IAS 38 Intangible Assets

31 March 2004
Contents
INTRODUCTION IN1-IN13
Reasons for revising IAS 38 IN2-IN4Summary of main changes IN5-IN13
International Accounting Standard 38Intangible Assets
OBJECTIVE 1
SCOPE 2-7
DEFINITIONS 8-17
Intangible Assets 9-17
Identifiability 11-12
Control 13-16
Future Economic Benefits 17
RECOGNITION AND MEASUREMENT 18-67
Separate Acquisition 25-32
Acquisition as Part of a BusinessCombination 33-43
Measuring the Fair Value of an IntangibleAsset Acquired in a Business Combination 35-41
Subsequent Expenditure on an Acquired In-processResearch and Development Project 42-43
Acquisition by way of a Government Grant44
Exchanges of Assets 45-47
Internally Generated Goodwill 48-50
Internally Generated Intangible Assets51-67
Research Phase 54-56
Development Phase 57-64
Cost of an Internally Generated IntangibleAsset 65-67
RECOGNITION OF AN EXPENSE 68-71
Past Expenses not to be Recognised as anAsset 71
MEASUREMENT AFTER RECOGNITION 72-87
Cost Model 74
Revaluation Model 75-87
USEFUL LIFE 88-96
INTANGIBLE ASSETS WITH FINITE USEFUL LIVES 97-106
Amortisation Period and AmortisationMethod 97-99
Residual Value 100-103
Review of Amortisation Period andAmortisation Method 104-106
INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES 107-110
Review of Useful Life Assessment 109-110
RECOVERABILITY OF THE CARRYING AMOUNT- IMPAIRMENT LOSSES111
RETIREMENTS AND DISPOSALS 112-117
DISCLOSURE 118-128
General 118-123
Intangible Assets Measured afterRecognition using the Revaluation Model 124-125
Research and Development Expenditure126-127
Other Information 128
TRANSITIONAL PROVISIONS AND EFFECTIVE DATE 129-132
Exchanges of Similar Assets 131
Early Application 132
WITHDRAWAL OF IAS 38 (issued 1998) 133
APPROVAL OF IAS 38 BY THE BOARD
BASIS FOR CONCLUSIONS
DISSENTING OPINION
ILLUSTRATIVE EXAMPLES
Assessing the Useful Lives of IntangibleAssets
TABLE OF CONCORDANCE
This revised Standard supersedes IAS 38(1998) Intangible Assets and should be applied:
(a) on acquisition to intangible assetsacquired in business combinations for which the agreement date is on or after31 March 2004.
(b) to all other intangible assets, forannual periods beginning on or after 31 March 2004.
Earlier application is encouraged.
International Accounting Standard 38 IntangibleAssets (IAS 38) is set out in paragraphs 1-133. All the paragraphs haveequal authority but retain the IASC format of the Standard when it was adoptedby the IASB. IAS 38 should be read in the context of its objective and theBasis for Conclusions, the Preface to International Financial ReportingStandards and the Framework for the Preparation and Presentation ofFinancial Statements. IAS 8 Accounting Policies, Changes in AccountingEstimates and Errors provides a basis for selecting and applying accountingpolicies in the absence of explicit guidance.
IAS 38 Intangible Assets

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Table of Concordance
This table shows how the contents of the superseded version of IAS 38 and the current version of IAS 38 correspond. Paragraphs are treated as corresponding if they broadly address the same matter even though their guidance may differ.
Superseded paragraph    Current paragraph    Superseded paragraph    Current paragraph
Objective    1    26    None*
1    2    27    33
2    3    28    35,38,39
3    4    29    40
4    5    30    41
5    6    31    34
6    7    32    None
7    8    33    44
8    9    34    45-47
9    10    35    45-47
10    11    36    48
11    12    37    40
12    12    38    50
13    13    39    51
14    14    40    52
15    15    41    53
16    16    42    54
17    17    43    55
18    18    44    56
19    21    45    57
20    22    46    58
21    23,25,33    47    59
22    24    48    60
23    26    49    61
24    27,28    50    62
25    32    51    63
52    64    83    None
53    65    84    93
54    66    85    94
55    67    86    95
56    68    87    96
57    69    88    97
58    70    89    98
59    71    90    99
60    18,21    91    100
61    20    92    101
62    20    93    102
63    72,74    94    104
64    72,75    95    105
65    76    96    106
66    77    97    111
67    78    98    None
68    79    99    None*
69    80    100    None†
70    72    101    None
71    73    102    None
72    81    103    112
73    82    104    113
74    83    105    None
75    84    106    None
76    85    107    118
77    86    108    119
78    87    109    120
79    97    110    121
80    90    111    122
81    92    112    123
82    None    113    124
114    125    None    42,43
115    126    None    88,89
116    127    None    91
117    128    None    103
118-122    129-131    None    107-110
123    133    None    114-117
None    19    None    132
None    29-31    None    Illustrative Examples
None    36,37        

