Inte

ernatiional Acco
ountin
ng
Sta
andard
d 38 ((IAS 3
38), In
ntangiible
Ass
sets
By BRIA
AN FRIEDRIC
CH, MEd, CGA
A, FCCA(UK)), CertIFR and
d LAURA FRIEDRICH,
MSc, CG
GA, FCCA(UK
K), CertIFR
Updated
d By STEPHE
EN SPECTOR
R, MA, FCGA
A and WAYNE
E BRIDGEMAN, CGA

This artiicle is part of a series on thee move to Inteernational Finaancial Reporting

Standard
ds to be publisshed on PD Neet.
Snapshot
Overvie
ew of IAS 38
Differen
nces from Can
nadian GAAP

Snap
pshot
First relleased

Septeember 1998

Revised and re-releassed

Marchh 2004

Subsequ
uent amendm
ments

May 22009 (to reflecct Annual

Improovements to IF
FRSs 2007 andd 2008)

Effectivee date (IASB basis)

Fiscall periods beginnning on or affter

Marchh 31, 2004

Effectivee date (Canad

dian basis)

Fiscall periods beginnning on or affter

Januaary 1, 2011 (allthough currennt section
3064 is harmonizedd with IAS 38))

Outstan
nding Exposurre Drafts and
d
issues un
nder considerration

none

Overrview of
o IAS 3
38
As we reeview this stan
ndard, you willl notice that IA
AS 38 is veryy similar to IAS
S 16
Propertyy, Plant and Eq
quipment, whiich was the suubject of anothher article in thhis
PD Net series.
s
This staands to reasonn, given that booth sections ddeal with long--term
assets. However,
H
IAS 38 includes addditional requuirements that stem from thee specific
characterristics and risk
ks associated w
with intangiblles.

Objecttive
The objeective of IAS 38
3 is to prescrribe the accounnting treatmennt for intangibble assets
that are not
n specifically dealt with inn another stanndard. IAS 38 defines the criiteria for
asset recognition, speccifies how carrrying amountss should be meeasured in subbsequent
periods, and provides guidance on rrequired discloosures.
CG
GA-Canada 2011

As with property, plant and equipment (PP&E), all costs of intangible assets are accounted for
by the entity at the time these costs are incurred. The entity then allocates the costs over the
useful life of the asset via amortization. Any impairment losses must also be accounted for.
These concepts should already be familiar to Canadian accountants; what IAS 38 adds to
Canadian GAAP is the option to use fair value to determine the carrying value of intangible
assets subsequent to acquisition.

Scope
Common examples of intangible assets are computer software, patents, copyrights, motion
picture films, customer lists, mortgage servicing rights, fishing licenses, import quotas,
franchises, customer or supplier relationships, customer loyalty, market share, and marketing
rights. IAS 38 is applied in accounting for all intangible assets, except the following (2):
a) intangible assets that are within the scope of another standard
b) financial assets, as defined in IAS 39 Financial Instruments: Recognition and Measurement
c) the recognition and measurement of exploration and evaluation assets (see IFRS 6
Exploration for and Evaluation of Mineral Resources)
d) expenditures on the development and extraction of minerals, oil, natural gas, and similar
non-regenerative resources
For example, IAS 38 would not apply to intangible assets held by an entity for sale in the
ordinary course of business (see IAS 2 Inventories), goodwill acquired in a business
combination (see IFRS 3 Business Combinations), or intangibles classified as held for sale in
accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
In addition to the general exclusions cited in the scope section of IAS 38, the standard
provides additional guidance for specific situations. For example, some intangible assets may
be contained in or on a physical substance for example, computer software residing on a
computer hard drive or compact disc, licenses or patents embodied in legal documentation,
and audio or film products. In cases where an asset incorporates both tangible and intangible
elements, judgment is required to assess whether the tangible or intangible element is more
significant; the outcome of that assessment determines whether the asset is accounted for
under IAS 16 Property, Plant and Equipment or as an intangible asset under IAS 38.
Consequently, the operating system of a computer is an integral part of the related hardware
and it is treated as PP&E. Application software, which is not an integral part of the related
hardware, is treated as an intangible asset.
As a further example, research and development activities are directed to the development of
knowledge. Therefore, although these activities may result in an asset with physical substance
(for example, a prototype), the physical element of the asset is secondary to the knowledge
embodied in it.
In accordance with paragraph 2(a), leases that are within the scope of IAS 17 Leases, are dealt
with under that standard. Rights under licensing agreements for items such as motion picture
films, video recordings, plays, manuscripts, patents, and copyrights are excluded from the
scope of IAS 17 and are included in IAS 38. Moreover, IAS 17 specifies that after initial
recognition, a lessee would account for any intangible asset held under a finance lease in
accordance with IAS 38.

