The companies incur higher costs in the expectation of getting benefits in the future. For instance, organizations pay salaries to App Developers, who develop applications. It is not relevant to put these salaries in profit or loss statements at the time they are incurred. Since the company will get advantages from such expenses in the future.
What types of Assets are Included in IAS38?
As per the standards of IAS38, describes the rules for accounting for intangible assets except for intangible assets that are covered by another form of standard.
- Deferred tax assets (These are covered by IAS 12 Income taxes)
- Goodwill (This is covered by IFRS 3 Business Combinations)
- Intangible assets to be held for sale (These are covered by IFRS 5 Non-Current Assets Held for Sale and operations that are discontinued)
- Financial Assets (These are covered by IAS 32 Financial Instruments: Presentation and IFRS 9 Financial instruments)
- Evaluation and Exploration Assets (These are covered by IFRS 6 Exploration for Evaluation of Mineral Assets)
- Expenditures incurred on Extraction and development of oils, minerals, natural gas, and some other non-generative resources, etc.
Definition of Intangible Assets
According to the definition from IAS 38, the intangible assets can be defined as a non-monetary identifiable asset without any physical material. The basic attributes of intangible assets are:
- Economic benefits in the future
This definition can be interpreted in distinct manners by people; IAS 38 consists of assistance for its application.
Recognition of an Intangible Asset
Sometimes you do not recognize the intangible assets in your financial statements. The reason for this scenario could be that the items do not match the recognition criteria.
The intangible assets can be recognized only:
- If the costs can be reliably measured.
- If the economic benefits from the future are probable.
What happens when the Assets are internally generated?
When the items are purchased from somebody else, it is easier to make it out that it is an intangible asset or expense. It is also probable that the recognition criteria are met. For the situation when you develop the intangible assets yourself. This is a complex scenario, for this situation IAS 38 provides specific assistance for intangible assets generated internally.
Research means an investigation that you acquire for some knowledge. For instance, for your new software product, you evaluate distinct alternatives. You cannot capitalize on any spending on research. You must expense this in loss or profit as incurred.
After the research phase comes to the development phase. At this moment, you plan new products, processes, and materials, before the initiation of commercial production. It is crucial to differentiate between research and development. This is because; you can capitalize on the spending for development. The following mentioned are the criteria that must be viewed in mind, before capitalizing these expenditures. This is the rule of the PIRATE:
- Probable economic advantages in the future
- Intention to sell or use the asset
- Resources which are adequate and are available to sell or use the asset
- Ability to sell or use the asset
- Technical feasibility
- Expenditures can be measured reliably
Cost of Intangible Assets
The cost of separately acquired intangible asset consist (IAS 38.27):
- Directly attributable costs: These costs are for preparing the assets for the intended use.
- Purchase Price and duties on imports are non-refundable taxes, deducting rebates, and discounts.
The intangible assets are measured in the same way as property, equipment, and plant.
Following are two models:
- Revaluation Model: In this, the intangible asset can be carried at fair value at the date of revaluation minus amortization accumulated minus impairment deficit.
- Cost Model: In this model, the intangible asset can be carried at its cost minus accumulated amortization minus accumulated impairment loss.
Just as in the same manner as the property, equipment, and plant. Amortization means the allocation of the amount that is depreciable of an intangible asset over its worth living.
In this it is crucial to decide:
- What amortization method to apply, and how to do this.
- How long to amortize, and what is the useful life of an asset.
- What is the value of depreciation and how to amortize?
There is something specific about amortization and that is, the useful life of intangible assets.
The intangibles can have the following:
- Indefinite useful life: There is no limited time period within which the asset generates cash flow, such as brands.
- Finite useful life: You can make an estimation of the life of an asset. For instance software
The asset with an indefinite useful life, do not need to get amortized. On the contrary, you must revise the useful life of assets at the end of every financial year.
When you must de-recognize the Intangible Assets?
You must derecognize the intangible asset if:
- Future benefits are no longer expected from that asset.
- You dispose it of.
The loss or gain on derecognition of .intangibles is measured as:
- Net disposal proceeds minus carrying amount of assets.
Relevant examples of the suitability of revenue-based amortization.
According to IAS 38, the condition where the predominant limiting factor is inherent in intangible assets is the achievement of the threshold of revenue. The revenue needs to be generated must be an appropriate basis for amortization of asset. The standards for this gives the following examples:
- A right to operate toll road which is based on a fixed amount of revenue generation from tolls charged.
- The concession to get gold and extract it from the gold mine is limited to a fixed amount of generated revenue.
To conclude, in this world of ultra-competitiveness, some of the nations must jump on the saddle of progress. By obsolete accounting, reporting standards, and implementation of all measures, intangible assets in the 21st century can be recognized.
If you have any question about intangible assets or you would like us to help you in your bookkeeping Services or accounting areas, please do not hesitate to contact us on 03 9310 7871 or email: firstname.lastname@example.org