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• How to value patent , copyright, trademark ,brand name etc? • The list of subscribers are the biggest intangible asset for a bank, internet and telephone service provider. Do you agree. • The amount of R&D . is it an asset. Does it have influence on the value of patent. • R&D expenses if considered as an expense , is it a capital or revenue expenditure. Some people have the opinion as the failure rate is very high they do not have any effect on future income. Only a successful experiment would make a patent. So they should be treated as a revenue expenditure
SUCH a huge question i Hope followinf answer will satisifed this question...
Valuing brands and other intangible assets isn't as subjective an exercise as some think. This article from Intangible Business explains the basic methodologies.
Traditionally, accountants have shown the value of a company’s assets predominantly as tangible assets based on their historical cost with scant regard for the true value of intangibles. However, in today’s increasingly knowledge-based economy, it is often the company’s intellectual property that drives business and accounts for a large proportion of a company’s value.
Over the last twenty years sophisticated valuation techniques have been developed and brand and intangible asset valuation is now recognised by legal and finance practitioners. Since2002, under the accounting standard FASB141, all US companies have been required to report the values of all their acquired intangible assets on their balance sheets. Despite this, research that we carried out into how the S&P100 accounted for their acquisitions between2002 and2006, shows that many leading companies are failing to comply with FASB141 and are yet to fully recognise and/or explain the value of their intangible assets.
Although the application of intangible assets can be a complicated process, the theory is no different to the valuation of tangible assets, such as a house. For example, a real estate agent will begin by comparing the cost of the house to other properties on the market to give an estimate of its value. A brand valuation process will use this Market valuation method to compare intangibles using market transaction data.
The brand valuation process will then examine how much it would cost to recreate an existing intangible asset based on the original cost of creating it and the potential cost to recreate. This Cost valuation method is less realistic than the other methodologies since the value of the asset is likely to be different from the costs incurred when creating it. Likewise, the value of a house is likely to be far higher than the cost of the materials and labour used to build it.
The intangible asset can generate an income for the business in the same way that a house can generate a rental income for the owners. The Income valuation method looks at the projected future earnings that are attributable to the asset over its useful life and discounted to its net present value. This allows businesses to see how much of their income is generated by a brand and other intangible assets.
Intangible assets are generally valued through a combination of these methods, depending on the individual asset or purpose of the valuation: The income valuation method is considered to be the most realistic approach and produces the most informed results. The other methods are useful for supporting and qualifying the results.
Intangible assets are crucial to business value and growth and it is important that they are identified alongside the tangible assets and valued as individual components. The valuation methods outlined in this article are proof that intangible asset valuation should not be ignored or regarded with suspicion, rather business information should be critical.
Intangible: Webster defines the term as something "that represents value but has either no intrinsic value or no material being." The fact that intangible assets are lacking in intrinsic value or material being makes it difficult to pinpoint their value, yet such assets often play an important role in the value of a business. So how do you determine the value of intangible assets?
Many businesses have intangible assets, and no list could ever be complete because intangibles can be unique to a specific business. Some, however, are fairly common and can be found in many businesses. These more common intangibles include:
Proprietary Lists — Proprietary lists can include customer or client lists, patent lists or even mailing lists, whether they are made up of customers or prospects. Lists can be especially valuable to a business if the relationships they represent are ongoing. Consider, for example, a magazine’s list of advertisers. The magazine may get75% of its advertising revenue from the companies on that list. Therefore, the list is critical to the magazine's future profitability.
Beneficial Contracts — Long-term contracts can add value to a company. For instance, a company may have a contract that allows it to sell its product or service for a higher-than-normal markup. Or it may have a contract that allows it to purchase or lease items at a below-market rate.
Patents and Applications for Patents — How much the patents are worth depends on the strength of the patent claim (which can be difficult to determine if the patent hasn’t withstood litigation) and the patent’s economic and legal life.
Copyrights — Copyrights are trickier to value than patents because, while they may have a long legal life, their practical value may only be for a short period. This is especially true for technical works that become dated quickly. The value of a copyright also depends on the author’s previous success.
