IAS 38 : Intangible Assets Part 2 Flashcards

Question

Internally generated intangible assets : Internally generated brands, mastheads, publishing titles and customer lists IAS 38 considers internally generated brands, mastheads, publishing titles, customer lists and items similar in substance to be indistinguishable from the cost of developing a business as a whole so it prohibits their recognition. [IAS 38.63-64]. As discussed at 3.3 above, the same applies to subsequent expenditures incurred in connection with such intangible assets even when originally acquired externally. [IAS 38.20]. For example, expenditure incurred in redesigning the layout of newspapers or magazines, which represent subsequent expenditure on publishing titles and mastheads, should not be capitalised.

Answer 1

IAS 38 considers internally generated brands, mastheads, publishing titles, customer lists and items similar in substance to be indistinguishable from the cost of developing a business as a whole so it prohibits their recognition. [IAS 38.63-64]. As discussed at 3.3 above, the same applies to subsequent expenditures incurred in connection with such intangible assets even when originally acquired externally. [IAS 38.20]. For example, expenditure incurred in redesigning the layout of newspapers or magazines, which represent subsequent expenditure on publishing titles and mastheads, should not be capitalised.

Answer 2

SIC-32 clarifies how IAS 38 applies to costs in relation to websites designed for use by the entity in its business. An entity’s own website that arises from development and is for internal or external access is an internally generated intangible asset under the standard. [SIC-32.7].

Answer 3

A website designed for external access may be used for various purposes such as to promote and advertise an entity’s own products and services, provide electronic services to customers, and sell products and services. A website may be used within the entity to give staff access to company policies and customer details, and allow them to search relevant information. [SIC-32.1].

Answer 4

SIC-32 does not apply to items that are accounted for under another standard, such as the development or operation of a website (or website software) for sale to another entity (IAS 2 and IFRS 15); acquiring or developing hardware supporting a website (IAS 16); or in determining the initial recognition of an asset for a website subject to a leasing arrangement (IFRS 16). However, the Interpretation should be applied by lessors providing a web site under an operating lease and by lessees considering the treatment of subsequent expenditure relating to a web site asset leased under a finance lease, [SIC-32.5-6], because the related website asset will be carried on the entity’s statement of financial position.

Answer 5

Under SIC-32, an intangible asset should be recognised for website development costs if and only if, it meets the general recognition requirements in IAS 38 (see 3.1 above) and the six conditions for recognition as development costs (see 6.2.2 above). Most important of these is the requirement to demonstrate how the website will generate probable future economic benefits. [SIC-32.8]

Answer 6

The Interpretation deems an entity unable to demonstrate this for a website developed solely or primarily for promoting and advertising its own products and services. All expenditure on developing such a website should be recognised as an expense when incurred. Accordingly, it is unlikely that costs will be eligible for capitalisation unless an entity can demonstrate that the website is used directly in the income-generating process, for example where customers can place orders on the entity’s website. [SIC-32.8]

Answer 7

The following stages of a website’s development are identified by the interpretation: [SIC-32.2, 9] (a) planning includes undertaking feasibility studies, defining objectives and specifications, evaluating alternatives and selecting preferences. Expenditures incurred in this stage are similar in nature to the research phase and should be recognised as an expense when they are incurred;

Answer 8

(b) application and infrastructure development includes obtaining a domain name, purchasing and developing hardware and operating software, installing developed applications and stress testing. The requirements of IAS 16 are applied to expenditure on physical assets. Other costs are recognised as an expense, unless they can be directly attributed, or allocated on a reasonable and consistent basis, to preparing the website for its intended use and the project to develop the website meets the SIC-32 criteria for recognition as an intangible asset;

Answer 9

(c) graphical design development includes designing the appearance of web pages. Costs incurred at this stage should be accounted for in the same way as expenditure incurred in the ‘application and infrastructure development’ stage described under (b) above;

Answer 10

(d) content development includes creating, purchasing, preparing and uploading information, either textual or graphical in nature, on the website before the completion of the website’s development. The costs of content developed to advertise and promote an entity’s own products and services are always expensed as incurred. Other costs incurred in this stage should be recognised as an expense unless the criteria for recognition as an asset described in (b) above are satisfied; and

Answer 11

(e) the operating stage, which starts after completion of the development of a website, when an entity maintains and enhances the applications, infrastructure, graphical design and content of the website. [SIC-32.3]. Expenditure incurred in this stage should be expensed as incurred unless it meets the asset recognition criteria in IAS 38.

Answer 12

In making these assessments, the entity should evaluate the nature of each activity for which expenditure is incurred, independently of its consideration of the website’s stage of development. [SIC-32.9]. This means that even where a project has been determined to qualify for recognition as an intangible asset, not all costs incurred in relation to a qualifying stage of development are eligible for capitalisation. For example, whilst the direct costs of developing an online ordering system might qualify for recognition as an asset, the costs of training staff to operate that system should be expensed because training costs are deemed not necessary to creating, producing or preparing the website for it to be capable of operating (see Cost of an internally generated intangible asset ). [IAS 38.67].

