International accounting standards, hereinafter IAS, have been issued by the IASC (International Accounting Standard Committee) since the 1973 until 2001. In 2001 the IASB settled in London (International accounting Standard Board) is composed by 14 members from nine different countries and in 2001 substituted the IASC. The IASB changed some already existing IASs and adopted new IFRS (International Financial Reporting Standards) to amend some already existing IASs and to covered topics uncovered before.
Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC) substituted the SICs (Standing Interpretation Committee). Finally the IASB issued the Framework for the presentation and the preparation of financial statements. While not a standard, it serves as a guide to resolve accounting issues that are not explicated directly in a standard. In fact, in the absence of a standard or an interpretation that specifically applies to a transaction, IAS 8 requires that an entity must use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgment, IAS 8.11 requires management to consider the definitions, recognition criteria and measurement concepts for assets, liabilities, income, and expenses in the framework [1] .
There are up to now nine IFRS and 41 IAS dealing with many different aspects of the Financial Statements.
IFRS have been adopted all over the world, with the inclusion of countries and areas such as the European Union, Hong Kong, Australia, Malaysia, Pakistan, Arab States of the Gulf countries, Russia, South Africa, Singapore and Turkey. More than 113 countries in the world, including all of Europe, currently require or permit IFRS reporting. Approximately 85 of those countries require IFRS reporting for all domestic, listed companies [2] .
Purpose of our work
We will introduce and explain how IAS deals with the valuation of intangible assets, which areas are covered and which are not, and which sectors will mainly be affected by this regualtion.
We will try to understand why IASB found it necessary to harmonize this part of financial statements all over the world through a short comparison study beetween two different countries' GAAPS, one anglo-saxon and one european, in order to underline some differences but also to see which of the two suffered a major change with the adoption of Ias 38. Finally we will conclude with some reflections and critical points dealing with the issue.
Ias 38: intangible assets
Definition
An intangible asset is an identifiable non-monetary asset without physical substance.
An asset is defined in this way when it is controlled by the firm as the result of past events and from which economic benefits are expected to flow to the enterprise.
Non-monetary, which distinguishes it from a financial asset. Its benefits stem from its use in the business, not just as a direct claim to cash.
Without physical substance means that these assets are not tangible but there are some exceptions (for example some intangible assets can stay in a physical asset like a CD).
An intangible asset has three critical elements: identifiability, control, and future economic benefits.
To be identifiable it must either: be separable (capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, asset, or liability); or arises from contractual or other legal rights, regardless of whether these rights are transferable or separable from the entity or from other rights and obligations.
It is important that it can be identifiable to separate it from the general goodwill that belongs to the business as a whole, which imply that it can be sold or disposed without diminishing the value of the other assts.
A firm controls an asset when it has the capacity to take the future economic benefits flowing from the resource and to restrict the access of others to those benefits. A firm can control a patent on a new drug but cannot control the loyalty of a customer or a skilled staff from going away.
Future economic benefits include revenues deriving from the sale of products, services, or processes, but also includes cost savings or other benefits from use of an asset. Use of intellectual property can reduce operating costs rather than produce revenue [3] .
What is included and what is not in the scope of IAS 38
Some examples of the assets considered as intangible can be: Franchise agreements; Patented drugs; Computer software; Copyrights; Film rights; Broadcasting licences; Import quotas; Trademarks ; Brands; Masterhead and publishing titles.
Are considered out of the scope of IAS 38: the goodwill (IFRS 3); those assets held for sale in the ordinary course of business; financial assets as defined in IAS 39; intangible assets arising for contract issued by insurance companies Mineral rights and expenditures on the exploration for, or development and extraction of, minerals, oil, natural gas, and similar non-regenerative resources. This last category is at discretion of the single industry accounting and it is covered by IFRS 6.
Initial recognition and measurement.
IAS 38 requires an entity to recognize an intangible asset, whether purchased or self-created (at cost) only if: it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably (IAS 38.21).
Furthermore 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 (IAS 38.22
If an intangible item does not match both these definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognized as an expense when it is incurred (IAS 38.68) [4]
Acquisition of an intangible asset
An intangible asset can enter in possess of a firm in different ways which require different treatments.
When an intangible asset is acquired as a single asset the cost it is no more than the cash paid. Other expenses can be capitalized such as non-refundable taxes; import duties and other directly attributable costs of preparing it for its intended use. The cost is discounted to present value if the payment is extended beyond normal credit terms.
The acquisition can take place as part of a business combination. In this case it is necessary according to IFRS 3 to measure its value reliably to distinguish it from the goodwill if the asset has a finite useful life. The easiest way to value it is the market value if there is one, otherwise other techniques can be used (DCF, multiples, etc.). With regard to this particular case the IASB had expressed its preference toward the recognition of as many individual assets as possible in order to reduce the unallocated amount of acquisition cost that becomes part of the goodwill. The rationale of this statement is the willingness to increase transparency for investors and to other financial statement users. [5]
The third case is the acquisition of an intangible asset through a governmental grant. This arises where a company is given certain intangible rights free of charge, such as airport landing rights or broadcasting rights. The treatment described on the slide is consistent with that required by IAS 20, Accounting for Government Grants and Disclosure of Government Assistance.
Where an intangible asset is given in the form of a grant, its initial measurement may be at either: A nominal amount; The fair value of the asset at the time of the grant.