Trademarks and Brand Names — If a brand name or trademark lets a company sell its products for a higher price or in greater quantity than its competition, it has value.
Subscriptions and Service Contracts — Subscriptions are especially important for newspapers, magazines and cable companies because a large portion of their revenues is based on subscriptions. With both subscriptions and service contracts, the longer they have been in effect, the more they are worth.
Franchise Agreements — Franchises with long track records and well-recognized names have significant value over newer, less known franchises. This is especially true in some industries (such as the hotel industry) that are dominated by franchises.
Software — Many companies have developed proprietary software specific to their businesses. If this software provides efficiencies and benefits that the business wouldn’t have without the software, it is a separate asset.
Goodwill — Goodwill means many things to many people, but generally it refers to intangibles like reputation and location that lead to repeat business.
Intangible assets may need to be valued for a variety of reasons, including determining a fair license rate, calculating an amortization deduction, quantifying a charitable deduction, calculating an intercompany transfer price (related to federal or state income taxes) or estimating damages in an infringement case.
Valuing intangible assets is also an important part of determining the value of a business for marital dissolutions, gift tax determination, estate planning, shareholder rights cases, conversion from C corporation to S corporation status or sale of a business.
Because most businesses have some intangible assets and because so many occasions call for their valuation, understanding how intangible assets are valued can be useful.
Valuing intangible assets can be done using one of three basic methods: cost of creation, capitalization of income or savings, or discounted cash flow. Rule-of-Thumb formulas do exist for some assets in some industries but are better for providing an estimate of value to be compared with the value determined by the other methods.
Cost of Creation — The cost of creation method of valuing intangible assets relies on calculating what it would cost another business to duplicate a given asset today. This method does not measure an asset’s future impact on profits; it merely looks at what it would cost to create the asset from scratch at a particular point in time.
Assets that may be valued using the cost of creation method include:
Capitalization of Income or Savings Method — The capitalization method measures the future benefits intangible assets will bring to a company, when those benefits will be generated and for how long. The capitalization rates used in this method should reflect the risk associated with the intangible asset being valued.
In addition to the income an intangible asset may bring to a company, the benefits may also include savings to the company as a result of owning the asset, or not having to pay a royalty to someone else who owns the asset or of efficiencies generated by the asset.
Assets that work well with this method include:
The capitalization method works well for all of these assets when they are relatively new. As they come closer to the end of their economic usefulness, however, other methods of valuing them may become more appropriate.
Discounted Cash Flow — The discounted cash flow method is good for assets with predictable lifespans and future financial benefits, including:
The discounted cash flow method can be applied to savings flows as well as to income flows.
Finding the value of intangible assets is an important part of determining the value of a business. But because intangible assets can be difficult to define, finding their value requires skill and experience. Rules-of-thumb generally do not apply, and choosing the right method of valuation is essential.
OR
Valuing Intangible Assets
By Benjamin P. Foster, Robin Fletcher, and William D. Stout
In Brief
Establishing Practices in an Emerging Area
Recently issued accounting standards have created the need for valuation of intangible assets for financial statement purposes. Arriving at these valuations can be a complicated and uncertain process. Although the standards address only those intangibles acquired in a business combination, they raise the question of what values remain hidden within internally developed intangibles. The variability of such assets is evidenced by the declines of dot-com companies whose reported assets could have never accounted for their market valuation highs. As business evolves, however, more reliable means of valuing intangible assets—such as a bank’s valuation of intellectual property to be used as collateral—are becoming more common, and someday may become the norm.
In recent years, three factors have changed the way financial statement users view intangible assets, especially intellectual property (IP): newly issued financial accounting standards, the rise (and fall) of many companies whose main assets were intangible, and the increase in objective external evidence of the value of IP. The business environment’s evolving view of intangible assets has significant implications for accounting for and valuing these increasingly important items.
Accounting for Intangible Assets
SFAS141, Business Combinations, addresses accounting for intangible assets acquired in a business combination. SFAS142, Goodwill and Other Intangible Assets, addresses accounting for the acquisition of intangible assets outside of a business combination. SFAS142 also addresses the accounting for all intangible assets following their acquisition. Neither standard, however, addresses the reporting of internally developed intangible assets.
