Although in last month’s post, we began to glimpse the importance of intangible assets in IFRS, in this post, I would like to highlight the main points that make up these assets to have a closer look at what, within the next four years, will be the assets that the essential accounting associations will have to work hard on.
Intangible assets are covered by IAS 38, the objective of which is none other than to prescribe the accounting treatment of these assets that are specifically dealt with in another standard. A critical significance is that this standard requires an entity to recognise an intangible asset if, and only if, specific criteria are met.
Generally, this standard applies in accounting for intangible assets, except:
- the intangible asset is within the scope of another standard;
- they are financial assets as defined in IAS 32 Financial Instruments: Presentation;
- they are collected, recognised and measured as exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources); and
- they are expenditures for developing and extracting minerals, oil, natural gas and non-renewable resources.
At this point, it is essential to recall that the standard specifies that an asset is a resource controlled by an entity due to past events and from which future economic benefits are expected to flow to the entity. Specifically, an intangible asset is an identifiable non-monetary asset without physical substance, recalling that monetary assets are the money at its disposal and the assets to be received in fixed or determinable amounts of money. All of the above leads us to incorporate in the definition that the residual value of an intangible asset is the estimated amount that the entity would currently obtain from the disposal of the asset, net of the estimated costs of removal, if the asset were already in its expected time and condition at the end of its useful life, being the useful life:
- the period over which an asset is expected to be available by the entity, or
- the number of units of production or similar output expected to be obtained from the asset.
Common elements include software, patents, copyrights, films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights. Further elaborating on intangible resources, a good proxy for intangible resources would be examples of scientific or technical knowledge, the design and implementation of new processes or systems, licences, intellectual property, market knowledge and trademarks (including brand names and publishing titles).
Not all of the items described in the preceding paragraph meet the definition of an intangible asset, i.e. identifiability, control over a resource and the existence of future economic benefits. Suppose an item within the scope of this standard does not meet the definition of an intangible asset. In that case, it is recognised as an expense when incurred to acquire or internally generate it. However, if the item is acquired in a business combination, it forms part of the goodwill recognised at the acquisition date.
While control over the resource itself and the existence of future economic benefits meet a simple definition, I wanted to finish by focusing on the concept of identifiability. An asset is identifiable if it is separable, i.e. it is capable of being separated or divided from the entity and sold, transferred, licensed, rented, leased or exchanged, either individually or together with a related contract, an identifiable asset or liability, whether or not 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 other rights and obligations.