Highlights of the standard

Definition of an intangible asset
IAS 38 defines an intangible asset as an identifiable non-monetary asset without physical
substance. All three criteria are required before the standard can be applied. The definition
International Accounting Standard 38 (IAS 38), Intangible Assets 2

requires an intangible asset to be identifiable to distinguish it from goodwill. An asset is

identifiable if it either (12)
is separable, that is, is capable of being separated or divided from the entity and sold,

transferred, licensed, rented, or exchanged, either individually or together with a related

contract, identifiable asset or liability, regardless of whether the entity intends to do so; or

arises from contractual or other legal rights, regardless of whether those rights are

transferable or separable from the entity or from other rights and obligations.

Initial recognition of an intangible asset

If an item meets the definition of an intangible asset, it is to be recognized if, and only if, (21)
it is probable that the expected future economic benefits that are attributable to the asset

will flow to the entity;

the cost of the asset can be measured reliably.

These are the same criteria required for recognition of PP&E under IAS 16. The probability
of expected future economic benefits is assessed using reasonable and supportable
assumptions that represent managements best estimates of the economic conditions that will
exist over the assets useful life.
If the definition and recognition criteria are met, then the item is recognized as an intangible
asset. IAS 38 stipulates that intangible assets are initially recognized at cost. For separately
acquired intangibles, cost includes the following (27):
the purchase price, including import duties and non-refundable purchase taxes, after

deducting trade discounts and rebates

any directly attributable cost of preparing the asset for its intended use

IAS 38 provides additional guidance on determining measurement amounts in specific cases,

such as when an intangible is purchased as part of a business combination, when it is acquired
by way of government grant, or when an asset exchange is involved. For example, for
intangibles acquired in a business combination, paragraph 40 provides direction when there is
no active market for the asset in question. Further, paragraph 41 offers guidance for entities
involved in the purchase and sale of intangible assets as to how to employ techniques for
estimating fair values indirectly.
Under IAS 38, internally generated intangibles are, with one exception, expensed as incurred.
Paragraph 63 specifically states that internally generated brands, mastheads, publishing titles,
customer lists, and items similar in substance are not to be recognized as intangible assets.
Paragraph 64 goes on to say that expenditures on internally generated items, such as brands,
mastheads, and so on, cannot be distinguished from the cost of developing the business as a
whole. Therefore, such items are not recognized as intangible assets.
Furthermore, internally generated goodwill is not recognized as an asset because it is not an
identifiable resource controlled by the entity that can be measured reliably at cost (48 and
49). Other examples of items that are expensed as incurred include expenditures for
start-up costs that are not included in PP&E in accordance with IAS 16;
training, advertising, and promotional activities;
relocating or reorganizing part or all of an entity.

The standard does, however, allow for the recognition of development costs as an intangible
asset, although this action is subject to very specific and rigid criteria. To assess whether an

International Accounting Standard 38 (IAS 38), Intangible Assets 3

internally generated intangible asset meets these criteria, an entity must classify the
expenditures into two phases:
a research phase
a development phase (52)

Expenditures during the research phase are expensed as incurred because, during this phase,
an entity cannot demonstrate that an intangible asset exists that will generate probable future
economic benefits. However, expenditures incurred during the development phase may be
capitalized, subject to further requirements.
An intangible asset arising from development can be recognized if, and only if, an entity can
demonstrate all of the following (57):
the technical feasibility of completing the intangible asset so that it will be available for use

or sale

the entitys intention to complete the intangible asset and use or sell it
the entitys ability to use or sell the intangible asset
how the intangible asset will generate probable future economic benefits. Among other

things, the entity can demonstrate the existence of a market for the output of the intangible
asset or the intangible asset itself or, if it is to be used internally, the usefulness of the
intangible asset

the availability of adequate technical, financial, and other resources to complete the

development and to use or sell the intangible asset

the entitys ability to measure reliably the expenditure attributable to the intangible asset

during its development

If all these criteria are met, the entity may begin capitalizing development costs. Paragraph 71
stipulates that expenditures initially recognized as expenses cannot be reversed and treated as
part of the cost of an intangible asset at a later date.
Carrying value after initial recognition
The initial recognition of intangibles under IAS 38 is much the same as pre-changeover
Canadian GAAP. What happens after initial recognition is where the difference between
IAS 38 and pre-changeover Canadian GAAP (Handbook section 3064) emerges. As with
PP&E (in IAS 16), IAS 38 offers management a free choice of accounting policy with respect
to the carrying value of intangibles after initial recognition.
Paragraph 72 stipulates that an entity can choose either the cost model or the revaluation
model. Once the policy is chosen, it must be applied to all other assets in that class, unless
there is no active market for those assets. A class would involve items of a similar nature or
use in an entity (for example, patents, software, franchises). Application of these two models
for intangibles is very similar to what was discussed with respect to PP&E in the IAS 16
PD Net article, but with a few added twists.
The cost model (74)
We begin (as always) by recognizing the asset at cost (as discussed above). Subsequent to
recognition as an asset, an intangible asset accounted for under the cost model must be carried
at its cost less any accumulated amortization and any accumulated impairment losses.1
1