Answer 13

Examples of other costs that would be recognised as an expense regardless of the stage of the project are given in the Illustrative Example to SIC-32, including: (a) selling, administrative and other general overhead expenditure unless it can be directly attributed to preparing the web site for use to operate in the manner intended by management; (b) clearly identified inefficiencies in the project, such as those relating to alternative solutions explored and rejected; and (c) initial operating losses incurred before the web site achieves planned performance.

Answer 14

A website qualifying for recognition as an intangible asset should be measured after initial recognition by applying the cost model or the revaluation model in IAS 38. In respect of the useful life of website assets, the expectation is that it should be short. [SIC-32.10].

Answer 15

On initial recognition, an intangible asset should be measured at cost, [IAS 38.24], which the standard defines 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. It is important to ensure that cost includes only the expenditure incurred after the recognition criteria are met and to confirm that only costs directly related to the creation of the asset are capitalised.

Answer 16

The cost of an internally generated intangible asset is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria of the standard, [IAS 38.65], and meets the detailed conditions for recognition of development phase costs as an asset. Costs incurred before these criteria are met are expensed, [IAS 38.68], and cannot be reinstated retrospectively, [IAS 38.65], because IAS 38 does not permit recognition of past expenses as an intangible asset at a later date. [IAS 38.71]. Example 17.7: Recognition of internally generated intangible assets on OneNote

Answer 17

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management.

Answer 18

Examples of directly attributable costs are: (a) costs of materials and services used or consumed in generating the intangible asset; (b) costs of employee benefits arising from the generation of the intangible asset; (c) fees to register a legal right; (d) amortisation of patents and licences that are used to generate the intangible asset; and (e) borrowing costs that meet the criteria under IAS 23 for recognition as an element of cost. [IAS 38.66].

Answer 19

Indirect costs and general overheads, even if they can be allocated on a reasonable and consistent basis to the development project, cannot be recognised as part of the cost of any intangible asset. The standard also specifically prohibits recognition of the following items as a component of cost: (a) selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use; (b) identified inefficiencies and initial operating losses incurred before the asset achieves planned performance; and (c) expenditure on training staff to operate the asset. [IAS 38.67].

Answer 20

Unless expenditure is incurred in connection with an item that meets the criteria for recognition as an intangible asset, and is an eligible component of cost, it should be expensed. The only exception is in connection with a business combination, where the cost of an item that cannot be recognised as an intangible asset will form part of the carrying amount of goodwill at the acquisition date. [IAS 38.68]. Some of the ineligible components of cost are identified at Costs to be expensed and Cost of an internally generated intangible asset above and include costs that are not directly related to the creation of the asset, such as costs of introducing a new product or costs incurred to redeploy an asset.

Answer 21

(a) start-up costs, unless they qualify for recognition as part of the cost of property, plant and equipment under IAS 16. Start-up costs recognised as an expense may consist of establishment costs such as legal and secretarial costs incurred in setting up a legal entity, expenditure to open a new facility or business or expenditures for starting new operations or launching new products or processes; (b) training costs; (c) advertising and promotional activities (including mail order catalogues); and (d) relocation or reorganisation costs. [IAS 38.69]. For these purposes no distinction is made between costs that are incurred directly by the entity and those that relate to services provided by third parties. However, the standard does not prevent an entity from recording a prepayment if it pays for the delivery of goods before obtaining a right to access those goods. Similarly, a prepayment can be recognised when payment is made before the services are received. [IAS 38.70].

Answer 22

The Board considers that advertising and promotional activities do not qualify for recognition as an intangible asset because their purpose is to enhance or create internally generated brands or customer relationships, which themselves cannot be recognised as intangible assets. [IAS 38.BC46B].

Answer 23

An entity has a different asset, a prepayment, if it has paid for goods or services before they are provided, as described above. However, the Board did not believe this justified an asset being recognised beyond the point at which the entity gained the right to access the related goods or received the related services. [IAS 38.BC46D]. Entities cannot, therefore maintain a prepayment asset and defer recognising an expense in the period between receiving the material from a supplier and delivery to its customers or potential customers. [IAS 38.BC46E].

Answer 24

Accordingly, the IASB is deliberate in using the phrase ‘obtaining the right to access those goods’ when it defines the point that an expense is recognised. This is because the date of physical delivery could be altered without affecting the substance of the commercial arrangement with the supplier. [IAS 38.BC46E]. Recognition is determined by the point when the goods have been constructed by the supplier in accordance with the terms of the customer contract and the entity could demand delivery in return for payment. [IAS 38.69A].

Answer 25

Therefore an entity must recognise an expense for customer catalogues once they are ready for delivery from the printer, even if the entity has arranged for the printer to send catalogues directly to customers when advised by the entity’s sales department. Similarly in the case of services, an expense is recognised when those services are received by the entity, and not deferred until the entity uses them in the delivery of another service, for example, to deliver an advertisement to its customers. [IAS 38.69A].

Answer 26

The Board rejected calls to make a special case for mail order catalogues, where it was argued that they created a distribution network, on the grounds that their primary objective was to advertise goods to customers. [IAS 38.BC46G]. For this reason the wording in the standard cites mail order catalogues as an example of expenditure on advertising and promotional activities that is recognised as an expense. [IAS 38.69].

