PAS 38

INTANGIBLE ASSETS
CORE PRINCIPLE (INN)
Intangible Assets → Identifiable
→ non-monetary asset
→ no physical substance

Outside the scope of PAS 38 → Goodwill, does not have physical substance but it
is outside the scope of PAS 38 because it is
unidentifiable. Goodwill is accounted for
PFRS 3, PFRS 10, and PAS 36.
→ Deposit in banks, Bank receivables and other
debt instruments, do not have physical
substance but are also outside the scope
because they are monetary assets.
→ Intangible assets held as inventory (PAS 2)
→ Intangible assets classified as HFS (PFRS 5)

ESSENTIAL ELEMENTS OF AN INTANGIBLE ASSET (ICF)

1. Identifiability → Separable (capability to be sold, transferred, rented, licensed or
exchanged)
→ Arises from contractual or other legal rights

2. Control → The entity has the power to benefit from the intangible assets or
prevent others from benefitting from it.
→ Control of an intangible normally arises from legal rights that are
enforceable in the court of law.
→ MARKET AND TECHNICAL KNOWLEDGE meets the control
criterion if the knowledge is protected by legal rights such as
copyrights, restraint of trade agreement or legal duty on
employees to maintain confidentiality.
→ Employees skills developed from training provided by the
entity, are not recognized as intangible asset because the entity
does not control the future actions of its employees.
→ Specific managerial or technical talent and customer
relationships and loyalty are usually not recognized as intangible
assets unless they are protected by legal rights.
3. Future Economic Benefits → May include revenue from the sale of products or
services, cost savings or other benefits resulting from
the entity’s use of the asset.
 ASSETS WITH BOTH INTANGIBLE AND TANGIBLE ELEMENTS
▪ Intangible component is an integral part of the asset as a whole, the intangible
element is treated as Property, Plant and Equipment (PAS 16).

▪ If the software or intangible component is not an integral part of the related hardware
or part of the asset, it is treated as a separate intangible asset (PAS 38).

Illustration:
Asset Integral Part → Property, Plant and Equipment
Not an Integral Part → Intangible Asset

FINANCIAL STATEMENT PRESENTATION

▪ Intangible assets are presented separately from Goodwill.
▪ Aggregated and presented as one-line item under the heading of “Intangible assets
or Other Intangible Assets” in the SFP.
▪ Goodwill is presented separately under a line item described as “Goodwill”.

RECOGNITION CRITERIA
An intangible asset is recognized when;
▪ Meets the definition of an intangible asset (Core Principle)
▪ Probable future economic benefits will flow to the entity
▪ Cost can be measured reliably

INITIAL MEASUREMENT
▪ Intangible assets are initially measured at COST.
▪ The measurement of cost depends on how the intangible asset is acquired.
• Separate Acquisition
• Acquisition as part of a business combination
• Acquisition by way of Government Grant
• Exchanges of assets
• Internal generation

SEPARATE ACQUISITION
▪ The cost of a separately acquired asset comprises:
• Purchase Price including import duties, non-refundable purchase taxes, after
deducting trade discounts and rebates and
• Directly Attributable Cost of preparing the asset for its intended use.
Illustration:
Cost = Purchase Price + Directly Attributable Cost

Note: If the payment is deferred, the cost is the cash price equivalent. Any difference
between this amount and the total payments is recognized as interest expense over the
credit period, unless it qualifies for capitalization under PAS 23 (Borrowing Cost)

ACQUISTION AS PART OF A BUSINESS COMBINATION

▪ The cost of an intangible asset acquired in a business combination is its FAIR VALUE
at the acquisition date.
 ACQUISITION BY WAY OF A GOVERNMENT GRANT
▪ Intangible assets acquired by way of government grant may be initially measured
either:
• Fair value
• Alternatively, at nominal amount plus direct cost incurred in preparing the
asset for its intended use.

EXCHANGES OF ASSETS
▪ WITH COMMERCIAL SUBSTANCE
Order of priority:
• FV of the asset Given up
• FV of the asset Received
• Carrying amount of the asset Given up

▪ LACKS OF COMMERCIAL SUBSTANCE

• The intangible asset received is measured at the carrying amount of the
asset given up.
Note: No gain or loss if the asset received is measured at the CA of the asset given up.

INTERNALLY GENERATED INTANGIBLE ASSETS

The costs of self-creating an intangible asset are classified into:

a. Research costs – include costs of searching new knowledge and identifying and
selecting possible alternatives.
b. Development costs – include costs of designing from selected alternative and using
knowledge gained from research.