Impairment losses are covered in IAS 36 Impairment of Assets, which is the topic of a separate
article in this series. In brief, an impairment loss is recognized when the recoverable amount of
an asset is lower than its carrying value.
International Accounting Standard 38 (IAS 38), Intangible Assets 4

The revaluation model (75)

Subsequent to recognition as an asset (at cost), an intangible asset accounted for under the
revaluation model is to be carried at a revalued amount namely, its fair value at the
revaluation date less any accumulated amortization and any accumulated impairment
losses. Revaluations need to be made often enough to ensure that the carrying amount is not
materially different from fair value at the end of the reporting period.
Under the revaluation model, fair value must be determined by reference to an active market (in
other words, if there is no active market for the intangible asset, you would need to use the cost
model). This differs from the treatment of PP&E, where the revaluation model can be used without
the existence of an active market, as long as fair value can be reliably measured. For the purposes
of IAS 38, an active market is defined as a market in which all the following conditions exist:
The items traded in the market are homogeneous.
Willing buyers and sellers can normally be found at any time.
Prices are available to the public.

Paragraph 78 notes that it is uncommon for such an active market to exist for intangible assets,
given their unique nature. Thus, we would expect that in most cases the cost model would be used.
Assuming there is an active market and the revaluation method is used, the rules for intangibles
follow the same logic as the rules for revaluing PP&E. Generally speaking, if an assets carrying
value is increased as a result of revaluation, the increase is recorded as a component of other
comprehensive income, and is accumulated in equity as an item of other comprehensive
income under the heading Revaluation surplus. If an assets carrying amount is decreased
as a result of a revaluation, the decrease is to be recognized in profit or loss (85 and 86).
However, if an increase or decrease reverses a previously recognized revaluation, the
treatment is different. Paragraph 85 requires an increase to be recognized in profit or loss to
the extent that it reverses a revaluation decrease of the same asset that was previously
recognized in profit or loss. Similarly, paragraph 86 requires a decrease to be recognized in
other comprehensive income to the extent of any credit balance existing in the revaluation
surplus in respect of that asset.
For example, if the current revaluation results in a decrease in an intangible assets value, but
there was an increase previously recognized in other comprehensive income, the decrease
would be recognized in other comprehensive income, where it would reduce the revaluation
surplus previously accumulated in respect of that asset. Once the original increase is
reversed, any additional decreases would be recognized in profit and loss. Obviously, if there
are no previous increases to reverse, decreases are reflected immediately in profit and loss.
As with PP&E, when an intangible asset is revalued, any accumulated amortization at the date
of the revaluation is treated in one of two ways (80):
a) restated proportionately with the change in the gross carrying amount of the asset so that
the carrying amount of the asset after revaluation equals its revalued amount, or
b) eliminated against the gross carrying amount of the asset and the net amount restated to
the revalued amount of the asset.
As noted earlier, paragraph 72 requires all assets in a class to be treated using the same model,
unless there is no active market for an asset in a class. Paragraph 81 elaborates, stating that if
an intangible asset that belongs to a class of revalued intangible assets cannot be revalued
because there is no active market for this asset, the asset shall be carried at its cost less any
accumulated amortization and impairment losses. In other words, if an entity uses the
revaluation model for all of its patents, but one patent cant be revalued because there is no
active market for it, that patent would be carried using the cost model.
International Accounting Standard 38 (IAS 38), Intangible Assets 5