Answer 27

IAS 38, in common with a number of other standards, provides an entity the option to choose between two alternative treatments: [IAS 38.72] • the cost model, which requires measurement at cost less any accumulated amortisation and any accumulated impairment losses; [IAS 38.74] or • the revaluation model, which requires measurement at a revalued amount, being its fair value at the date of the revaluation, less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. [IAS 38.75].

Answer 28

The revaluation option is only available if there is an active market for the intangible asset. [IAS 38.75, 81-82]. Active market is defined by IFRS 13; see Chapter 14. There are no provisions in IAS 38 that allow fair value to be determined indirectly, for example by using the techniques and financial models applied to estimate the fair value of intangible assets acquired in a business combination. Therefore, in accordance with IFRS 13, an entity must measure the fair value of an intangible under the revaluation model using the price in an active market for an identical asset, i.e. a Level 1 price.

Answer 29

If an entity chooses an accounting policy to measure an intangible asset at revalued amount, it must apply the revaluation model to all the assets in that class, unless there is no active market for those other assets. [IAS 38.72]. A class of intangible assets is a grouping of assets of a similar nature and use in an entity’s operations. [IAS 38.73].

Answer 30

Examples of separate classes of intangible asset include: (a) brand names; (b) mastheads and publishing titles; (c) computer software; (d) licences and franchises; (e) copyrights, patents and other industrial property rights, service and operating rights; (f) recipes, formulae, models, designs and prototypes; and (g) intangible assets under development. [IAS 38.119].

Answer 31

The standard requires assets in the same class to be revalued at the same time, as to do otherwise would allow selective revaluation of assets and the reporting of a mixture of costs and values as at different dates within the same asset class. [IAS 38.73].

Answer 32

Under the cost model, after initial recognition, the carrying amount of an intangible asset is its cost less any accumulated amortisation and accumulated impairment losses. [IAS 38.74].

Answer 33

An entity can only apply the revaluation model if the fair value can be determined by reference to an active market. [IAS 38.75, 81-82]. An active market will rarely exist for intangible assets. [IAS 38.78].

Answer 34

After initial recognition an intangible asset should be carried at a revalued amount, which is its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. [IAS 38.75]. To prevent an entity from circumventing the recognition rules of the standard, the revaluation model does not allow: • the revaluation of intangible assets that have not previously been recognised as assets; or • the initial recognition of intangible assets at amounts other than cost. [IAS 38.76].

Answer 35

These rules are designed to prevent an entity from recognising at a ‘revalued’ amount an intangible asset that was never recorded because its costs were expensed as they did not at the time meet the recognition rules. As noted above, IAS 38 does not permit recognition of past expenses as an intangible asset at a later date. [IAS 38.71].

Answer 36

However, it is permitted to apply the revaluation model to the whole of an intangible asset even if only part of its cost was originally recognised as an asset because it did not meet the criteria for recognition until part of the way through the process. [IAS 38.77]. Since the prohibition on initial recognition of intangible assets at amounts other than cost would also prevent the revaluation of quotas and permits allocated by governments and similar bodies – which are amongst the few intangible assets that do have an active market – the standard specifically makes an exception and allows the revaluation model to be applied to ‘an intangible asset that was received by way of a government grant and recognised at a nominal amount’. [IAS 38.77].

Answer 37

Example 17.8: Application of revaluation model to intangible assets that are partially recognised or received by way of government grant. see OneNote

Answer 38

An entity can only elect to apply the revaluation model if the fair value can be determined by reference to an active market for the intangible asset. [IAS 38.81-82]. An active market is defined in IFRS 13 as one in which transactions for the item take place with sufficient frequency and volume to provide pricing information on an ongoing basis. [IFRS 13 Appendix A].

Answer 39

Few intangible assets will be eligible for revaluation and indeed the standard concedes that such an active market would be uncommon. Nevertheless, in some jurisdictions, an active market may exist for freely transferable taxi licences, fishing licences or production quotas. [IAS 38.78]. However, by their very nature most intangible assets are unique or entity-specific. The standard lists brands, newspaper mastheads, music and film publishing rights, patents or trademarks as items that are ineligible for revaluation because each such asset is unique. [IAS 38.78]. The existence of a previous sale and purchase transaction is not sufficient evidence for the market to be regarded as active because of the requirement in the definition for a sufficient frequency and volume of transactions to allow the provision of ongoing pricing information.

Answer 40

The standard notes that where contracts are negotiated between individual buyers and sellers or when transactions are relatively infrequent, the price of a previous transaction for one intangible asset may not provide sufficient evidence of the fair value of another. In addition, if prices are not available to the public, this is taken as evidence that an active market does not exist. [IAS 38.78].

