How to Pass the Financial Accounting and Reporting Module: Mastering Intangible Assets

Introduction 

Understanding the accounting treatment for intangible assets is essential for success in the Financial Accounting and Reporting module. This guide delves into the key concepts and standards outlined in IAS 38, providing clarity on recognition, measurement, and disclosure requirements. Whether tackling exams or real-world applications, having a solid grasp of these principles will set you apart.

IAS 38, Intangible Assets 

IAS 38 prescribes the accounting for intangible assets not covered by other standards, such as goodwill acquired in business combinations. It ensures consistent practices in recognition, measurement, and disclosures.

Intangible Assets 

Intangible assets differ from property, plant, and equipment (PPE) due to their non-physical nature. Examples include marketing-related assets, customer databases, copyrights, and technology-based assets. Assessing the recognition and measurement of these assets requires professional judgment, particularly in capitalizing costs and determining amortization periods.

Scope 

IAS 38 applies broadly but excludes goodwill from business combinations, financial assets, and mineral extraction costs.

Definition of an Intangible Asset 

An intangible asset must be identifiable, non-monetary, and lack physical substance.

Identifiability 

The asset should be separable (capable of being sold or transferred independently) or arise from contractual or other legal rights. Examples include patents and copyrights. Goodwill, however, is not separable and thus not classified as an identifiable intangible asset.

Control 

Control must be demonstrated, typically through legal enforceability. Employee skills or market share are not recognized as intangible assets due to the absence of control over future benefits.

Initial Recognition and Measurement 

Intangible assets are recognized if it is probable that future economic benefits will flow to the entity and the cost can be reliably measured. Initial measurement is at cost.

Initial Recognition and Measurement 

Recognition hinges on the likelihood of future economic benefits and reliable cost measurement, with initial measurement at cost.

Subsequent Expenditure 

Subsequent expenditure is rarely capitalized, as it typically maintains the benefits of the existing asset.

Separately Acquired Intangible Assets 

When acquired externally, assets such as brands, copyrights, and software meet IAS 38 criteria and should be capitalized.

Cost Components for Intangible Assets

• Purchase price, including duties and non-refundable taxes
• Direct costs for asset preparation

Directly Attributable Costs 

These include employee costs related to asset preparation, legal fees, and testing costs.

Exclusions from Cost 

Advertising, promotional expenses, and training costs are excluded.

Cessation of Capitalisation 

Capitalisation ends when the asset is ready for use, regardless of actual usage.

Intangible Assets Acquired in Business Combinations 

In business combinations, identifiable intangibles like patents are recognized separately from goodwill and measured at fair value.

Recognition of an Expense 

Expenditure is recognized as an expense unless it forms part of an asset meeting recognition criteria. Examples include start-up and training costs.

Internally Generated Assets 

Internally generated goodwill is not recognized. Research phase expenditures are expensed, while development phase costs can be capitalized if criteria are met.

Recognition of Internally Generated Assets 

Recognizing internally generated assets is challenging due to the difficulty in determining their creation and cost measurement.

Research Costs 

Research costs are expensed due to uncertainty in future economic benefits.

Development Costs 

Development costs are capitalized if specific criteria are met, such as demonstrating technical feasibility and probable future benefits.

Examples of Capitalizable Development Costs

• Prototype design and testing
• Construction of pilot plants

Other Internally Generated Intangible Assets 

Internally generated brands and similar assets are not recognized as they are indistinguishable from business development costs.

Cost of an Internally Generated Intangible Asset 

Costs are measured from the date recognition criteria are met and include direct costs like materials and legal fees.

Subsequent Measurement of Intangible Assets 

Post-recognition, assets can be measured using the cost or revaluation model.

Cost Model 

Assets are carried at cost less accumulated amortization and impairment losses.

Revaluation Model 

Assets are carried at fair value less subsequent amortization and impairment, contingent on the existence of an active market.

Revaluation: Accounting Treatment 

Revaluation gains and losses are recognized based on prior revaluations and whether they impact profit or loss or other comprehensive income.

Useful Life 

Determination of useful life considers usage, industry norms, and legal constraints.

Amortization Period and Method 

Finite life assets are amortized over their useful life, while indefinite life assets are tested annually for impairment.

Disposals 

Gains or losses from disposals are recognized in profit or loss.

Disclosure Requirements 

IAS 38 mandates comprehensive disclosures, including amortization methods, useful life assessments, and reconciliation of carrying amounts.

Goodwill 

Internally generated goodwill is not recognized, but purchased goodwill is tested for impairment annually.

What is Goodwill? 

Goodwill represents value beyond net identifiable assets, arising from customer relationships and reputation.

Purchased Goodwill 

Purchased goodwill, recognized during acquisitions, is classified as an intangible asset and tested for impairment.

Ethical and Judgement Issues 

Accounting for intangibles involves significant judgment, particularly in capitalizing development costs and assessing useful life.

UK GAAP Comparison 

FRS 102 allows more flexibility in capitalizing development costs and mandates finite lives for all intangibles, differing from IAS 38.

Next Steps 

Mastering these concepts is crucial for excelling in the Financial Accounting and Reporting module. For more in-depth guidance, comprehensive study materials, and exam-focused practice, consider subscribing to our package. Gain access to expert insights and resources designed to help you achieve exam success and build a strong foundation in accounting principles.