of inventory are classified as operating activities in the statement of cash flows; and • rights are carried at the lower of cost and net realisable value.

Answer 16

Recognition 2 Although IAS 38 does not define ‘probable’, it is defined in other standards as ‘more likely than not’. [IAS 37.23, IFRS 5 Appendix A]. In assessing whether expected future economic benefits are probable, the entity should use reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset. [IAS 38.22]. In making this judgement the entity considers the evidence available at the time of initial recognition, giving greater weight to external evidence. [IAS 38.23].

Answer 17

Recognition 4 The guidance in IAS 38 on the recognition and initial measurement of intangible assets takes account of the way in which an entity obtained the asset. Separate rules for recognition and initial measurement apply for intangible assets depending on whether they were: • acquired separately (see 4 below); • acquired by way of government grant (see 4.6 below); • obtained in an exchange of assets (see 4.7 below); • acquired as part of a business combination (see 5 below); and • generated internally (see 6 below). [IAS 38.19]

Answer 18

The difficulties that may arise in applying these criteria when an entity enters into a contract to buy an intangible asset for delivery in some future period are discussed in detail (in the context of programme broadcast rights) at below.

Answer 19

For recognition purposes IAS 38 does not distinguish between an internally and an externally developed intangible asset other than when considering the treatment of goodwill. When the definition of an intangible asset and the relevant recognition criteria are met, all such assets should be recognised. [IAS 38.BCZ40]. Preparers do not have the option to decide, as a matter of policy, that costs relating to internally generated intangible assets are expensed if the recognition criteria in the standard are met. [IAS 38.BCZ41]

Answer 20

Television stations frequently enter into contracts to buy programme rights related to long-running televisions series or future sports events that are not yet available for broadcast, sometimes over a specified period or for a certain number of showings or viewings. Payments might be made at the beginning of or during the broadcast period, which raises the question of when those programme rights and the related obligations for payment should be recognised in the statement of financial position.

Answer 21

The IASB’s Conceptual Framework discusses the concept of executory contracts. An executory contract is a contract, or a portion of a contract, that is equally unperformed – neither party has fulfilled any of its obligations, or both parties have partially fulfilled their obligations to an equal extent. [CF 4.56]. An executory contract establishes a combined right and obligation to exchange economic resources. This combined right and obligation are interdependent and cannot be separated, hence they constitute a single asset or liability. [CF 4.57]

Answer 22

To the extent that either party fulfils its obligations under the contract, the contract is no longer executory. If the reporting entity performs first under the contract, that performance is the event that changes the reporting entity’s right and obligation to exchange economic resources into a right to receive an economic resource. That right is an asset. If the other party performs first, that performance is the event that changes the reporting entity’s right and obligation to exchange economic resources into an obligation to transfer an economic resource. That obligation is a liability. [CF 4.58]

Answer 23

Therefore, obligations under contracts that are equally proportionately unperformed are generally not recognised as liabilities in the financial statements. For example, liabilities in connection with non-cancellable orders of inventory or items of property, plant and equipment are generally not recognised in an entity’s statement of financial position until the goods have been delivered. The same approach can also be applied to broadcast rights

Answer 24

Accordingly, an entity recognises a broadcast right at the first date that it controls an asset. The meaning of control is discussed above. Determining the date at which control is obtained is a complex matter that depends on the specific facts and circumstances of each case. Factors that may be relevant include whether: (a) the underlying resource is sufficiently developed to be identifiable. For example, a right to broadcast a film or play might not be sufficiently developed until a manuscript or screenplay is written or a director and actors are hired. For a right to broadcast a sporting event to be identifiable it might be appropriate to establish the existence of a venue, participants or the number or timing of events subject to the right;

Answer 25

(b) the entity has legal, exclusive rights to broadcast (with exclusivity potentially defined in terms of a defined period or geographical area); (c) there is a penalty payable for non-delivery of the content (e.g. the film or sporting event subject to the broadcast right); (d) it is probable that the event will occur or the content will be delivered (e.g. completion of a film or a lack of history of cancellations, strikes or rain-outs); and (e) it is probable that economic benefits will flow to the entity