But what happens if an active market disappears? Paragraph 82 states that if the fair value of
a revalued intangible asset can no longer be determined by reference to an active market, the
carrying amount of the asset will be its revalued amount at the date of the last revaluation by
reference to the active market less any subsequent accumulated amortization and any subsequent
accumulated impairment losses. In other words, the assets value is frozen at the last
revalued amount where an active market existed, and it is amortized from there. Note that if
an active market no longer exists for a revalued intangible asset, this may indicate that the
asset may be impaired and that it needs to be tested in accordance with IAS 36.
As with PP&E, the cumulative revaluation surplus is eventually transferred to retained
earnings, but this doesnt occur until the surplus is realized. The whole surplus may be
realized on the retirement or disposal of the asset. However, some of the surplus may be
realized as the asset is used by the entity; in such a case, the amount of the surplus realized is
the difference between amortization based on the revalued carrying amount of the asset and
amortization that would have been recognized based on the assets historical cost. The
transfer from revaluation surplus to retained earnings is not made through profit or loss (87).
Useful life and amortization
The accounting for intangible assets after initial recognition depends on the assets useful life.
Based on paragraph 88, an entity needs to assess whether the useful life of an intangible asset
is finite or indefinite. An intangible asset has an indefinite useful life when there is no
foreseeable limit to the period over which the asset is expected to generate net cash inflows
for the entity. If the assets useful life is finite, an estimate is needed in terms of the length of
time or the units of production that constitute the useful life. Be aware that the term indefinite
does not mean infinite. Instead, it simply means that there is no foreseeable limit to the period
over which the asset is expected to generate net cash inflows for the entity.
Intangible assets with finite useful lives are amortized; those with indefinite useful lives are
not (89). Instead, they are tested for impairment by comparing recoverable amount with
carrying amount.
Specific guidance is given regarding the useful life of an intangible asset that arises from
contractual or other legal rights. The useful life cannot exceed the period of contractual or
other legal rights, but may be shorter depending on the period over which the entity expects to
use the asset. Furthermore, the useful life can include any renewal period(s) on the rights, but
only if there is evidence to support renewal by the entity without significant cost (94).
For intangibles with finite useful lives, the depreciable amount is allocated on a systematic
basis over its useful life. As with PP&E, amortization begins when the asset is available for
use, and continues until the asset is derecognized, or until it is classified as held for sale under
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The amortization
method used should reflect the pattern in which the assets future economic benefits are
expected to be consumed by the entity. (If that pattern cannot be estimated reliably, the
straight-line method is used.) (97)
The depreciable amount to be allocated is determined after deducting the assets residual
value. Paragraph 100 states that the residual value of an intangible asset with a finite useful
life shall be assumed to be zero unless
a) there is a commitment by a third party to purchase the asset at the end of its useful life; or
b) there is an active market for the asset, and:
i)

residual value can be determined by reference to that market;

ii) it is probable that such a market will exist at the end of the assets useful life.

International Accounting Standard 38 (IAS 38), Intangible Assets 6

The amortization period and method must be reviewed at least at each financial year end and,
if there has been a change in the estimated useful life or expected pattern of consumption of
the future economic benefits embodied in the asset, the amortization period and/or method
must be changed accordingly. These changes are accounted for prospectively as changes in
accounting estimates in accordance with IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors (but, as with PP&E, if the method is changed for a reason other than a
change in the consumption pattern, this would still be considered a change in accounting
policy, which requires retroactive application).
For intangibles deemed to have indefinite useful lives, this assessment is reviewed annually.
If the expectation of an indefinite useful life can no longer be supported, the asset is changed
to having a finite useful life and is accounted for as above, with the changes being treated as
changes in estimate (109). Also, in accordance with IAS 36, an entity is required to test for
impairment by comparing the assets recoverable amount with its carrying amount annually,
and whenever there is an indication that the intangible asset may be impaired (108).
Impairment
As previously mentioned, carrying values need to reflect any impairment losses. To determine
whether an item of intangible asset is impaired, refer to IAS 36 Impairment of Assets.
Derecognition
An intangible asset is removed from the balance sheet (that is, derecognized) when it is
disposed of or when no future economic benefits are expected from its use or disposal. The
gain or loss arising from derecognition is included in profit or loss when the item is
derecognized; moreover, gains are not to be classified as revenue (112 and 113).

Presentation and disclosure

IAS 38 provides a considerable set of disclosure requirements for intangible assets. For each
class of intangibles, and distinguishing between internally generated and other assets, the
financial statements must disclose the following (118):
whether the useful lives are indefinite or finite and, if finite, the useful lives or the

amortization rates used

the amortization methods used for intangible assets with finite useful lives
the gross carrying amount and any accumulated amortization (aggregated with

accumulated impairment losses) at the beginning and end of the period

the line item(s) of the statement of comprehensive income in which any amortization of

intangible assets is included

detailed reconciliation of the carrying amount at the beginning and end of the period

(showing, for example, additions, amortization, impairment losses, revaluation

information, foreign currency translation impacts, and so on)