Answer 41

An entity should stop revaluing an asset if the market used to determine its fair value ceases to meet the criteria for an active market. The valuation is ‘frozen’ from that date, and reduced thereafter by subsequent amortisation and any subsequent impairment losses. [IAS 38.82]. The IASB believes that the disappearance of a previously active market may indicate that the asset needs to be tested for impairment in accordance with IAS 36. [IAS 38.83]. If an active market for the previously revalued asset emerges at a later date, the entity is required to apply the revaluation model from that date. [IAS 38.84]

Answer 42

IAS 38 requires revaluations to be performed ‘with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value’. [IAS 38.75]. The standard lets entities judge for themselves the frequency of revaluations depending on the volatility of the fair values of the underlying intangible assets. Significant and volatile movements in fair value would necessitate annual revaluation, whereas a less frequent update would be required for intangibles whose price is subject only to insignificant movements. [IAS 38.79]

Answer 43

Nevertheless, since an entity can only revalue assets for which a price is quoted in an active market, there should be no impediment to updating that valuation at each reporting date. As noted above, when an entity has a number of items in the same class of intangible assets, the standard requires that they are all valued at the same time. [IAS 38.73]

Answer 44

Increases in an intangible asset’s carrying amount as a result of a revaluation should be credited to other comprehensive income under the heading of revaluation surplus, except to the extent that the revaluation reverses a revaluation decrease of the same asset that was previously recognised in profit or loss. [IAS 38.85].

Answer 45

Conversely, decreases in an intangible asset’s carrying amount as a result of a revaluation should be recognised in profit or loss, unless the decrease reverses an earlier upward revaluation, in which case the decrease should first be recognised in other comprehensive income to extinguish the revaluation surplus in respect of the asset. [IAS 38.86]

Answer 46

The transfer from revaluation surplus to retained earnings is not made through profit or loss. [IAS 38.87]. It is not the same as recycling a gain or loss previously recognised in other comprehensive income. Accordingly, the transfer will appear as a line item in the Statement of Changes in Equity rather than in other comprehensive income.

Answer 47

When an intangible asset is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in the accumulated amortisation is eliminated against the gross carrying amount of the asset. [IAS 38.80].

Answer 48

AMORTISATION OF INTANGIBLE ASSETS

Answer 49

IAS 38 defines the useful life of an intangible asset as: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity. [IAS 38.8].

Answer 50

The standard requires an entity to assess whether the useful life of an intangible asset is finite or indefinite. [IAS 38.88]. An intangible asset with a finite useful life is amortised over its useful life or the number of production units (or similar units) constituting that useful life, whereas an intangible asset with an indefinite useful life is not amortised. [IAS 38.89].

Answer 51

The standard requires an intangible asset to be classified 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’. [IAS 38.88]. Therefore, for this purpose the term ‘indefinite’ does not mean ‘infinite’. [IAS 38.91].

Answer 52

Entities should not confuse the absence of a foreseeable limit to an asset’s life with an ability to renew, refresh or upgrade an asset to ensure it continues to generate future cash flows. Some intangible assets are based on legal rights that are conveyed in perpetuity rather than for finite terms, whether or not those terms are renewable. If the cash flows are expected to continue indefinitely, the useful life is indefinite. [IAS 38.BC62].

Answer 53

An important underlying assumption in making the assessment of the useful life of an intangible asset is that it ‘reflects only that level of future maintenance expenditure required to maintain the asset at its standard of performance assessed at the time of estimating the asset’s useful life, and the entity’s ability and intention to reach such a level. A conclusion that the useful life of an intangible asset is indefinite should not depend on planned future expenditure in excess of that required to maintain the asset at that standard of performance.’ [IAS 38.91].

Answer 54

Determining exactly what constitutes the level of expenditure ‘required to maintain the asset at that standard of performance’ is a matter of judgement. However, a clear distinction exists between this type of expenditure and costs that might be incurred to renew, refresh or upgrade an asset to ensure it continues to generate future cash flows. Expenditure to ensure that an intangible asset does not become obsolete is not the type of maintenance expenditure that, though very necessary to ensure continuing future cash flows, would be indicative of an indefinite life. Indeed, the standard asserts that assets subject to technological change would be expected to have a short useful life. [IAS 38.92].

Answer 55

The standard identifies a number of factors that may affect the useful life of an intangible asset: (a) the expected usage of the asset by the entity and whether the asset could be managed efficiently by another management team; (b) typical product life cycles for the asset and public information on estimates of useful lives of similar assets that are used in a similar way; (c) technical, technological, commercial or other types of obsolescence; (d) the stability of the industry in which the asset operates and changes in the market demand for the products or services output from the asset;

Answer 56

(e) expected actions by competitors or potential competitors; (f) the level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entity’s ability and intention to reach such a level; (g) the period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases, discussed further at 9.1.2 below; and (h) whether the useful life of the asset is dependent on the useful life of other assets of the entity. [IAS 38.90].

Answer 57

The standard explicitly warns against both: • overestimating the useful life of an intangible asset. For example, a history of rapid changes in technology means that the useful lives of computer software and many other intangible assets that are susceptible to technological obsolescence will be short; [IAS 38.92] and • underestimating the useful life. Whilst uncertainty justifies estimating the useful life of an intangible asset on a prudent basis, it does not justify choosing a life that is unrealistically short. [IAS 38.93].

Answer 58

Where an intangible asset is acquired in a business combination, but the acquiring entity does not intend to use it to generate future cash flows, it is unlikely that it could have anything other than a finite useful life. Indeed, whilst in our view an entity would not recognise an immediate impairment loss on acquisition, the estimated useful life of the asset is likely to be relatively short.