Answer 26

Example 17.2: Determining when to recognise a broadcast right. A sporting competition – rights secured over a number of seasons Entity A (the licensee) signs a contract with a licensor for the exclusive rights to broadcast matches in a longestablished sporting competition covering the whole season for a number of years. The entity is required to pay agreed amounts at the start of each season, with the rights to that season and future seasons reverting to the licensor if payment is not made on time. Entity A concludes that an obligation does not exist until the beginning of each season for the amount payable to secure rights for that season. Based on an evaluation of the factors above, the entity concludes that it has an asset for the rights to broadcast matches in each season and recognises that asset at the start of each season. The entity discloses a commitment for amounts payable in future years without recognising any asset or liability at that time.

Answer 27

Example 17.2: Determining when to recognise a broadcast right. Rights to broadcast the future output of a film production company. Entity B (the licensee) signs a contract with a film production company (the licensor) whereby the entity agrees to pay amounts in the future for a specified number of films that the licensor will release in that year, but neither the licensee not the licensor knows which films will be released when they sign the contract. Based on an evaluation of the facts and circumstances, Entity B concludes that the underlying resource (the films) is not sufficiently developed to be identifiable at the time of signing the contract. Instead, the entity concludes that the criteria for recognising an intangible asset are not met until delivery of the films by the licensor.

Answer 28

On initial recognition an intangible asset should be measured at cost. [IAS 38.24]. The standard defines this as the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction. When the nature of the consideration given is governed by other IFRSs, the cost of the asset is the amount initially recognised in accordance with the specific requirements of that standard, e.g. IFRS 2. [IAS 38.8]. IAS 38’s initial measurement depends, in part, on the manner in which the asset is acquired and these are discussed in more detail below. The components of the cost of an internally generated intangible asset are discussed in more detail below.

Answer 29

Although IAS 38 is based on a general recognition principle that applies to both initial acquisition and subsequent expenditures, the hurdle for the recognition of subsequent expenditure as an addition to an intangible asset is set higher, because it must first be confirmed that the expenditure is not associated with the replacement of an existing asset (see 9.5.1 below) or the creation of an internally generated intangible that would not be eligible for recognition under the standard (see 6 below).

Answer 30

The standard presumes that only rarely will subsequent expenditure, i.e. expenditure incurred after the initial recognition of an acquired intangible asset or after completion of an internally generated intangible asset, be recognised in the carrying amount of an asset. In most cases, subsequent expenditures are likely to maintain the expected future economic benefits embodied in an existing intangible asset rather than meet the definition of an intangible asset and the recognition criteria in IAS 38. The standard also notes that it is often difficult to attribute subsequent expenditure directly to a particular intangible asset rather than to the business as a whole. [IAS 38.20].

Answer 31

Capitalisation of subsequent expenditure on brands, mastheads, publishing titles, customer lists and similar items is expressly forbidden even if they were initially acquired externally, which is consistent with the general prohibition on recognising them if internally generated. This is because the standard argues that such expenditure cannot be distinguished from the cost of developing the business of which they are a part. [IAS 38.20, 63]. Thus, at best such expenditure creates unrecognised internally generated goodwill that might be crystallised only in a business combination.

Answer 32

Separately acquired intangible rights will normally be recognised as assets. IAS 38 assumes that the price paid to acquire an intangible asset usually reflects expectations about the probability that the future economic benefits embodied in it will flow to the entity. In other words, the entity always expects there to be a flow of economic benefits, even if it is uncertain about the timing or amount. [IAS 38.25]. Therefore, the standard assumes that the cost of a separately acquired intangible asset can usually be measured reliably, especially in the case of cash or other monetary purchase considerations. [IAS 38.2]

Answer 33

Not all external costs incurred to secure intangible rights automatically qualify for capitalisation as separately acquired assets, because they do not meet the definition of an intangible asset in the first place. An entity that subcontracts the development of intangible assets (e.g. development-and-supply contracts or R&D contracts) to other parties (its suppliers) must exercise judgement in determining whether it is acquiring an intangible asset or whether it is obtaining goods and services that are being used in the development of an intangible asset by the entity itself. In the latter case, the entity will only be able to recognise an intangible asset if the expenditure meets IAS 38’s requirements for internally-generated assets.

