IAS 38 Intangible Assets
Definition of an intangible asset
According to International Accounting Standard No. 38 (IAS 38) an intangible asset is defined as an asset that is not readily identifiable physically and is of a non-monetary nature.
Criteria for initial recognition
According to the Standard, an intangible asset may be recognized by the company if, and only if:
(a) It is probable that the future economic benefits that have been attributed to it will flow to the entity.
(b) The cost of the intangible asset can be measured reliably or reliably.
These requirements apply both when the intangible asset has been acquired from third parties and when it has been generated internally. IAS 38 specifies that, when they have been generated internally, trademarks, newspaper or magazine mastheads, editorial labels or names, customer lists or other similar items in substance should not be recognized in any case as assets. The same treatment should be applied to internally generated goodwill.
Objective in a financial audit
In a financial audit, the auditor’s objective and responsibility is to obtain sufficient audit evidence to evaluate whether management has been able to verify the basis of the agreements under which the intangible assets were initially valued and recorded in the accounts, taking into consideration their potential future benefit value. Also, examine the inherent risks, verify that the balances are owned by the company. Evidence the accuracy and completeness of the accounting of income from the ownership of assets such as patents and determine that these are expenditures that resulted in benefits in future periods.
Considerations when evaluating Intangible Assets
The standard mentions that the probability criterion should be evaluated using reasonable and well-founded assumptions that represent management’s best estimates considering the economic conditions during the useful life of the asset.
Upon initial recognition, the intangible asset is measured at cost; subsequent recognitions will measure such assets at cost less accumulated amortization and accumulated impairment losses.
The cost of an asset acquired separately includes:
- Acquisition price, including import duties and non-recoverable taxes, after deducting trade discounts and rebates.
- Any costs directly attributable to the preparation of the asset for its intended use.
Paragraph 28 of the standard shows some examples of costs directly attributable on initial recognition:
- Employee remuneration costs arising directly from bringing the asset to its intended use.
- Professional fees arising directly from bringing the asset to its working condition.
- The costs of verifying that the asset is working properly.
The recognition of costs in the carrying amount of an intangible asset will end when the asset is in the location and condition necessary to operate in the manner intended by management.
Accounting Amortization of Intangible Assets – IAS 38
When we read IAS 38 we will see that it classifies it in 2 categories: finite or indefinite in relation to the useful life of the asset. Let’s see what IAS 38 mentions in paragraph 88:
An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, shall assess the duration or number of productive or other similar units that constitute its useful life. An entity shall consider an intangible asset to have an indefinite useful life when, based on an analysis of all relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows to the entity.
It is of utmost importance to evaluate the intangible asset, because to proceed with amortization will depend on whether it is finite or indefinite.
The accounting for an intangible asset is based on its useful life. An intangible asset with a finite useful life is amortized, while an intangible asset with an indefinite useful life is not amortized.