Initial Recognition of Intangible Assets Under IAS 38
Definition of an intangible asset
According to International Accounting Standard No. 38 (IAS 38) an intangible asset is defined as an identifiable non-monetary asset without physical substance.
However, not all assets meet the definition of an intangible asset because they must meet concepts of identifiability, control over the resource and existence of future economic benefits.
The identifiability criterion is met when an intangible asset is separable, or when it arises from legal or other contractual rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
The characteristic of control over the resource lies in the right of the entity to obtain future economic benefits. However, the legal enforceability of a right over the item is not a necessary condition for the existence of control because the entity may exercise control over the economic benefits in some other way.
Future economic benefits from an intangible asset include revenue from the sale of products or services, cost savings and other miscellaneous returns arising from the use of the asset by the entity.
Criteria for initial recognition
According to the Standard, an intangible asset is recognized if, and only if:
- It is probable that future economic benefits attributed to the asset will flow to the entity.
- The cost of the asset can be measured reliably.
The standard also states that the probability criterion should be assessed using reasonable and well-founded assumptions that represent management’s best estimates considering the economic conditions during the asset’s useful life.
At the time of 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 a separately acquired asset includes:
- Acquisition price, including import duties and non-recoverable taxes, after deducting trade discounts and rebates
- Any costs directly attributable to preparing the asset for its intended use.
Paragraph 28 of the standard shows some examples of costs directly attributable at initial recognition:
- Employee benefits costs, derived directly from bringing the asset to its condition of use.
- Professional fees arising directly from putting the asset into its condition of use.
- Costs of verifying that the asset is functioning properly.
The recognition of the costs in the book amount of an intangible asset will end when the asset is in the place and condition necessary to operate in the manner foreseen by management.
Trademarks, newspaper or magazine headers, stamps or publishing names, customer lists or other similar items generated internally shall not be recognized as intangible assets.
Below are some examples of intangible assets and we will determine whether they are within the scope of this standard:
- The acquisition of a recognized brand in the market, of a product that can be marketed for a period of 20 years. This brand meets the definition of an intangible asset according to the standard. In this case, the company will exercise control over the production and marketing of the product under the brand and has the legal right over it, meeting the criteria of identifiability, control and will generate future economic benefits.
- The acquisition of an urban transport line with licenses to operate 50 buses on a specific route in the city, which can be transferred to other companies. According to the definition of an intangible asset, these licenses to cover urban routes can be recognized as such, because the company will exercise control because it has the legal right to operate, meeting the criteria of identifiability, control and will be able to generate future economic benefits.
Islava Zulema Ruiz Quiroz Degree in Public Accounting