Answer 34

In determining whether a supplier is providing services to develop an internally generated intangible asset, the terms of the supply agreement should be examined to see whether the supplier is bearing a significant proportion of the risks associated with a failure of the project. For example, if the supplier is always compensated under a development-and-supply contract for development services and tool costs irrespective of the project’s outcome, the entity on whose behalf the development is undertaken should account for those activities as its own.

Answer 35

If the entity pays the supplier upfront or by milestone payments during the course of a project, it will not necessarily recognise an intangible asset on the basis of those payments. Only costs incurred after it becomes probable that economic benefits are expected to flow to the entity will be part of the cost of an intangible asset

Answer 36

The cost of a separately acquired intangible asset comprises: • its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and • any directly attributable cost of preparing the asset for its intended use, [IAS 38.27], for example: - costs of employee benefits arising directly from bringing the asset to its working condition; - professional fees arising directly from bringing the asset to its working condition; and - costs of testing whether the asset is functioning properly. [IAS 38.28].

Answer 37

Capitalisation of expenditure ceases when the asset is in the condition necessary for it to be capable of operating in the manner intended by management. [IAS 38.30]. This may well be before the date on which it is brought into use.

Answer 38

If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price equivalent. The difference between this amount and the total payments is recognised as interest expense over the period of credit unless it is capitalised in accordance with IAS 23 – Borrowing Costs.