Take note:

• If an entity cannot identify in which phase a cost is incurred, the cost is

regarded as incurred in research phase.

RESEARCH AND DEVELOPMENT COST

1. Costs incurred in research phase are expensed immediately.
2. Costs incurred in development phase are capitalized only if all of the conditions listed
in PAS 38 are met.
(1) Technical feasibility,
(2) Intention to complete,
(3) Ability to use or sell,
(4) Probable economic benefits,
(5) Availability of adequate resources, and
(6) Measured reliably.
 ITEMS NOT RECOGNIZED AS INTANGIBLE ASSETS
Internally generated brands, mastheads, publishing titles, customer lists and similar
items are NOT RECOGNIZED AS INTANGIBLE ASSETS. Internally generated goodwill is not
recognized as an asset. The cost to develop these items including subsequent expenditures
on them are expensed.
Research and development cost that do not qualify for capitalization are expensed and
disclosed as Research and Development expense.

COST OF AN INTERNALLY GENERATED INTANGIBLE ASSET

• The cost of an IGIA includes all directly attributable cost.

Examples:
a. Cost of materials consumed and services used
b. Cost of employee benefits
c. Registration fees
d. Amortization of patents and licenses
e. Capitalizable borrowing cost

REINSTATEMENT OF COST IN SUBSEQUENT PERIOD

• Pas 38 prohibits the reinstatement of cost, meaning if a cost had been expensed, it
cannot anymore be capitalized as an intangible asset at a later date.

ORGANIZATIONAL COST

• Start-up cost incurred in establishing a new business.

• Expensed when incurred.
Examples:
a. Legal and secretarial cost
b. Pre-opening costs
c. Pre-operating costs

SUBSEQUENT EXPENDITURES

• Capitalization of cost ceases when the IA is in the condition necessary for it to be

capable of operating in the manner intended by the management.

• Accordingly, subsequent expenditures on IA are expensed.

Examples:
a. Cost of using or redeploying an IA
b. Initial operating losses
c. Cost of relocating or reorganizing part of the entity
d. Advertising and promotion costs
e. Litigation costs

SUBSEQUENT MEASUREMENT

After initial recognition, an entity shall choose as its accounting policy either the

a. Cost model, or
b. Revaluation model – applicable only if the intangible asset has an active market.
 USEFUL LIFE

a. FINITE USEFUL LIFE → the entity can determine reliably the length of, or number of
production or similar units constituting the intangible assets useful life.

b. INFINITE USEUL LIFE → there is no foreseeable limit to the period over which the asset
is expected to provide future economic benefits.

• Intangible assets with finite useful life are amortized over the shorter of the asset’s
useful life and legal life.

• Intangible assets with indefinite useful life are not amortized but tested for
impairment at least annually.

• The default method of amortization is the straight-line method.

AMORTIZATION

→ systematic allocation of the depreciable amount of an intangible asset over its useful
life. Similar to the depreciation of PPE, but the term “amortization” is simply used to refer
intangible assets.

→ Amortization starts when the asset is available for use.

→ Amortization stops when the asset is derecognized (sold or disposed)

→ Amortization does not cease when the asset is no longer used, unless one of the
conditions above are met.

→ Amortization are recognized as expense in the P/L unless it is included in the cost of
producing the asset.

AMORTIZATION METHOD

• PAS 38, mentions three examples namely;

a. Straight line method
b. Diminishing balance method
c. Units of production method

• However, PAS 38 does not prescribed specific method. It also prohibits the use of an
amortization method that is based on revenue.

• Residual value is assumed to be zero.

• PAS 38, requires annual review of the amortization method and the assessments and
estimates of useful life and residual value at each year.

Annual Amortization Expense = Cost – Residual Amount

Shorter of UL and RLL

Remaining legal life = IA legal life – Years held by the entity

Carrying amount = Cost – Accumulated Amortization

 PROBLEMS – ANSWER KEY
________________________________________________________________________

Refer to: CFAS (421-422)

1. B – cost, cost or revaluation model

2. D – expensed, expensed but may be capitalized in some circumstances
3. D – intangible assets with indefinite useful life
4. B – 570,000
AAE = C - RA
Shorter of UL and RLL
= 600K
20
= 30,000

Cost 600,000
AA 30,000
CA 570,000
5. C – 1,300,000
300k + 620k + 380k
6. A – Research cost