Answer 59

Example 17.11: Assessing the useful life of an intangible asset

Answer 60

Where an intangible asset arises from contractual or other legal rights, the standard requires an entity to take account of both economic and legal factors influencing its useful life and determine the useful life as the shorter of: * the period of the contractual or other legal rights; and * the period (determined by economic factors) over which the entity expects to obtain economic benefits from the asset. [IAS 38.94-95].

Answer 61

If the contractual or other legal rights can be renewed, the useful life of the intangible asset should include the renewal period only if there is evidence to support renewal by the entity without significant cost. However, renewal periods must be ignored if the intangible asset is a reacquired right that was recognised in a business combination. [IAS 38.94].

Answer 62

The existence of the following factors may indicate that an entity is able to renew the contractual or other legal rights without significant cost: (a) there is evidence, possibly based on experience, that the contractual or other legal rights will be renewed. If renewal is contingent upon the consent of a third party, this includes evidence that the third party will give its consent; (b) there is evidence that any conditions necessary to obtain renewal will be satisfied; and (c) the cost to the entity of renewal is not significant when compared with the future economic benefits expected to flow to the entity from renewal. [IAS 38.96].

Answer 63

A renewal period is only added to the estimate of useful life if its cost is insignificant when compared with the future economic benefits expected to flow to the entity from renewal. [IAS 38.94]. If this is not the case, then the original asset’s useful life ends at the contracted renewal date and the renewal cost is treated as the cost to acquire a new intangible asset. [IAS 38.96]. An entity needs to exercise judgement in assessing what it regards as a significant cost.

Answer 64

In the case of a reacquired contractual right, recognised as an intangible asset in a business combination accounted for under IFRS 3, its useful life is the remaining contractual period of the contract in which the right was granted. Renewal periods may not be taken into account. [IAS 38.94].

Answer 65

The following examples are derived from those in IAS 38’s Illustrative Examples and show the effect of contractual or other legal rights on the useful life of an intangible asset, when assessed together with other factors. The useful life may be shorter than the legal rights or, if supported by facts and circumstances, renewal rights could mean that the intangible asset’s life is indefinite. Example 17.12: Legal rights and useful life see OneNote.

Answer 66

Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life. The depreciable amount is the cost of an asset, or other amount substituted for cost (e.g. revaluation), less its residual value. [IAS 38.8]. The depreciable amount of an intangible asset with a finite useful life should be allocated on a systematic basis over its useful life in the following manner: [IAS 38.97]

Answer 67

• amortisation should begin when the asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, even if an entity is not using the asset, it should still be amortised because it is available for use, although there may be exceptions from this general rule (see Review of amortisation period and amortisation method below);

Answer 68

• amortisation should cease at the earlier of: - the date that the asset is classified as held for sale, or included in a disposal group that is classified as held for sale, in accordance with IFRS 5; and - the date that the asset is derecognised. • the amortisation method should reflect the pattern of consumption of the economic benefits that the intangible asset provides. If that pattern cannot be reliably determined, a straight-line basis should be used.

Answer 69

Amortisation of an intangible asset with a finite useful life continues until the asset has been fully depreciated or is classified as held for sale, as noted above, or derecognised. Amortisation does not cease simply because an asset is not being used, [IAS 38.117], although this fact might give rise to an indicator of impairment.

Answer 70

The standard allows a variety of amortisation methods to be used to depreciate the asset on a systematic basis over its useful life, such as the straight-line method, the diminishing balance method and the unit of production method. [IAS 38.98]. The factors to consider in determining the most appropriate amortisation method are similar to those that are relevant for the depreciation of property, plant and equipment in accordance with IAS 16.

Answer 71

The amortisation charge for each period should be recognised in profit or loss unless IFRS specifically permits or requires it to be capitalised as part of the carrying amount of another asset (e.g. inventory or work in progress). [IAS 38.97, 99].

Answer 72

There is a rebuttable presumption that an amortisation method based on the pattern of expected revenues is not appropriate. This is because a revenue-based method reflects a pattern of generation of economic benefits from operating the business (of which the asset is a part), rather than the consumption of the economic benefits embodied in the asset itself. By contrast, an amortisation method based on estimated total output (a unit of production method) is appropriate.

Answer 73

The future economic benefits of some intangible assets are clearly consumed on a declining balance basis. This often applies to customer relationships and similar assets acquired as part of a business combination. Both the fair value and the future economic benefits from the customer relationship or similar asset decline over time as the consumption of the economic benefits embodied in the asset declines. Therefore amortising the customer relationship on a declining balance method would be appropriate.

Answer 74

It is important to distinguish this from an asset whose fair value shows a declining balance profile over its life but where the future economic benefits are consumed on a time basis, e.g. a motor vehicle where the entity will obtain as much benefit in year 4 as in year 1. A straight-line method of amortisation properly reflects the consumption of benefits from the motor vehicle.

Answer 75

In practice entities rarely use declining balance methods for amortisation. One reason for customer relationships and similar intangible assets is the uncertainty about the future economic benefits that might arise several years in the future and the difficulty in distinguishing them from cash flows that have been generated by internally-generated assets of the business. As a pragmatic solution, supported by valuations experts, entities often use a straight-line method over a shorter period so that at all points the amortised carrying amount of the asset is below the curve for the expected benefits. As long as the benefits expected to arise in the period after the intangible asset is fully amortised are not expected to be significant and the entity applies the requirements of IAS 38 to review the useful life and amortisation method, this method will give a reasonable approximation of the consumption of economic benefits.