Answer 39

``` The following types of expenditure are not considered to be part of the cost of a separately acquired intangible asset: • costs of introducing a new product or service, including costs of advertising and promotional activities; • costs of conducting business in a new location or with a new class of customer, including costs of staff training; ```

Answer 40

* administration and other general overhead costs; * costs incurred in using or redeploying an intangible asset; * costs incurred while an asset capable of operating in the manner intended by management has yet to be brought into use; and * initial operating losses, such as those incurred while demand for the asset’s output builds up. [IAS 38.29-30]. Accordingly, start-up costs, training costs, advertising and promotional activities, and relocation or reorganisation costs should be expensed.

Answer 41

When an entity generates income while it is developing or constructing an asset, the question arises as to whether this income should reduce the initial carrying value of the asset being developed or be recognised in profit or loss. IAS 38 requires an entity to consider whether the activity giving rise to income is necessary to bring the asset to the condition necessary for it to be capable of operating in the manner intended by management, or not. The income and related expenses of incidental operations (being those not necessary to develop the asset for its intended use) should be recognised immediately in profit or loss and included in their respective classifications of income and expense. [IAS 38.31]. Such incidental operations can occur before or during the development activities.

Answer 42

Example 17.3: Incidental operations Entity A is pioneering a new process for the production of a certain type of chemical. Entity A will be able to patent the new production process. During the development phase, A is selling quantities of the chemical that are produced as a by-product of the development activities that are taking place. The expenditure incurred comprises labour, raw materials, assembly costs, costs of equipment and professional fees. The revenues and costs associated with the production and sale of the chemical are accounted for in profit or loss for the period, while the development costs that meet the strict recognition criteria of IAS 38 are recognised as an intangible asset. Development costs that fail the IAS 38 recognition test are also expensed.

Answer 43

Whilst IAS 38 is not explicit on the matter, it follows that when the activity is determined to be necessary to bring the intangible asset into its intended use, any income should be deducted from the cost of the asset. An example would be where income is generated from the sale of samples produced during the testing of a new process or from the sale of a production prototype. However, care must be taken to confirm whether the incidence of income indicates that the intangible asset is ready for its intended use, in which case capitalisation of costs would cease, revenue would be recognised in profit or loss and the related costs of the activity would include a measure of amortisation of the asset.

Answer 44

Transactions involving contingent consideration are often very complex and payment is dependent on a number of factors. In the absence of specific guidance in IAS 38, entities trying to determine an appropriate accounting treatment are required not only to understand the commercial complexities of the transaction itself, but also to negotiate a variety of accounting principles and requirements.

Answer 45

Consider a relatively simple example where an entity acquires an intangible asset for consideration comprising a combination of up-front payment, guaranteed instalments for a number of years and additional amounts that vary according to future activity (revenue, profit or number of units output).

Answer 46

Where the goods and services in question have been delivered, there is no doubt that there is a financial liability under IFRS 9 – Financial Instruments. A contingent obligation to deliver cash meets the definition of a financial liability. However, where the purchaser can influence or control the crystallisation of the contingent payments or they are wholly dependent on its future activities, the circumstances are more difficult to interpret. Many consider that these arrangements contain executory contracts that are only accounted for when one of the contracting parties performs.

Answer 47

Further complications arise when the terms of the agreement indicate that a future payment relates to the completion of a separate performance obligation, or the delivery of intangible rights in addition to those conferred by the exchange of the original asset.

Answer 48

In practice there are two general approaches. One includes the fair value of all contingent payments in the initial measurement of the asset. The other excludes executory payments from initial measurement. Under both approaches, contingent payments are either capitalised when incurred if they meet the definition of an asset, or expensed as incurred.

Answer 49

Example 17.4: Contingent consideration relating to a football player’s registration

Answer 50

An intangible asset may sometimes be acquired free of charge, or for nominal consideration, by way of a government grant. Governments frequently allocate airportlanding rights, licences to operate radio or television stations, emission rights (see 11.2 below), import licences or quotas, or rights to access other restricted resources. [IAS 38.44]

Answer 51

Government grants should be accounted for under IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance – which permits initial recognition of intangible assets received either at fair value or a nominal amount. [IAS 20.23]. This represents an accounting policy choice for an entity that should be applied consistently to all intangible assets acquired by way of a government grant.

Answer 52

It may not be possible to measure reliably the fair value of all of the permits allocated by governments because they may have been allocated for no consideration, may not be transferable and may only be bought and sold as part of a business.

Answer 53