Any expenditure attributable to preparing the asset for its intended use should also be capitalised.
Sometimes, intangible assets are acquired in a swap transaction. IAS 38 says that where an intangible asset is acquired in exchange for one or more non-monetary assets (or for a combination of monetary and non-monetary assets), the cost of the acquired asset should be measured at its fair value, which will also therefore determine how to measure the gain or loss on disposal of the asset disposed of. The only exceptions are if (a) the exchange transaction lacks commercial substance (see IAS 38.46) or (b) the fair value of neither asset is reliably measurable (see IAS 38.47). In these circumstances, the new asset is measured at the carrying value of the asset disposed of, and no gain or loss on disposal is therefore reported. The standard had slightly different rules on swap transactions before it was revised in 2004, but the new treatment does not have to be retrospectively applied to transactions undertaken in earlier periods.
Internally generated intangible assets
Internally generated goodwill may never be recognised as an asset. This also applies to internally generated brands, mastheads, publishing titles, customer lists, etc. The process of creating any other intangible asset is deemed to fall into two phases: research and development. All expenditures incurred during the research phase are written off. Expenditure during the development phase should be capitalised if stringent conditions are met. The entity must demonstrate: The technical feasibility of completing the asset so that it can be used or sold Its intention to use or sell the asset Its ability to do so How the asset will generate future economic benefits That it has enough technical, financial, and other resources to complete the development and use or sell the asset Its ability to measure the attributable expenditure reliably. Those costs that can be directly attributed, or reasonably allocated, to creating, producing, and preparing the asset for its intended use, including:Materials used and services consumed Costs of employee benefits arising from the generation of the intangible asset Other direct costs, such as fees to register a legal right Amortisation of patents and licences used to generate the assetBorrowing costs, if capitalised under IAS 23.
Any expenditure that fails to satisfy the criteria for recognition as an intangible asset must by default be recognised as an expense. Costs written off in earlier periods may not be reinstated as an asset. IAS 38 also expressly requires these to be expensed: Start-up costs Training costs Advertising and promotional costs Relocation or reorganisation costs
Any expenditure that fails to satisfy the criteria for recognition as an intangible asset must by default be recognised as an expense. Costs written off in earlier periods may not be reinstated as an asset. IAS 38 also expressly requires these to be expensed: Start-up costs Training costs Advertising and promotional costs Relocation or reorganisation costs
Measurement subsequent to initial recognition. Cost models: historical cost; revaluation model.
Amortization Decide whether the useful life is finite or indefinite. If the useful life is finite, the depreciable amount is allocated on a systematic basis over its useful life. The amortisation method should reflect the pattern in which the benefits of the asset are consumed. The straight-line method is used unless another method can be shown to be a reliable reflection of consumption. The amortisation is expensed unless it is included in the carrying amount of another asset.
Factors affecting the useful life/ review of useful lives and depreciation methods
Residual life
Retirement and disposal
IAS 38 Disclosure Requirements
IAS 38 has an extensive list of disclosure requirements, as shown on the next four slides. It also notes that IAS 8 requires disclosure of the nature and effect of changes in an estimate where they have a material effect on the current or future periods. This may be relevant to any changes in amortisation method, useful lives, etc.
The requirement to disclose research and development expense is slightly unclear because the terms are now used more broadly than in their original context in IAS 9, which focussed on scientific and technical research and development. Companies will therefore have to decide what activities fall under these headings in the circumstances of their own business.
[Refer to the Danisco extract for an example of the R&D disclosure and Good Group financial statements for the disclosure of useful lives and amortisation methods.]
A reconciliation of movements in the period for each class of intangible assets, including: Additions, including separately those purchased, developed internally, and from business combinations Those classified as held for sale under IFRS 5 Retirements and disposals Revaluation movements Impairments and their reversal Amortisation Exchange differences Any other movements.
When assets are included at a revaluation: For each class of intangible assets: The effective date of the revaluation The carrying amount of revalued intangible assets The equivalent carrying amount if the cost model had been used for these assets The revaluation surplus at the beginning and end of the period, showing the changes for the period, and any restrictions on its distribution The methods and assumptions used in estimating fair values
The carrying amounts of assets with indefinite useful lives, disclosing the reasons and the factors that led to that view A description, the carrying amount and remaining life of any single asset that is material to the whole accounts For assets acquired by grant and initially measured at fair value: that value, their present carrying amount, and whether the cost or revaluation model is used The existence and carrying amounts of assets with restrictions on title, and of assets pledged as security for liabilities The amount of contractual commitments for the acquisition of intangible assets
First time adoption issue on opening balance sheet
Under IFRS 1, the opening balance sheet on the date of transition to IFRS is to be restated in accordance with standards now in force. This requires it to include only those intangibles that qualify under IAS 38 (except those that were acquired in a business combination and were neither recognised on consolidation under previous GAAP nor would qualify for recognition under IAS 38 in the balance sheet of the acquiree).
In assessing what assets may now be included, hindsight should not be used to conclude that the recognition criteria have been met; it is necessary that the expenditure would have qualified for capitalisation under IAS 38 at the time it was incurred.
In theory, a first-time adopter can use a revaluation as a surrogate for deemed cost of intangibles on first-time application, but in practice this is rarely likely to be possible; it requires the original cost of the asset to have been reliably measurable (otherwise it would not have qualified to be recognised as an intangible), and also an active market to exist in such assets.
