IAS 38 – Intangible Assets Explained (ACCA & Accounting Students Guide)

IAS 38 – Intangible Assets is one of the most important standards in financial reporting. It helps us understand how to treat assets that are not physical, like patents and trademarks. Let’s simplify it!

IAS 38 – Intangible Assets

1. Introduction to IAS 38

IAS 38 is the IFRS standard that governs the accounting for intangible assets, setting out when they should be recognised, how they are measured, and what disclosures are required:contentReference[oaicite:0]{index=0}. It applies to identifiable non‑monetary assets without physical substance. In practice, this means items like patents, licences, trademarks, software and copyrights are within its scope, whereas tangible assets are not:contentReference[oaicite:1]{index=1}. Notably, goodwill acquired in a business combination is excluded from IAS 38 and accounted under IFRS 3, and internally generated goodwill is also not recognised as an intangible asset because it is not identifiable:contentReference[oaicite:2]{index=2}:contentReference[oaicite:3]{index=3}. Thus, IAS 38 provides the framework for recognising, measuring and disclosing most intangible assets in financial statements.

2. Definition and Scope of Intangible Assets

IAS 38 defines an intangible asset as “an identifiable non‑monetary asset without physical substance”:contentReference[oaicite:4]{index=4}. To be identifiable, the asset must be separable (capable of being sold or transferred) or arise from contractual or legal rights:contentReference[oaicite:5]{index=5}. Typical examples include computer software, licences, trademarks, patents, copyrights and similar rights:contentReference[oaicite:6]{index=6}. A crucial scope note is that any intangible covered by another standard is excluded (for example, exploration costs or insurance contract intangibles):contentReference[oaicite:7]{index=7}. In particular, IAS 38 explicitly excludes goodwill acquired in a business combination (this is handled by IFRS 3):contentReference[oaicite:8]{index=8}. Internally generated brands, mastheads, publishing titles, customer lists or similar items are also not recognised as assets under IAS 38 because they are not identifiable in the same way (they fail the recognition criteria):contentReference[oaicite:9]{index=9}:contentReference[oaicite:10]{index=10}.

3. Recognition Criteria

For an intangible asset to be recognised on the statement of financial position, it must meet three criteria: it must satisfy the IAS 38 definition (identifiable, controlled by the entity, no physical substance), it must be probable that future economic benefits will flow to the entity, and its cost must be reliably measurable:contentReference[oaicite:11]{index=11}:contentReference[oaicite:12]{index=12}. If these conditions are not met, expenditure is expensed in profit or loss. In practice this means most costs of internally generated intangibles are expensed: for example, research costs are always expensed, and development costs are capitalised only if they meet specific criteria (such as technical feasibility, intention to complete, and ability to use or sell the asset):contentReference[oaicite:13]{index=13}:contentReference[oaicite:14]{index=14}. For example, if a company spends money on the research phase of a project, that expenditure is immediately charged to expense; if it moves into development and all IAS 38 tests are satisfied, then those development costs can be capitalised as an intangible asset:contentReference[oaicite:15]{index=15}:contentReference[oaicite:16]{index=16}.

4. Initial and Subsequent Measurement

Intangible assets meeting the recognition criteria are initially measured at cost:contentReference[oaicite:17]{index=17}. Cost typically includes purchase price (for acquired intangibles) and any directly attributable costs to prepare the asset for use. For assets acquired in a business combination, IFRS 3 requires that each identifiable intangible asset is recognised at its fair value on the acquisition date (which becomes the asset’s cost):contentReference[oaicite:18]{index=18}. After initial recognition, IAS 38 offers two measurement models: the cost model or the revaluation model. Under the cost model, the asset is carried at cost less accumulated amortisation and impairment. Under the revaluation model (which is allowed only if there is an active market for the intangible), the asset can be carried at a revalued amount (fair value at revaluation date) less subsequent amortisation:contentReference[oaicite:19]{index=19}:contentReference[oaicite:20]{index=20}. In practice, active markets for intangibles are rare, so most entities use the cost model. Regardless of model choice, the initial cost in a business combination is treated as fair value per IFRS 3, so the recognition criteria (probable benefits and reliable measurement) are always satisfied in that context:contentReference[oaicite:21]{index=21}.

5. Amortization and Useful Life

IAS 38 requires that intangible assets with finite useful lives be amortised on a systematic basis (often straight-line) over that useful life:contentReference[oaicite:22]{index=22}:contentReference[oaicite:23]{index=23}. The useful life should reflect the period over which the asset will generate economic benefits, which may be limited by legal, contractual, or economic factors. Each period’s amortisation is recognised in profit or loss (usually within depreciation and amortisation expense). In contrast, an intangible asset with an indefinite useful life is not amortised:contentReference[oaicite:24]{index=24}. IAS 38 defines an indefinite life as one where there is no foreseeable limit on the period of benefits. Such assets (e.g. certain brand names or indefinite licences) are tested for impairment annually instead of being amortised:contentReference[oaicite:25]{index=25}:contentReference[oaicite:26]{index=26}. In practice, intangible assets like patents or software with legal lives have finite lives and are amortised; assets like perpetual broadcasting licences might be judged indefinite and thus only impairment tested.