Asset exchanges are transactions that have challenged standard-setters for many years. An entity might swap certain intangible assets that it does not require or is no longer allowed to use for those of a counterparty that has other surplus assets.

Answer 54

For example, it is not uncommon for airlines and media groups to exchange landing slots and newspaper titles, respectively, to meet demands of competition authorities. The question arises whether such transactions should be recorded at cost or fair value, which would give rise to a gain in the circumstances where the fair value of the incoming asset exceeds the carrying amount of the outgoing one. Equally, it is possible that a transaction could be arranged with no real commercial substance, solely to boost apparent profits.

Answer 55

IAS 38 requires all acquisitions of intangible assets in exchange for non-monetary assets, or a combination of monetary and non-monetary assets, to be measured at fair value. The acquired intangible asset is measured at fair value unless: [IAS 38.45] (a) the exchange transaction lacks commercial substance; or (b) the fair value of neither the asset received nor the asset given up is reliably measurable.

Answer 56

The acquired asset is measured in this way even if an entity cannot immediately derecognise the asset given up. If an entity is able to reliably determine the fair value of either the asset received or the asset given up, then it uses the fair value of the asset given up to measure cost unless the fair value of the asset received is more clearly evident. [IAS 38.47]. If the fair value of neither the asset given up, nor the asset received can be measured reliably the acquired intangible asset is measured at the carrying amount of the asset given up. [IAS 38.45].

Answer 57

In this context the fair value of an intangible asset is reliably measurable if the variability in the range of reasonable fair value measurements is not significant for that asset or the probabilities of the various estimates within the range can be reasonably assessed and used when measuring fair value. [IAS 38.47].

Answer 58

A gain or loss is only recognised on an exchange of non-monetary assets if the transaction is determined to have commercial substance. Otherwise, the acquired asset is measured at the cost of the asset given up. [IAS 38.45]

Answer 59

The commercial substance test for asset exchanges was put in place to prevent gains being recognised in income when the transaction had no discernible effect on the entity’s economics. [IAS 16.BC21]. The commercial substance of an exchange is determined by forecasting and comparing the future cash flows expected to be generated by the incoming and outgoing assets. Commercial substance means that there must be a significant difference between the two forecasts.

Answer 60

An exchange transaction has commercial substance if: (a) the configuration (i.e. risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred; or (b) the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the exchange; and (c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged

Answer 61

IAS 38 defines the entity-specific value of an intangible asset as the present value of the cash flows an entity expects to arise from its continuing use and from its disposal at the end of its useful life. [IAS 38.8]. In determining whether an exchange transaction has commercial substance, the entity-specific value of the portion of the entity’s operations affected by the transaction should reflect post-tax cash flows. [IAS 38.46]. This is different to the calculation of an asset’s value in use under IAS 36, as it uses a post-tax discount rate based on the entity’s own risks rather than IAS 36, which requires use of the pre-tax rate that the market would apply to a similar asset.

Answer 62

The requirements of IFRS 3 apply to intangible assets acquired in a business combination. The recognition and initial measurement requirements are discussed in detail in Chapter 9 and a summary is given below. The emphasis in IFRS 3 is that, in effect, it does not matter whether assets meeting the definition of an intangible asset have to be combined with other intangible assets, incorporated into the carrying value of a complementary item of property, plant and equipment with a similar useful life or included in the assessment of the fair value of a related liability. The important requirement is that the intangible asset is recognised separately from goodwill.

Answer 63

The process of identifying intangible assets in a business combination might involve, for example: • reviewing the list of items that meet the definition of an intangible asset in IFRS 3; • a review of documents such as those related to the acquisition, other internal documents produced by the entity, public filings, press releases, analysts’ reports, and other externally available documents; and • comparing the acquired business to similar businesses and their intangible assets.

Answer 64

Intangible assets that are used differ considerably between industries and between individual entities. Therefore, considerable expertise and careful judgement is required in determining whether there are intangible assets that need to be recognised and valued separately. IFRS 3 provides a long list of items that should be recognised separately from goodwill.

Answer 65

As noted at 3.1 above, an intangible asset should only be recognised if: [IAS 38.21] (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.

Answer 66

In the case of a business combination, the probability recognition criterion is always considered to be satisfied. The cost of the intangible asset is its fair value at the acquisition date. The standard indicates that the fair value reflects expectations about the probability that the future economic benefits embodied in the asset will flow to the entity. [IAS 38.33]. In other words, the existence of a fair value means that an inflow of economic benefits is considered to be probable, in spite of any uncertainties about timing or amount.

Answer 67