Answer 76

The value of programme and other broadcast rights diminishes because the programmes or events have been broadcast to the same audience before and as result of the passage of time, e.g. audiences lose interest in old programmes or repeats of events for which the result is known or the right is for a limited period. In accounting for this diminution in value, in practice, entities usually take into account how often a programme has been broadcast and, less frequently, the passage of time as such.

Answer 77

When an entity accounts for broadcast rights as inventory, the problem arises that IAS 2 requires valuation ‘at the lower of cost and net realisable value’ and does not appear to recognise the concept of amortisation of inventories. [IAS 2.9].

Answer 78

An entity that accounts for programme and other broadcast rights as intangible assets would need to comply with the requirements of IAS 38, which requires that the amortisation method reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. [IAS 38.97]. As discussed above, the standard permits a range of amortisation methods (e.g. the straight-line method, the diminishing balance method and the unit of production method), provided that the chosen method reflects the pattern in which the asset’s future economic benefits are expected to be consumed. [IAS 38.97-98].

Answer 79

Consumption of the future economic benefits of an asset is the principle on which amortisation is based. Whether this completely precluded revenue-based methods of amortisation had become a matter of debate, particularly in the context of service concession arrangements that are accounted for using the intangible asset model.

Answer 80

In May 2014, the IASB clarified IAS 38 by introducing a rebuttable presumption that a revenue-based approach is not appropriate. Revenue reflects the output of the intangible asset but it also measures the impact of other factors, such as changes in sales volumes and selling prices, the effects of selling activities and changes to inputs and processes. The price component of revenue may be affected by inflation. [IAS 38.98A].

Answer 81

The IASB acknowledged certain ‘limited circumstances’ that would allow revenuebased amortisation. Therefore, the presumption that they are not acceptable is rebuttable only: (a) when the rights embodied in that intangible asset are expressed as a measure of revenue; or (b) when it can be demonstrated that revenue and the consumption of the economic benefits embodied in the intangible asset are highly correlated. [IAS 38.98A].

Answer 82

A ‘highly correlated’ outcome would only be achieved where a revenue-based method of amortisation is expected to give a similar answer as one of the other methods permitted by IAS 38. For example, if revenue is earned evenly over the expected life of the asset, the pattern of amortisation would be similar to a straightline basis. In situations where unit prices are fixed and all production is sold, the pattern of amortisation would replicate the use of the units-of-production method.

Answer 83

However, when unit prices are not fixed, revenue would not provide the same answer and its use would therefore be inappropriate (as in the example above). [IAS 38.98B]. The revised standard notes that revenue is the predominant limiting factor that is inherent in the intangible asset in circumstances in which it is appropriate to use it as the basis of amortisation. In other words, in these circumstances, revenue determines the useful life of the asset, rather than, for example, a number of years or the number of units produced.

Answer 84

The amended standard includes two examples in which revenue earned can be regarded as a measure of consumption of an intangible asset. • A contract may allow the extraction of gold from a mine until total cumulative revenue from the sale of gold reaches $2 billion; or • The right to operate a toll road could be based on a fixed total amount of revenue to be generated from cumulative tolls, i.e. the operator can collect up to €100 million from the tolls collected. [IAS 38.98C].

Answer 85

Some respondents had argued that a units of production method did not seem practicable when the units of production were not homogeneous. For example, a producer of a motion picture generates revenue through showing the picture in theatres, selling DVDs, licensing the rights to characters to toy manufacturers and licensing the broadcast rights to television. The IASB acknowledges that such situations require the exercise of judgement.

Answer 86

An entity should review the amortisation period and the amortisation method for an intangible asset with a finite useful life at least at each financial year-end. If the expected useful life of the asset has changed, the amortisation period should be changed accordingly. [IAS 38.104]. An entity may, for example, consider its previous estimate of the useful life of an intangible asset inappropriate upon recognition of an impairment loss on the asset. [IAS 38.105].

Answer 87

If the expected pattern of consumption of the future economic benefits embodied in the asset has changed, the amortisation method should be changed to reflect the new pattern. [IAS 38.104]. The standard provides two examples of when this might happen: • if it becomes apparent that a diminishing balance method of amortisation is appropriate rather than a straight-line method; [IAS 38.106] and

Answer 88

• if use of the rights represented by a licence is deferred pending action on other components of the business plan. In this case, economic benefits that flow from the asset may not be received until later periods. [IAS 38.106]. This implies that circumstances may exist in which it is appropriate not to recognise an amortisation charge in relation to an intangible asset, because the entity may not yet be ready to use it. For example, telecommunication companies acquired UMTS (3G) licences, before constructing the physical network necessary to use the licence. Note that an entity must perform an impairment test at least annually for any intangible asset that has not yet been brought into use. [IAS 36.10].