6. Impairment (Connection to IAS 36)

Impairment testing for intangible assets is governed by IAS 36. The core principle is that no asset should be carried above its recoverable amount – if the carrying value exceeds recoverable amount, the asset is impaired and written down to the recoverable amount:contentReference[oaicite:27]{index=27}. Intangible assets are therefore tested for impairment under IAS 36. In particular, any intangible asset with an indefinite life (and intangible assets not yet available for use) must have its recoverable amount assessed at least annually:contentReference[oaicite:28]{index=28}. Other intangibles (finite lives) are tested for impairment only if there are indicators of impairment. Recoverable amount is defined as the higher of an asset’s fair value less costs of disposal and its value in use (present value of future cash flows):contentReference[oaicite:29]{index=29}. If impaired, IAS 36 requires recognition of an impairment loss in profit or loss and reduction of the asset’s carrying amount:contentReference[oaicite:30]{index=30}:contentReference[oaicite:31]{index=31}. Notably, any impairment loss on goodwill (which is outside IAS 38) can never be reversed, and impairments on other intangibles may be reversed if conditions improve (up to original carrying amount):contentReference[oaicite:32]{index=32}:contentReference[oaicite:33]{index=33}.

7. Disclosure Requirements

IAS 38 mandates detailed disclosures in the financial statements for intangible assets. Entities must disclose information by class of asset (separately for internally generated vs. acquired intangibles). Required disclosures include whether each class has a finite or indefinite life and, if finite, the useful life or amortisation rate:contentReference[oaicite:34]{index=34}. The amortisation methods used must be stated. For each class, the gross carrying amount and accumulated amortisation (including impairment losses) at the beginning and end of the period must be reported, along with the line item in profit or loss that includes amortisation:contentReference[oaicite:35]{index=35}. Importantly, a reconciliation of movements in carrying amount must be provided: this must break down additions (internal development, separately acquired, business combinations), disposals or reclassifications to held-for-sale, revaluation increases or decreases (in OCI), impairment losses and reversals (in P/L), amortisation expense, foreign exchange adjustments, and other changes:contentReference[oaicite:36]{index=36}. The standard also suggests separate disclosure of any significant changes in estimates (useful lives or methods). For clarity, it even gives examples of separate classes of intangibles (e.g. brand names, mastheads, software, licences, patents):contentReference[oaicite:37]{index=37}. These disclosures ensure that users understand how intangibles are measured and how their values have changed.

8. Examples and Case Studies

For illustration, common examples of intangible assets include software, licences, trademarks and patents:contentReference[oaicite:38]{index=38}. IFRS guidance categorises intangibles as marketing-related (e.g. trade names, non‑compete agreements), customer-related (e.g. customer lists), artistic (e.g. music, books), contract-based (e.g. licences, service contracts) and technology-based (e.g. patented technology) assets:contentReference[oaicite:39]{index=39}:contentReference[oaicite:40]{index=40}. As a case, consider a technology firm that develops a new software product: all research phase costs are expensed, but once development meets IAS 38 criteria, the remaining development costs are capitalised as an intangible (software) and amortised over its estimated life:contentReference[oaicite:41]{index=41}:contentReference[oaicite:42]{index=42}. Another example is a company acquiring a patent from another entity: the purchase price is recognised as an intangible asset (at fair value on acquisition) and amortised over the patent’s legal life. In a business combination, if the acquirer obtains identifiable intangibles like customer relationships or trademarks, IFRS 3 requires these to be recorded at fair value as separate assets:contentReference[oaicite:43]{index=43}:contentReference[oaicite:44]{index=44}. These examples demonstrate the application of IAS 38’s recognition, measurement and amortisation rules in practice.

9. Comparison with Other Standards

IAS 38 interfaces with other IFRS. In a business combination, IFRS 3 takes precedence: any intangible assets acquired are recognised separately (if identifiable) and measured at fair value at acquisition:contentReference[oaicite:45]{index=45}. In fact, IAS 38 acknowledges this by stating that the cost of an intangible acquired in a business combination is its fair value at the acquisition date:contentReference[oaicite:46]{index=46}. Thus, IFRS 3 effectively ensures the IAS 38 recognition criteria (probable benefits and reliable cost) are always met for acquired intangibles. Goodwill from a business combination, however, falls outside IAS 38’s scope (handled by IFRS 3). Regarding impairment, IAS 38 relies on IAS 36: intangible assets are impaired using the IAS 36 model (recoverable amount tests as described). In summary, IAS 38 focuses on recognition and amortisation, while IFRS 3 governs initial acquisition in a purchase and IAS 36 governs ongoing impairment testing:contentReference[oaicite:47]{index=47}:contentReference[oaicite:48]{index=48}.

10. Conclusion

IAS 38 provides the framework for accounting for intangible assets under IFRS. It ensures that only identifiable intangibles meeting strict criteria (probable future benefit and reliable cost measurement) are recognised:contentReference[oaicite:49]{index=49}:contentReference[oaicite:50]{index=50}. Intangibles are initially measured at cost (or fair value in a business combination:contentReference[oaicite:51]{index=51}) and subsequently carried either at cost less amortisation or revalued amount if an active market exists:contentReference[oaicite:52]{index=52}:contentReference[oaicite:53]{index=53}. Finite-life intangibles are amortised over their useful lives, whereas indefinite-life intangibles are not amortised but tested annually for impairment:contentReference[oaicite:54]{index=54}:contentReference[oaicite:55]{index=55}. The standard also mandates comprehensive disclosures, helping users understand the nature, measurement and movements of intangible assets:contentReference[oaicite:56]{index=56}:contentReference[oaicite:57]{index=57}. Mastery of IAS 38 is essential for ACCA students, as it ensures proper accounting for valuable non‑physical assets like patents, software, and brands in accordance with IFRS.