The entity is also required to disclose the following information (122):

the carrying amount of any intangible asset assessed as having an indefinite useful life, and

the reasons supporting the assessment of an indefinite useful life

a description, the carrying amount, and remaining amortization period of any individual

intangible asset that is material to the entitys financial statements

detailed information on intangible assets acquired by way of a government grant and

initially recognized at fair value

the existence and carrying amounts of intangible assets whose titles are restricted and the

carrying amounts of intangible assets pledged as security for liabilities

the amount of contractual commitments for the acquisition of intangible assets

International Accounting Standard 38 (IAS 38), Intangible Assets 7

If intangible assets are accounted for at revalued amounts, paragraph 124 requires the entity
to disclose
a) by class of intangible assets:
i)

the effective date of the revaluation;

ii) the carrying amount of revalued intangible assets; and

iii) the carrying amount that would have been recognized had the revalued class of
intangible assets been measured after recognition using the cost model in paragraph 74;
b) the amount of the revaluation surplus that relates to intangible assets at the beginning and
end of the period, indicating the changes during the period and any restrictions on the
distribution of the balance to shareholders;
c) the methods and significant assumptions applied in estimating the assets fair values.
And, finally, paragraph 126 requires an entity to disclose the aggregate amount of research
and development expenditure recognized as an expense during the period.

Differences from Canadian GAAP

The adoption by Canada of International Financial Reporting Standards for publicly
accountable enterprises means that IFRS are Canadian GAAP. Therefore, there are no
differences. Moreover, for those familiar with pre-changeover Canadian GAAP, Handbook
section 3064 was based on IAS 38 and was, therefore, essentially the same. The key
difference that existed prior to January 1, 2011 was that IAS 38 allowed intangible assets to
be valued subsequent to acquisition using either the cost method or the revaluation method, if
there was an active market for the asset. On the other hand, pre-changeover Canadian GAAP
permitted only the cost method. This difference was somewhat minimized in practice
because the criteria for an active market would not commonly be met.

Further resources
Other IFRS/IAS articles and Professional Development Courses on PD Net
Deloitte summaries and updates on the standards
KPMG resources and newsletters
CICA Resources
Model Financial Statements prepared under IFRS:
Deloitte IAS PLUS
PriceWaterhouseCoopers
If you are not registered on PD Net, register now its fast, easy, and free.
Brian and Laura Friedrich are the principals of friedrich & friedrich corporation, an
accounting research, standards, and education firm. The firm provides policy, procedure, and
governance guidance; develops courses, examinations, and other assessments; and supports
the development of regional public accounting standards in Canada and internationally.
Brian and Laura have served as authors, curriculum developers, lecturers, exam developers,
and markers for numerous CGA and university courses in Canada, China, and the Caribbean,
and have also presented at IFRS conferences in Ecuador. Their volunteer involvement has
earned them CGA-BCs inaugural Ambassador of Distinction Award (2004) and the
J.M. Macbeth Award for service at the chapter level (Brian in 2006 and Laura in 2007).
International Accounting Standard 38 (IAS 38), Intangible Assets 8

Brian and Laura are also Fellows of the Association of Chartered Certified Accountant
(FCCA UK).
Stephen Spector is a Lecturer currently teaching Financial and Managerial Accounting at
Simon Fraser University. He became a CGA in 1985 after obtaining his Master of Arts in
Economics from SFU in 1982. In 1997, CGA-BC presented him with the Harold Clarke
Award of Merit for recognition of his service to the By-Laws Committee for 19901996, and
in 2010 he was awarded Life Membership by CGA-BC. In 1999, Stephen received the Fellow
Certified General Accountant (FCGA) award for distinguished service to the Canadian
accounting profession. He has been on SFUs Faculty of Business Administrations Teaching
Honour Roll for May 2004 to April 2005, May 2006 to April 2007, and May 2008 to April
2010. In August 2008, he was one of the two annual winners of the Business Facultys
TD Canada Trust Distinguished Teaching Award. Stephen has held a number of volunteer
positions with CGA-BC; he was CGA-BCs 2009 President.
Wayne Bridgeman became a CGA in 1992 and is currently Senior Analyst with a provincial
securities commission. Previously, he was Examinations Development Specialist with
CGA-Canada and continues to be involved today with examination reviews and so on. He
completed the Canadian Securities Course in 1995 and has reviewed course and examination
questions for the Canadian Securities Institute. Annually, he reviews the updated solutions to
accompany the textbook Canadian Income Taxation: Planning and Decision Making by Bill
Buckwold, CA and Joan Kitunen, FCA. He has also volunteered since 2004 as a member of
the Finance and Audit Committee of the Heart and Stroke Foundation of Manitoba.

International Accounting Standard 38 (IAS 38), Intangible Assets 9