Business combinations. SFAS141 requires an acquiring entity to allocate the purchase price of an acquired entity to the assets acquired and liabilities assumed at their estimated fair values on the date of acquisition. The standard provides the following guidance:
An intangible asset shall be recognized as an asset apart from goodwill if it arises from contractual or other legal rights (regardless of whether those rights are transferable or separable from the acquired entity or from other rights and obligations). If an intangible asset does not arise from contractual or other legal rights, it shall be recognized as an asset apart from goodwill only if it is separable, that is, it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged (regardless of whether there is an intent to do so).
Appendix A to SFAS141 provides examples of intangible assets that might be recognized separately: trademarks, Internet domain names, noncompetition agreements, customer lists, books, advertising contracts, construction permits, use rights, employment contracts, patented and unpatented technologies, and secret formulas.
Once the acquisition cost has been allocated to acquired assets (including intangibles) and assumed liabilities, any remaining amount is then recognized as goodwill. Continuing current practice, SFAS141 requires acquired research and development assets recognized as part of a business combination to be immediately expensed if they have no alternative future use.
Post-acquisition accounting. SFAS142 addresses accounting for all intangible assets (including goodwill) after their acquisition, including those acquired in a business combination. The most significant change brought about by SFAS142 is the elimination of goodwill amortization. In its place, SFAS142 requires companies to conduct annual (in some cases interim) tests for impairment of goodwill.
The standard calls for a two-step impairment test. First, the fair value of a reporting unit is compared to the carrying amount, including goodwill previously recognized. Second, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of the goodwill. If the fair value is lower, it is considered impaired.
Accounting for other intangible assets is more straightforward. The asset is amortized over its useful life using a method that reflects how benefits of the asset are consumed. SFAS142 permits the use of the straight-line method if no other pattern can be reliably determined. Managers should evaluate the useful life each reporting period, and report adjustments as a change in accounting estimate prospectively over the remaining useful life. Perhaps, under SFAS142, managers could incorporate the use of appraisals if they can show that appraisals of intangible assets are reliable and reflect the pattern under which benefits are received better than the straight-line method.
Accounting and the New Economy
Recently, many companies’ GAAP stockholders’ equity per share has been significantly lower than the price per share as traded on stock exchanges. For example, Microsoft reported stockholders’ equity of about $68 billion in recent financial statements, yet its market value at the filing date was approximately four times that amount. Critics of the current financial reporting model cite the failure to report the value of certain intangible assets as a cause of these differences. Those critics say that GAAP must consider the values of these increasingly important, currently unrecognized assets in financial statements.
Electronic Business recently published an article titled “The Reporting Gap: Earnings and Other Financials No Longer Suffice as Measures of Corporate Health” (Roberts,2001). According to the author, accounting practices that prohibit the recognition of intangible assets are the main reason companies’ GAAP-based balance sheets do not reflect their true worth. In the April7,1997, Forbes, Baruch Lev stated, “How ironic that accounting is the last vestige of those who believe that things are assets and that ideas are expendable.” In the November1999 Strategic Finance, King and Henry said that the intangible assets of many high-tech companies “walk out the door every night.” King and Henry further lamented that GAAP does not allow the value of such intangible assets on balance sheets, and called for change.
These criticisms of current reporting requirements for intangible assets appear to be based on the premise that the balance sheet should show the value of a company’s assets. Accountants and most sophisticated investors, however, recognize that the book value of a particular asset on a balance sheet may have little relation to the actual value of that asset. In addition, a variety of definitions of “value” exist. FASB has struggled with this issue and has promulgated some accounting standards that attempt to reduce the difference between reported values of assets and liabilities and their fair values in the marketplace. For example, investments in marketable securities are generally recognized at fair market value on the balance sheet date. Derivative instruments are also reported at fair market value, as is long-term debt in certain situations. SFAS141 applies the fair value approach to intangible assets acquired in business combinations.