Under IFRS 3, the cost of the intangible asset acquired in a business combination can always be measured reliably. [IAS 38.BC19A]. In developing IFRS 3, the Board concluded that the needs of users were better served by recognising intangible assets, on the basis of an estimate of fair value, rather than subsuming them in goodwill, even if a significant degree of judgement is required to estimate fair value. [IAS 38.BC19B]. Accordingly, if an asset acquired in a business combination is separable or arises from contractual or other legal rights, there is sufficient information to measure reliably the fair value of the asset. Thus, the requirement at 3.1 above for reliable measurement of cost is always considered to be satisfied for intangible assets acquired in business combinations. [IAS 38.33].

Answer 68

Intangible assets need to be identifiable to distinguish them from goodwill and the two elements of identifiability are the existence of contractual or other legal rights and separability. Separability means that the asset is capable of being sold, transferred, licensed, rented or exchanged without having to dispose of the whole business. An intangible asset is considered to be separable regardless of whether the entity intends to sell or otherwise transfer it. [IAS 38.12].

Answer 69

The IASB recognised that an intangible asset acquired in a business combination might be separable, but only together with a related contract, identifiable asset or liability. In such cases, IAS 38 requires the acquirer to recognise the intangible asset separately from goodwill, but together with the related contract, asset or liability. [IAS 38.36]

Answer 70

Acquirers are permitted to recognise a group of complementary intangible assets as a single asset provided the individual assets in the group have similar useful lives. For example, the terms ‘brand’ and ‘brand name’ are often used as synonyms for trademarks and other marks. However, ‘brands’ are regarded as general marketing terms that are typically used to refer to a group of complementary assets such as a trademark or service mark and its related trade name, formulas, recipes and technological expertise. [IAS 38.37].

Answer 71

IFRS 3 contains additional guidance on the application of the contractual-legal and separability criteria that indicate how far the IASB expects entities to go to ensure that intangible assets acquired in a business combination are recognised separately from goodwill.

Answer 72

An intangible asset that arises from contractual or other legal rights is recognised separately from goodwill even if it is not transferable or separable from the acquiree or from other rights and obligations. For example: (a) an acquiree leases a manufacturing facility from a lessor under an operating lease that has terms that are favourable relative to market terms. The lease terms explicitly prohibit transfer of the lease (through either sale or sublease). The amount by which the lease terms are favourable compared with the terms of current market transactions for the same or similar items is an intangible asset that meets the contractual-legal criterion for recognition separately from goodwill, even though the acquirer cannot sell or otherwise transfer the lease contract.

Answer 73

(b) an acquiree owns and operates a nuclear power plant. The licence to operate that power plant is an intangible asset that meets the contractual-legal criterion for recognition separately from goodwill, even if the acquirer cannot sell or transfer it separately from the acquired power plant. However, IFRS 3 goes on to say that an acquirer may recognise the fair value of the operating licence and the fair value of the power plant as a single asset for financial reporting purposes if the useful lives of those assets are similar;

Answer 74

(c) an acquiree owns a technology patent. It has licensed that patent to others for their exclusive use outside the domestic market, receiving a specified percentage of future foreign revenue in exchange. Both the technology patent and the related licence agreement meet the contractual-legal criterion for recognition separately from goodwill even if selling or exchanging the patent and the related licence agreement separately from one another would not be practical. [IFRS 3.B32].

Answer 75

IFRS 3 emphasises that the separability criterion means that an acquired intangible asset is capable of being separated or divided from the acquiree, regardless of the intentions of the acquirer. It adds that an acquired intangible asset is recognised separately from goodwill if there is evidence of exchange transactions for that type of asset or an asset of a similar type, even if those transactions are infrequent and regardless of whether the acquirer is involved in them.

Answer 76

For example, customer and subscriber lists are frequently licensed and thus merit recognition as intangible assets. The standard acknowledges that an acquiree might try to distinguish its customer lists from those that are frequently licensed generally, in order to justify no recognition. However, in the absence of a truly distinguishing feature, such as confidentiality or other agreements that prohibit an entity from selling, leasing or otherwise exchanging information about its customers, these non-contractual rights should be recognised separately from goodwill. [IFRS 3.B33].

Answer 77

An intangible asset that is not individually separable from the acquiree or combined entity should still be recognised separately from goodwill if it could be separable in combination with a related contract, identifiable asset or liability.

Answer 78

For example, an acquiree owns a registered trademark and documented but unpatented technical expertise used to manufacture the trademarked product. The entity could not transfer ownership of the trademark without everything else necessary for the new owner to produce an identical product or service. Because the unpatented technical expertise must be transferred if the related trademark is sold, it is separable and not included in the carrying value of goodwill. [IFRS 3.B34]

Answer 79

The requirements described above demonstrate how IFRS 3 and IAS 38 define intangible assets in a way that eliminates as much as possible any barrier to recognising them separately from goodwill.

Answer 80

