IAS 38 – Intangible Assets - ACCA skill level | master in intangible assets | type of assets
1. Definition of Intangible Assets
IAS 38 governs the accounting for intangible assets, which are:
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Identifiable (either separable or arising from contractual/legal rights),
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Non-monetary (not cash or similar to cash),
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Without physical substance.
Examples: patents, trademarks, licenses, copyrights, brands, customer lists, software.
Key: Even though intangible assets are non-physical, they still provide future economic benefits to the entity.
2. Recognition Criteria
An intangible asset can be recognized in the financial statements if, and only if:
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It is probable that the expected future economic benefits will flow to the entity.
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The cost can be measured reliably.
If these two conditions are not met, expenditure must be recognized as an expense in the period it is incurred.
3. Initial Measurement
At initial recognition, an intangible asset is measured at cost.
Cost Includes:
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Purchase price (including import duties and non-refundable taxes).
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Any directly attributable costs to prepare the asset for its intended use (e.g., employee costs, legal fees).
If the intangible asset is acquired separately:
→ Cost is straightforward: purchase price + directly attributable costs.
If the intangible asset is acquired as part of a business combination:
→ Fair value at the acquisition date is used.
If the intangible asset is internally generated (like software or brand development):
→ Special, stricter rules apply (discussed below).
4. Internally Generated Intangible Assets
IAS 38 is very strict about internally generated assets. You must separate the process into two phases:
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Research Phase: All costs must be expensed immediately.
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Development Phase: Costs may be capitalized if specific criteria are met.
Research Phase Examples:
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Searching for alternatives
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Formulating hypotheses
Development Phase Examples:
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Designing, constructing prototypes
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Testing, before commercial production begins
Capitalization of development costs is allowed if ALL of the following six conditions are met:
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Technical feasibility of completing the intangible asset.
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Intention to complete and use or sell it.
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Ability to use or sell it.
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How it will generate probable future economic benefits.
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Availability of adequate resources to complete and use/sell the asset.
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Ability to measure reliably the expenditure.
If any condition is not met → expense it.
5. Subsequent Measurement
After initial recognition, IAS 38 allows two models:
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Cost Model: Carry at cost less accumulated amortization and impairment losses.
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Revaluation Model: Carry at a revalued amount (fair value) only if fair value can be determined by reference to an active market (which is rare for intangible assets).
Important: If using the revaluation model, all assets in that class must be revalued regularly to ensure the carrying amount does not differ materially from fair value.
6. Amortization of Intangible Assets
Amortization is the systematic allocation of the depreciable amount over the asset’s useful life.
Key Points:
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Most intangible assets have a finite useful life and are amortized over that period.
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If the useful life is indefinite, the asset is not amortized, but it must be tested annually for impairment under IAS 36.
Useful Life:
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Determined based on legal rights, technological life cycles, etc.
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Must be reviewed every year.
Amortization Methods:
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Straight-line method (most common)
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Other methods based on the pattern of economic benefits consumption.
7. Impairment of Intangible Assets
IAS 36 (Impairment of Assets) applies.
An intangible asset must be assessed for indicators of impairment at each reporting date.
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If an asset's recoverable amount (higher of value in use and fair value less costs to sell) is less than its carrying amount → an impairment loss must be recognized.
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Intangible assets with indefinite useful lives must be tested for impairment annually, even if no impairment indicators exist.
8. Derecognition of Intangible Assets
An intangible asset is derecognized:
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On disposal, or
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When no further economic benefits are expected from its use or disposal.
The gain or loss on derecognition (difference between proceeds and carrying amount) is recognized in the income statement.
9. Disclosures Required
IAS 38 requires detailed disclosures to ensure transparency:
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Whether the useful lives are indefinite or finite (and if finite, the useful lives or amortization rates used).
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Amortization methods and amounts.
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Gross carrying amount and accumulated amortization (and impairment losses).
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Basis for determining that useful lives are indefinite.
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Description of any significant intangible assets.
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For revalued intangible assets, the carrying amount that would have been under cost model, and details about the revaluation.
10. Special Cases
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Goodwill: Even though it’s an intangible asset, goodwill is specifically covered under IFRS 3 (Business Combinations), not IAS 38.
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Website Costs: Development costs may qualify for capitalization if they meet the development phase criteria.
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Expenditure on Training, Advertising, etc.: Always expensed — cannot be capitalized.
Summary Table: IAS 38 Overview
| Area | Key Points |
|---|---|
| Definition | Identifiable, non-monetary, no physical substance |
| Recognition | Probable economic benefits + Reliable measurement |
| Initial Measurement | Cost (purchase price + direct costs) |
| Internally Generated Assets | Research = Expense; Development = Capitalize if criteria met |
| Subsequent Measurement | Cost Model OR Revaluation Model (rare) |
| Amortization | Over useful life if finite; Annual impairment test if indefinite |
| Impairment | IAS 36 applies |
| Derecognition | On disposal or no future benefit |
| Disclosures | Useful life, methods, carrying amounts, revaluation info |
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