The balance sheet undoubtedly has significant limitations in terms of reporting an entity’s true value. Internally developed intangible assets, even those for which a fair value may be determinable, are not recognized in the financial statements. Other intangible assets, such as political clout and regulatory expertise, are generally not even discussed in company reports. Investors and creditors recognize these limitations, and presumably perform independent research and analysis in their investment and credit decisions.
The Intangible Asset Quandary
The two recent FASB standards do little, if anything, to help investors better evaluate this aspect of businesses. Some critics argue that currently unreported internally generated intangible assets should be reported at fair market value, just like those acquired from outside the entity. But doing so will require companies to incur potentially significant costs. Hiring appraisers and value analysts to determine the fair value of intangibles may be somewhat costly, but the extra risk incurred by executives and auditors may be extreme. Given that the value of intangibles can fluctuate wildly over time, will financial statement users perceive that the values reported previously were incorrect or perhaps even fraudulent? Will company executives and external auditors be exposed to additional liabilities?
In late1999, Ask Jeeves, Inc.’s common stock sold as high as $180 per share. At that price, Ask Jeeves’ market value was nearly200 times stockholders’ equity. The indicated market value was approximately $4 billion, but the company’s balance sheet showed assets of only $32 million, the bulk of which was cash, cash equivalents, and investments. Investors evidently thought that Ask Jeeves possessed significant intangible assets.
Less than18 months later, the stock sold for about $1 per share, with an indicated market value of $50 million. Apparently some of the company’s assets “that walk out the door every night” failed to return the next morning. If the company had reported substantial intangible assets in1999, would executives and auditors have been exposed to charges of fraud in2001?
Recent stock market performance makes it easy to find companies whose market value has significantly declined over relatively short periods of time. One could argue that the recent fluctuations in market value indicate that measures of intangible assets are inaccurate and unreliable. Fluctuations in the value of certain assets, however, are not an adequate excuse to ignore real and potentially substantial assets.
External Evidence for the Value of Internally Developed Intangible Assets
Recognizing (or even disclosing) the fair value of currently unrecognized intangible assets has at least two major drawbacks. First, determining fair value saddles the reporting company with new, unrecoverable costs. Second, the lack of objective evidence of value (such as acquisition cost in the case of a business combination) potentially exposes executives and auditors to increased liabilities should those valuations turn out to be incorrect. Two sources of external evidence on the value of intangible assets have, however, been largely ignored.
Intangible assets as collateral. The first source of external evidence on the value of unrecognized intangible assets is the willingness of lenders to accept such assets as collateral for loans. In a report by Reuters in September2002, Rozens reported that one bank, UCC Capital, has developed a niche by lending money for bonds secured by companies’ regular income from patents or fashion logo licensing. Also, King and Henry point out that major banks have made loans to corporations secured not by traditional assets, but rather by trade names and patents. In at least one case, a bank accepted specific intangible assets as collateral, and determined the value of these assets by appraisal.
Using intangible assets as collateral can temper the two major drawbacks of reporting the value of currently unrecognized intangible assets. If the cost of the appraisals is evidently not significant enough to prevent obtaining bank loans, why should appraisal costs be an issue for reporting to all investors and creditors? Interestingly, annual appraisals are required in the case King and Henry describe.
The second drawback is the reliability of the information and the potential for increased liability for executives and auditors. For a bank to accept intangible assets as collateral based on appraisals indicates that it is satisfied with the reliability of the appraisal. (Of course, the bank may lend only a fraction of the value of the intangible. The absolute reliability of the appraisal may not be as important for a particular bank loan as it would be in overall financial reporting.)
Insured values of intangible assets. The presence of insurance for intangible assets also offers objective external evidence of their value. Insuring individual intangible assets, or portfolios of intangible assets, began in the mid-1970s, and such insurance was offered to cover infringement litigation expenses in the1980s. Protecting IP from or through litigation is costly. A goal of litigation insurance is to address the needs of small companies owning IP. Many small companies experience difficulty penetrating markets because they cannot afford the expense of IP litigation encountered when facing competition from large companies that have extensive access to IP legal services. Companies without adequate resources or insurance may not be able to enforce their IP claims against larger competitors. Small companies may also not be able to adequately defend against allegations of IP infringement, whether or not those allegations have merit.