IFRS 3 provides a long list of examples of items acquired in a business combination that meet the definition of an intangible asset and should therefore be recognised separately from goodwill. [IFRS 3.IE16-44]. The list is not intended to be exhaustive and other items acquired in a business combination might still meet the definition of an intangible asset. [IFRS 3.IE16]. (refer OneNote)

Answer 81

IFRS 3 assumes that there will always be sufficient information to measure reliably the fair value of an intangible asset acquired in a business combination if it is separable or arises from contractual or other legal rights. The issues underlying the initial measurement of these intangible assets are discussed further in Chapter 9. The requirements of IFRS 13 are discussed in Chapter 14, which also addresses the challenges of applying IFRS 13 at initial recognition since fair value is defined as an exit price. In particular, the selection of appropriate valuation techniques, inputs to those valuation techniques and the application of the fair value hierarchy are discussed in Chapter 14.

Answer 82

Further guidance on customer relationships acquired in a business combination is provided by IFRS 3 in the Illustrative Examples. These demonstrate how the contractual-legal and separability criteria, discussed at 2.1.1 above, interact in the recognition of acquired customer relationships. [IFRS 3.IE30].

Answer 83

One of the most difficult areas of interpretation is whether an arrangement is contractual or not. Customer-related intangible assets might be either contractual or non-contractual. Contractual customer relationships are always recognised separately from goodwill as they meet the contractual-legal criterion. However, non-contractual customer relationships are recognised separately from goodwill only if they meet the separability criterion. Consequently, determining whether a relationship is contractual is critical to identifying and measuring customer relationship intangible assets and different conclusions could result in substantially different accounting outcomes.

Answer 84

The term ‘in-process research and development’ (IPR&D) refers to those identifiable intangible assets resulting from research and development activities that are acquired in a business combination. An acquirer should recognise IPR&D separately from goodwill if the project meets the definition of an intangible asset. This is the case when the IPR&D project meets the definition of an asset and is identifiable, i.e. it is separable or arises from contractual or other legal rights. [IAS 38.34].

Answer 85

IPR&D projects, whether or not recognised by the acquiree, are protected by legal rights and are clearly separable, as they can be bought and sold by entities in the normal course of business. Any subsequent expenditure incurred on the project after its acquisition should be accounted for in accordance with the general rules in IAS 38 on internally generated intangible assets which are discussed at 6.2 below. [IAS 38.42]

Answer 86

In summary, this means that the subsequent expenditure is accounted for as follows: [IAS 38.43] • research expenditure is recognised as an expense when incurred; • development expenditure that does not satisfy the criteria for recognition as an intangible asset is recognised as an expense when incurred; and • development expenditure that satisfies the recognition criteria is added to the carrying value of the acquired in-process research or development project.

Answer 87

Some crypto-assets entitle the holder to an underlying good or service from an identifiable counterparty. For example, some crypto-assets entitle the holder to a fixed weight of gold from a custodian bank. In those cases, the holder is able to obtain economic benefits by redeeming the crypto-asset for the underlying. While not money as such, these crypto-assets share many characteristics with representative money.

Answer 88

Other crypto-assets (e.g. Bitcoin) do not entitle the holder to an underlying good or service and have no identifiable counterparty. The holder of such a crypto-asset has to find a willing buyer that will accept the crypto-asset in exchange for cash, goods or services in order to realise the economic benefits from the crypto-asset.

Answer 89

Crypto-assets have different terms and conditions and the purpose for holding them differs among holders. Hence, holders of a crypto-asset will need to evaluate their own facts and circumstances in order to determine which accounting classification and measurement under current IFRS should be applied. Depending on the standard, the holder may also need to assess its business model in order to determine the appropriate classification and measurement.

Answer 90

Crypto-assets generally meet the relatively wide definition of an intangible asset, as they are identifiable, lack physical substance, are controlled by the holder and give rise to future economic benefits for the holder.

Answer 91

Crypto-assets that meet the definition of an intangible asset and are being accounted for under IAS 38 are only recognised if it is probable that future economic benefits will flow to the entity and its cost can be measured reliably. Separately acquired intangible assets will normally be recognised, as IAS 38 assumes that the acquisition price reflects the expectation about future economic benefits. Thus, an entity always expects future economic benefits, for these intangibles, even if there is uncertainty about the timing or amount.

Answer 92

Crypto-assets that meet the definition of an intangible asset and are being accounted for under IAS 38 are initially measured at cost.

Answer 93

The cost of acquiring crypto-assets would typically include the purchase price (after deducting trade discounts and rebates if any) and the related transaction costs, which could include blockchain processing fees. Where an intangible asset is acquired in exchange for another non-monetary asset, the cost is measured at fair value, unless the transaction lacks commercial substance or the fair value of neither the asset acquired nor the asset given up can be measured reliably. In such instances, the cost of the intangible asset is measured as the carrying amount of the asset given up.

Answer 94