Example 9 - a trademark for a line of products that was acquired several years ago in a business combination
At the time of the business combination the acquiree had been producing the line of products for 35 years with many new models developed under the trademark. At the acquisition date the acquirer expected to continue producing the line, and an analysis of various economic factors indicated there was no limit to the period the trademark would contribute to net cash inflows. Consequently, the trademark was not amortised by the acquirer. However, management has recently decided that production of the product line will be discontinued over the next four years.
Because the useful life of the acquired trademark is no longer regarded as indefinite, the carrying amount of the trademark would be tested for impairment in accordance with IAS 36 and amortised over its remaining four-year useful life.

Example 8 - a trademark acquired 10 years ago that distinguishes a leading consumer product
The trademark was regarded as having an indefinite useful life when it was acquired because the trademarked product was expected to generate net cash inflows indefinitely. However, unexpected competition has recently entered the market and will reduce future sales of the product. Management estimates that net cash inflows generated by the product will be 20 per cent less for the foreseeable future. However, management expects that the product will continue to generate net cash inflows indefinitely at those reduced amounts.
As a result of the projected decrease in future net cash inflows, the entity determines that the estimated recoverable amount of the trademark is less than its carrying amount, and an impairment loss is recognised. Because it is still regarded as having an indefinite useful life, the trademark would continue not to be amortised but would be tested for impairment in accordance with IAS 36 annually and whenever there is an indication that it may be impaired.

Example 7 - an acquired trademark used to identify and distinguish a leading consumer product that has been a market-share leader for the past eight years
The trademark has a remaining legal life of five years but is renewable every 10 years at little cost. The acquiring entity intends to renew the trademark continuously and evidence supports its ability to do so. An analysis of (1) product life cycle studies, (2) market, competitive and environmental trends, and (3) brand extension opportunities provides evidence that the trademarked product will generate net cash inflows for the acquiring entity for an indefinite period.
The trademark would be treated as having an indefinite useful life because it is expected to contribute to net cash inflows indefinitely. Therefore, the trademark would not be amortised until its useful life is determined to be finite. It would be tested for impairment in accordance with IAS 36 annually and whenever there is an indication that it may be impaired.

Example 5 - the broadcasting licence in Example 4
The licensing authority subsequently decides that it will no longer renew broadcasting licences, but rather will auction the licences. At the time the licensing authority's decision is made, the entity's broadcasting licence has three years until it expires. The entity expects that the licence will continue to contribute to net cash inflows until the licence expires.
Because the broadcasting licence can no longer be renewed, its useful life is no longer indefinite. Thus, the acquired licence would be amortised over its remaining three-year useful life and immediately tested for impairment in accordance with IAS 36.


Example 6 - an acquired airline route authority between two European cities that expires in three years
The route authority may be renewed every five years, and the acquiring entity intends to comply with the applicable rules and regulations surrounding renewal. Route authority renewals are routinely granted at a minimal cost and historically have been renewed when the airline has complied with the applicable rules and regulations. The acquiring entity expects to provide service indefinitely between the two cities from its hub airports and expects that the related supporting infrastructure (airport gates, slots, and terminal facility leases) will remain in place at those airports for as long as it has the route authority. An analysis of demand and cash flows supports those assumptions.
Because the facts and circumstances support the acquiring entity's ability to continue providing air service indefinitely between the two cities, the intangible asset related to the route authority is treated as having an indefinite useful life. Therefore, the route authority would not be amortised until its useful life is determined to be finite. It would be tested for impairment in accordance with IAS 36 annually and whenever there is an indication that it may be impaired.