Insuring IP against other forms of loss was a natural extension of IP litigation insurance. The potential losses that threaten the value of IP include infringement, loss of royalty stream, invalidation, unenforceability, or loss of ownership. The amount at risk is the IP value itself, which is based on factors such as income, competitive advantage, and other intangible benefits generated by the IP. Thus, a formal valuation taking into account all relevant factors regarding an item or portfolio of IP is required to insure its value for a specific amount. The dollar amount determined for IP in the formal valuation may be the amount to be insured. (The value of IP used for collateral on loans could also be insured, providing protection to lenders.)
The fact that insurance companies are willing to accept and insure the risks that companies face with IP, and that lenders face from collateralized loans, provides external evidence that an intangible asset has value. If a company chooses to insure its intangible assets, disclosure of the practice and the insured values could provide useful information to creditors and investors. The value they are willing to insure could be used for purposes of lending, borrowing, or financial reporting. Such a disclosure could help bridge the gap between reported values and market values.
Intangibles and GAAP
Appraisals are used to determine the value of intangible assets used as collateral for loans. Appraisals are also used to determine the value of intangible assets, especially IP, to be insured. The fact that IP is used for collateral on a loan or as an insured value is important in valuing such assets acquired through a merger under SFAS141. The records of an acquired company for appraisals related to the use of intangible assets as collateral for loans or insurance of intangible assets could provide valuable evidence for the existence and valuation of intangibles. In most instances, such items should be separately recorded as assets resulting from the business combination.
SFAS142 permits the use of the straight-line amortization method if no other amortization pattern can be reliably determined. Annual intangible asset appraisals used to determine values of collateral for loans and values for IP insurance may be another way to reliably determine amortization.
Application to future GAAP. In the long run, external evidence could help allow internally developed intangible assets to be included in financial reports. Initially, companies might voluntarily report these appraised values in the notes to their financial statements. If research determined that such disclosures were useful to investors, and if the valuation costs had already substantially been incurred, then FASB could consider recognizing those values directly in the financial statements.
Assets disappearing overnight, however, raises the issue of the need for a new scope for the definition of loss. Intangibles are not lost to tangible threats such as fire and storm. Intangibles are at risk of loss due to intangible forces, such as changing overall economic conditions, increased competition, new technology, and employment changes.
Accountants have long addressed asset value risks. Some of the same forces that can cause intangible assets to lose value can also affect fixed assets. SFAS144, Accounting for the Impairment or Disposal of Long-Lived Assets, addresses issues related to such declines in the value of tangible assets. Future standards regarding the reporting of internally generated intangible asset values could also specify how inevitable fluctuations in value should be handled.
To quantify intangible assets in monetary terms is a difficult task and to justify it at different times is another tough job. In business nothing is constant and permananent with time things vary in nature, size and value. Some of the Assets acquired during the process or coincidence to the business becomes integral part of it and creates a reputation which only helps in enhancing the volume of the business but also the value of the goods.
Accounting bodies have given guidelines how to value different Intangible assets and those are just the guidelines not the established methods since place of business, nature of business will have major say on valuation. Similarly the institution which sees the financials will look at it differently.
Rest of the answer is covered by other participants at length.
From corporate reporting point of view internally generated intangeble can be recognized in balance sheet unless it meet the criteria provided in IAS36.
From financial management point of view velue to intangible asset can be given using CIV Method or any other that kind of method.
IAS38 applies to all intangible assets other than: [IAS38.2-3]
Intangible asset: an identifiable non-monetary asset without physical substance. An asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. [IAS38.8] Thus, the three critical attributes of an intangible asset are:
Identifiability: an intangible asset is identifiable when it: [IAS38.12]
Examples of possible intangible assets include:
Intangibles can be acquired:
Recognition criteria. IAS38 requires an entity to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if: [IAS38.21]
This requirement applies whether an intangible asset is acquired externally or generated internally. IAS38 includes additional recognition criteria for internally generated intangible assets (see below).