``` As discussed at above, there are two subsequent measurement approaches under IAS 38 that can be applied as an accounting policy choice to each class of intangible asset, namely: • Cost model. • Revaluation model (subject to criteria as discussed below). ```

Answer 95

An entity that holds different types of crypto-assets would need to assess whether they constitute different classes of intangible assets as the rights and underlying economics of different crypto- assets vary widely.

Answer 96

The cost method under IAS 38 entails subsequent measurement at cost less any amortisation and impairment . Many crypto-assets such as Bitcoin do not have an expiry date, and there appears to be no foreseeable limit to the period over which they could be exchanged with a willing counterparty for cash or other goods or services.

Answer 97

A holder will therefore need to consider if there is a foreseeable limit to the period over which such a crypto-asset is expected to generate net cash inflows for the entity. If there is no foreseeable limit, such a crypto-asset could be considered to have an indefinite useful life and, as a result, no amortisation is required. However, intangible assets with an indefinite useful life need to be tested for impairment at least annually and whenever there is an indication of impairment.

Answer 98

Where there is a foreseeable limit to the period over which a crypto-asset is expected to generate net cash inflows for the holder, a useful life should be estimated and the cost of the crypto-asset, less any residual value, should be amortised on a systematic basis over this useful life . In addition, such a crypto-asset is also subject to IAS 36 impairment testing whenever there is an indication of impairment each end of reporting period.

Answer 99

An entity can only apply the revaluation model if the fair value can be determined by reference to an active market (see Revaluation model for measurement of intangible assets above), which IFRS 13 defines as ‘a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis’.

Answer 100

There are no provisions in IAS 38 that allow for the fair value of an intangible asset to be determined indirectly, for example by using valuation techniques and financial models applied to estimate the fair value of intangible assets acquired in a business combination. Consequently, if no observable price in an active market for an identical asset exists (i.e. a Level 1 price under IFRS 13), the holder will need to apply the cost method to crypto-assets held.

Answer 101

In assessing whether an active market exists for a crypto-asset, the holder will need to consider whether there is economic substance to the observable transactions, as many trades on crypto-exchanges are non-cash transactions in which one crypto-asset is exchanged for another.

Answer 102

Under the revaluation model, intangible assets are measured at their fair value on the date of revaluation less any subsequent amortisation and impairment losses.

Answer 103

The net increase in fair value over the initial cost of the intangible asset is recorded in the revaluation reserve via other comprehensive income. A net decrease below cost is recorded in profit or loss. The cumulative revaluation reserve may be transferred directly to retained earnings upon derecognition, and possibly by transferring the additional amortisation on the revalued amount to retained earnings as the asset is used, but IAS 38 does not allow the revaluation reserve to be transferred via profit or loss.