Answer 89

Both changes in the amortisation period and the amortisation method should be accounted for as changes in accounting estimates in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors – which requires such changes to be recognised prospectively by revising the amortisation charge in the current period and for each future period during the asset’s remaining useful life. [IAS 8.36, 38, IAS 38.104].

Answer 90

The residual value of an intangible asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. [IAS 38.8].

Answer 91

IAS 38 requires entities to assume a residual value of zero for an intangible asset with a finite useful life, unless there is a commitment by a third party to purchase the asset at the end of its useful life or there is an active market (as defined by IFRS 13) for the asset from which to determine its residual value and it is probable that such a market will exist at the end of the asset’s useful life. [IAS 38.100]. This presumption has been retained from the previous version of IAS 38 as an anti-abuse measure to prevent entities from circumventing the requirement to amortise all intangible assets. [IAS 38.BC59].

Answer 92

Given the definition of ‘active market’ (see 8.2.1 above) it seems highly unlikely that, in the absence of a commitment by a third party to buy the asset, an entity will ever be able to prove that the residual value is other than zero. A residual value other than zero implies that the entity intends to dispose of the asset before the end of its economic life. [IAS 38.101]

Answer 93

If an entity can demonstrate a case for estimating a residual value other than zero, its estimate should be based on current prices for the sale of a similar asset that has reached the end of its useful life and has operated under conditions similar to those in which the asset will be used. [IAS 38.102]. The standard requires a review of the residual value at each financial year end. This review can result in an upward or downward revision of the estimated residual value and thereby affect the depreciable amount of the asset; that change to depreciation should be accounted for prospectively as a change in an accounting estimate in accordance with IAS 8. [IAS 38.102].

Answer 94

IAS 38 prohibits amortisation of an intangible asset with an indefinite useful life. [IAS 38.107]. Instead, IAS 36 requires such an asset to be tested for impairment annually and whenever there is an indication that the intangible asset may be impaired. [IAS 38.108].

Answer 95

An entity should review and validate at the end of each reporting period its decision to classify the useful life of an intangible asset as indefinite. [IAS 38.109]. If events and circumstances no longer support an indefinite useful life, the change from indefinite to finite life should be accounted for as a change in accounting estimate under IAS 8, [IAS 38.109], which requires such changes to be recognised prospectively (i.e. in the current and future periods). [IAS 8.36]. Furthermore, reassessing the useful life of an intangible asset as finite rather than indefinite is an indicator that the asset may be impaired. [IAS 38.110]

Answer 96

Example 17.16: Review of indefinite useful lives , see OneNote

Answer 97

An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. [IAS 38.8]. An entity applies IAS 36 in determining whether an intangible asset is impaired. [IAS 38.111].

Answer 98

IAS 36 requires an entity to perform an annual impairment test on every intangible asset that has an indefinite useful life and every intangible asset that is not yet available for use. Many intangible assets with indefinite lives do not generate independent cash inflows as individual assets and so are tested for impairment with other assets of the cash-generating unit of which they are part. [IAS 36.10, 22]. This means that impairment losses, if any, will be allocated in accordance with IAS 36 and, if any goodwill allocated to the cash-generating unit has been written off, the other assets of the cash-generating unit, including the intangible asset, will be reduced pro rata to their carrying amount. [IAS 36.104].

Answer 99

Example 17.17: Impairment of an intangible asset with an indefinite useful life, see OneNote

Answer 100

An intangible asset should be derecognised on disposal (e.g. by sale, by entering into a finance lease, or by donation) or when no future economic benefits are expected from its use or disposal. [IAS 38.112, 114].

Answer 101

The date of disposal of an intangible asset is the date the recipient obtains control of that asset in accordance with the requirements for determining when a performance obligation is satisfied in IFRS 15. [IAS 38.114]. In the case of a disposal by a sale and leaseback, an entity should apply IFRS 16.

Answer 102

The gain or loss on derecognition, which is determined as the difference between the net disposal proceeds and the carrying amount of the asset, should be accounted for in profit or loss unless IFRS 16 requires otherwise on a sale and leaseback. Gains on disposal should not be presented as revenue because they are incidental to the entity’s main revenue-generating activities. [IAS 38.113].

Answer 103

The consideration to be included in the calculation of the gain or loss is determined in accordance with the requirements for determining the transaction price in paragraphs 47 to 72 of IFRS 15. [IAS 38.116]. If the transaction price includes variable consideration, subsequent changes to the estimated amount of the consideration included in the gain or loss on disposal are accounted for in accordance with the requirements for changes in the transaction price in IFRS 15. [IAS 38.116]

Answer 104

If the receipt of the consideration does not match the timing of the transfer of the asset (e.g. the consideration is prepaid or paid after the date of disposal), then the arrangement may also contain a financing component for which the transaction price will need to be adjusted, if significant.

Answer 105

In the case of a reacquired contractual right, recognised as an intangible asset in a business combination accounted for under IFRS 3, if the right is subsequently reissued or sold to a third party, any gain or loss is determined using the remaining carrying amount of the reacquired right. [IAS 38.115A].

Answer 106

The standard requires an entity to recognise the cost of replacing a part of an intangible asset as a component of the asset’s carrying amount and to derecognise that component when the part is replaced. ‘If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or internally generated.’ [IAS 38.115].