The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. [IAS38.22] The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination. [IAS38.33]
If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS38 requires the expenditure on this item to be recognised as an expense when it is incurred. [IAS38.68]
Business combinations. There is a presumption that the fair value (and therefore the cost) of an intangible asset acquired in a business combination can be measured reliably. [IAS38.35] An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date.
Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense. [IAS38.71]
If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only.
A research and development project acquired in a business combination is recognised as an asset at cost, even if a component is research. Subsequent expenditure on that project is accounted for as any other research and development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS38 for recognising such expenditure as an intangible asset). [IAS38.34]
Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets. [IAS38.63]
The following items must be charged to expense when incurred:
For this purpose, 'when incurred' means when the entity receives the related goods or services. If the entity has made a prepayment for the above items, that prepayment is recognised as an asset until the entity receives the related goods or services. [IAS38.70]
Intangible assets are initially measured at cost. [IAS38.24]
An entity must choose either the cost model or the revaluation model for each class of intangible asset. [IAS38.72]
Cost model. After initial recognition intangible assets should be carried at cost less accumulated amortisation and impairment losses. [IAS38.74]
Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortisation and impairment losses only if fair value can be determined by reference to an active market. [IAS38.75] Such active markets are expected to be uncommon for intangible assets. [IAS38.78] Examples where they might exist:
Under the revaluation model, revaluation increases are recognised in other comprehensive income and accumulated in the "revaluation surplus" within equity except to the extent that it reverses a revaluation decrease previously recognised in profit and loss. If the revalued intangible has a finite life and is, therefore, being amortised (see below) the revalued amount is amortised. [IAS38.85]
Intangible assets are classified as: [IAS38.88]
The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life: [IAS38.97]
The asset should also be assessed for impairment in accordance with IAS36. [IAS38.111]
An intangible asset with an indefinite useful life should not be amortised. [IAS38.107]
Its useful life should be reviewed each reporting period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate. [IAS38.109]
The asset should also be assessed for impairment in accordance with IAS36. [IAS38.111]
Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being recognised in the carrying amount of an asset. [IAS38.20] Subsequent expenditure on brands, mastheads, publishing titles, customer lists and similar items must always be recognised in profit or loss as incurred. [IAS38.63]
The objective of IAS38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another IFRS. The Standard requires an entity to recognise an intangible asset if, and only if, certain criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets. [IAS38.1
IAS38 applies to all intangible assets other than: [IAS38.2-3]
Intangible asset: an identifiable non-monetary asset without physical substance. An asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. [IAS38.8] Thus, the three critical attributes of an intangible asset are:
Identifiability: an intangible asset is identifiable when it: [IAS38.12]
Examples of possible intangible assets include:
Intangibles can be acquired:
Recognition criteria. IAS38 requires an entity to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if: [IAS38.21]
This requirement applies whether an intangible asset is acquired externally or generated internally. IAS38 includes additional recognition criteria for internally generated intangible assets (see below).
The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. [IAS38.22] The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination. [IAS38.33]
If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS38 requires the expenditure on this item to be recognised as an expense when it is incurred. [IAS38.68]
Business combinations. There is a presumption that the fair value (and therefore the cost) of an intangible asset acquired in a business combination can be measured reliably. [IAS38.35] An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date.
Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense. [IAS38.71]
If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only.