Example 3 - an acquired copyright that has a remaining legal life of 50 years
An analysis of consumer habits and market trends provides evidence that the copyrighted material will generate net cash inflows for only 30 more years.
The copyright would be amortised over its 30-year estimated useful life. The copyright also would be reviewed for impairment in accordance with IAS 36 by assessing at each reporting date whether there is any indication that it may be impaired.
Example 4 - an acquired broadcasting licence that expires in five years
The broadcasting licence is renewable every 10 years if the entity provides at least an average level of service to its customers and complies with the relevant legislative requirements. The licence may be renewed indefinitely at little cost and has been renewed twice before the most recent acquisition. The acquiring entity intends to renew the licence indefinitely and evidence supports its ability to do so. Historically, there has been no compelling challenge to the licence renewal. The technology used in broadcasting is not expected to be replaced by another technology at any time in the foreseeable future. Therefore, the licence is expected to contribute to the entity's net cash inflows indefinitely.
The broadcasting licence would be treated as having an indefinite useful life because it is expected to contribute to the entity's net cash inflows indefinitely. Therefore, the licence would not be amortised until its useful life is determined to be finite. The licence would be tested for impairment in accordance with IAS 36 annually and whenever there is an indication that it may be impaired.

Illustrative Examples - IAS 38 Intangible Assets
These examples accompany, but are not part of, IAS 38.
Assessing the Useful Lives of Intangible Assets
The following guidance provides examples on determining the useful life of an intangible asset in accordance with IAS 38.
Each of the following examples describes an acquired intangible asset, the facts and circumstances surrounding the determination of its useful life, and the subsequent accounting based on that determination.
Example 1 - an acquired customer list
A direct-mail marketing company acquires a customer list and expects that it will be able to derive benefit from the information on the list for at least one year, but no more than three years.
The customer list would be amortised over management's best estimate of its useful life, say 18 months. Although the direct-mail marketing company may intend to add customer names and other information to the list in the future, the expected benefits of the acquired customer list relate only to the customers on that list at the date it was acquired. The customer list also would be reviewed for impairment in accordance with IAS 36 Impairment of Assets by assessing at each reporting date whether there is any indication that the customer list may be impaired.
Example 2 - an acquired patent that expires in 15 years
The product protected by the patented technology is expected to be a source of net cash inflows for at least 15 years. The entity has a commitment from a third party to purchase that patent in five years for 60 per cent of the fair value of the patent at the date it was acquired, and the entity intends to sell the patent in five years.
The patent would be amortised over its five-year useful life to the entity, with a residual value equal to the present value of 60 per cent of the patent's fair value at the date it was acquired. The patent would also be reviewed for impairment in accordance with IAS 36 by assessing at each reporting date whether there is any indication that it may be impaired.

Dissenting Opinion
Dissent of Geoffrey Whittington
DO1. Professor Whittington dissents from the issue of this Standard because it does not explicitly require the probability recognition criterion in paragraph 21(a) to be applied to intangible assets acquired in a business combination, notwithstanding that it applies to all other intangible assets.
DO2. The reason given for this (paragraphs 33 and BC17) is that fair value is the required measurement on acquisition of an intangible asset as part of a business combination, and fair value incorporates probability assessments. Professor Whittington does not believe that the Framework precludes having a prior recognition test based on probability, even when subsequent recognition is at fair value. Moreover, the application of probability may be different for recognition purposes: for example, it may be the 'more likely than not' criterion used in IAS 37 Provisions, Contingent Liabilities and Contingent Assets, rather than the 'expected value' approach used in the measurement of fair value.
DO3. This inconsistency between the recognition criteria in the Framework and fair values is acknowledged in paragraph BC18. In Professor Whittington's view, the inconsistency should be resolved before changing the recognition criteria for intangible assets acquired in a business combination.