Answer 107

As noted by the standard, the nature of intangible assets is such that, in many cases, there are no additions or replacements that would meet its recognition criteria, so this should be an unlikely event. [IAS 38.20]

Answer 108

However, this requirement raises the question of how to account for the disposal of a part of a larger intangible item, acquired in a single transaction but capable of being subdivided for separate disposal. An example would be the division of the global rights to sell a particular product into a number of agreements providing exclusive rights over a particular continent or other geographic territory. In this case, the part disposed of is an identifiable and separable part of the original intangible asset. Because the rights are exclusive, the part still meets the definition of an intangible asset because it is embodied in legal rights that allow the acquirer to control the benefits arising from the asset, either by providing access to earn revenues in that geographic market or by restricting the access of others to that market. [IAS 38.13]

Answer 109

In that case, an entity would apply the requirements above for the derecognition of a replacement part of an asset, by determining the carrying amount of the separate part or, if to do so is impracticable, deducting the proceeds of disposal from the depreciated replacement cost of the original asset (in effect treating the value of the newly separated part as an indicator of original cost).

Answer 110

Where the subdivision of rights is not established on an exclusive basis, it would be more difficult to regard a separable component of the original intangible as having been disposed of. For example, rights might be assigned to a third party over a geographic area, but the entity retains the ability to sell goods in that market as well. In such circumstances it may not be appropriate to derecognise a portion of the original intangible asset. Instead the entity may have transferred a right of use (or lease) over the asset to the third party, or entered into a form of joint arrangement. The issues raised by the partial disposal of previously undivided interests in property, plant and equipment are discussed in Chapter 18.

Answer 111

``` IAS 38 requires certain disclosures to be presented by class of intangible assets. A class of intangible assets is defined as a grouping of assets of a similar nature and use in an entity’s operations. The standard provides examples of classes of assets, which may be disaggregated (or aggregated) into smaller (or larger) groups if this results in more relevant information for the users of the financial statements (see 8 above for examples of classes of intangible assets). [IAS 38.119]. ```

Answer 112

``` Although separate information is required for internally generated intangible assets and other intangible assets, these categories are not considered to be separate classes when they relate to intangible assets of a similar nature and use in an entity’s operations. Hence the standard requires the following disclosures to be given for each class of intangible assets, distinguishing between internally generated intangible assets and other intangible assets : ```

Answer 113

(a) whether the useful lives are indefinite or finite and, if finite, the useful lives or the amortisation rates used; (b) the amortisation methods used for intangible assets with finite useful lives; (c) the gross carrying amount and any accumulated amortisation (aggregated with accumulated impairment losses) at the beginning and end of the period; (d) the line item(s) of the statement of comprehensive income in which any amortisation of intangible assets is included; and

Answer 114

(e) a reconciliation of the carrying amount at the beginning and end of the period showing: (i) additions, indicating separately those from internal development, those acquired separately, and those acquired through business combinations; (ii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals; (iii) increases or decreases during the period resulting from revaluations and from impairment losses recognised or reversed in other comprehensive income in accordance with IAS 36 (if any);

Answer 115

(iv) impairment losses recognised in profit or loss during the period in accordance with IAS 36 (if any); (v) impairment losses reversed in profit or loss during the period in accordance with IAS 36 (if any); (vi) any amortisation recognised during the period; (vii) net exchange differences arising on the translation of the financial statements into the presentation currency, and on the translation of a foreign operation into the presentation currency of the entity; and (viii) other changes in the carrying amount during the period. [IAS 38.118].

Answer 116

The standard permits an entity to present the reconciliation required under (e) above either for the net carrying amount or separately for the gross carrying amount and the accumulated amortisation and impairments. IAS 1.38 requires comparative information for the reconciliation in (e) above. An entity may want to consider separate disclosure of intangible assets acquired by way of government grant or obtained in an exchange of assets, even though disclosure is not specifically required under (e)(i) above.

Answer 117

There are a number of additional disclosure requirements, some of which only apply in certain circumstances: (a) for an intangible asset assessed as having an indefinite useful life, the carrying amount of that asset and the reasons supporting the assessment of an indefinite useful life. In giving these reasons, the entity should describe the factor(s) that played a significant role in determining that the asset has an indefinite useful life;

Answer 118

(b) a description, the carrying amount and remaining amortisation period of any individual intangible asset that is material to the entity’s financial statements; (c) for intangible assets acquired by way of a government grant and initially recognised at fair value : (i) the fair value initially recognised for these assets; (ii) their carrying amount; and (iii) whether they are measured after recognition under the cost model or the revaluation model.

Answer 119

(d) the existence and carrying amounts of intangible assets whose title is restricted and the carrying amounts of intangible assets pledged as security for liabilities; (e) the amount of contractual commitments for the acquisition of intangible assets. [IAS 38.122].

Answer 120

Finally, an entity is encouraged, but not required, to disclose the following information: (a) a description of any fully amortised intangible asset that is still in use; and (b) a brief description of significant intangible assets controlled by the entity but not recognised as assets because they did not meet the recognition criteria in this Standard or because they were acquired or generated before the version of IAS 38 issued in 1998 was effective. [IAS 38.128].