A research and development project acquired in a business combination is recognised as an asset at cost, even if a component is research. Subsequent expenditure on that project is accounted for as any other research and development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS38 for recognising such expenditure as an intangible asset). [IAS38.34]
Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets. [IAS38.63]
The following items must be charged to expense when incurred:
For this purpose, 'when incurred' means when the entity receives the related goods or services. If the entity has made a prepayment for the above items, that prepayment is recognised as an asset until the entity receives the related goods or services. [IAS38.70]
Intangible assets are initially measured at cost. [IAS38.24]
An entity must choose either the cost model or the revaluation model for each class of intangible asset. [IAS38.72]
Cost model. After initial recognition intangible assets should be carried at cost less accumulated amortisation and impairment losses. [IAS38.74]
Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortisation and impairment losses only if fair value can be determined by reference to an active market. [IAS38.75] Such active markets are expected to be uncommon for intangible assets. [IAS38.78] Examples where they might exist:
Under the revaluation model, revaluation increases are recognised in other comprehensive income and accumulated in the "revaluation surplus" within equity except to the extent that it reverses a revaluation decrease previously recognised in profit and loss. If the revalued intangible has a finite life and is, therefore, being amortised (see below) the revalued amount is amortised. [IAS38.85]
Intangible assets are classified as: [IAS38.88]
The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life: [IAS38.97]
The asset should also be assessed for impairment in accordance with IAS36. [IAS38.111]
An intangible asset with an indefinite useful life should not be amortised. [IAS38.107]
Its useful life should be reviewed each reporting period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate. [IAS38.109]
The asset should also be assessed for impairment in accordance with IAS36. [IAS38.111]
Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being recognised in the carrying amount of an asset. [IAS38.20] Subsequent expenditure on brands, mastheads, publishing titles, customer lists and similar items must always be recognised in profit or loss as incurred. [IAS38.63]
IAS38 Intangible Assets outlines the accounting requirements for intangible assets, which are non-monetary assets which are without physical substance and identifiable (either being separable or arising from contractual or other legal rights). Intangible assets meeting the relevant recognition criteria are initially measured at cost, subsequently measured at cost or using the revaluation model, and amortised on a systematic basis over their useful lives (unless the asset has an indefinite useful life, in which case it is not amortised).
dentifiability: an intangible asset is identifiable when it: [IAS38.12]
Examples of possible intangible assets include:
Intangibles can be acquired:
Recognition criteria. IAS38 requires an entity to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if: [IAS38.21]
This requirement applies whether an intangible asset is acquired externally or generated internally. IAS38 includes additional recognition criteria for internally generated intangible assets (see below).
The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. [IAS38.22] The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination. [IAS38.33]
If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS38 requires the expenditure on this item to be recognised as an expense when it is incurred. [IAS38.68]
Business combinations. There is a presumption that the fair value (and therefore the cost) of an intangible asset acquired in a business combination can be measured reliably. [IAS38.35] An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date.
Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense. [IAS38.71]
If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only.
A research and development project acquired in a business combination is recognised as an asset at cost, even if a component is research. Subsequent expenditure on that project is accounted for as any other research and development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS38 for recognising such expenditure as an intangible asset). [IAS38.34]
Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets. [IAS38.63]
The following items must be charged to expense when incurred:
For this purpose, 'when incurred' means when the entity receives the related goods or services. If the entity has made a prepayment for the above items, that prepayment is recognised as an asset until the entity receives the related goods or services. [IAS38.70]
Intangible assets are initially measured at cost. [IAS38.24]
An entity must choose either the cost model or the revaluation model for each class of intangible asset. [IAS38.72]
Cost model. After initial recognition intangible assets should be carried at cost less accumulated amortisation and impairment losses. [IAS38.74]
Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortisation and impairment losses only if fair value can be determined by reference to an active market. [IAS38.75] Such active markets are expected to be uncommon for intangible assets. [IAS38.78] Examples where they might exist:
Under the revaluation model, revaluation increases are recognised in other comprehensive income and accumulated in the "revaluation surplus" within equity except to the extent that it reverses a revaluation decrease previously recognised in profit and loss. If the revalued intangible has a finite life and is, therefore, being amortised (see below) the revalued amount is amortised. [IAS38.85]
Intangible assets are classified as: [IAS38.88]
The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life: [IAS38.97]
The asset should also be assessed for impairment in accordance with IAS36. [IAS38.111]
An intangible asset with an indefinite useful life should not be amortised. [IAS38.107]
Its useful life should be reviewed each reporting period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate. [IAS38.109]
The asset should also be assessed for impairment in accordance with IAS36. [IAS38.111]
Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being recognised in the carrying amount of an asset. [IAS38.20] Subsequent expenditure on brands, mastheads, publishing titles, customer lists and similar items must always be recognised in profit or loss as incurred. [IAS38.63]
