FRS 38 should be read in the context of its objective, the Preface to Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 38 paragraph for which exemption is available: 118 (e) (comparative period only). FRS 102's definition of an intangible asset is now more in line with IFRS and expands on what is defined as an intangible asset in comparison to the old UK GAAP. IAS 38 prescribe the recognition of research expenditure as an expense (par 54) and par 57 prescribe the recognition of development costs as: “ An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following: [IAS 38.20] Subsequent expenditure on brands, mastheads, publishing titles, customer lists and similar items must always be recognised in profit or loss as incurred. [IAS 38.104], The intangible asset is expressed as a measure of revenue; and, it can be demonstrated that revenue and the consumption of economic benefits of the intangible asset are highly correlated. Internally generated goodwill, brands, customer lists and similar items cannot be recognised as an asset as expenditure on them cannot be distinguished from the cost of developing the business as a whole (IAS 38.48-50, 63-64). However, the carrying value of the asset given up is Example: Prepayment on advertising services. FRS 38 Intangible Assets - Summary ... Intangible items that do not meet the criteria for recognition as an asset is recognized as an expense when incurred. IAS 38 provides a framework for recognition of internally generated intangible assets that helps identifying whether and when there is an identifiable asset that will generate expected future economic benefits and determining the cost of the asset reliably. The way that the requirements of IFRS 16 are set out results in depreciation and interest charges being spread throughout the lease period (including rent-free periods) without any manual adjustments to general recognition model. This site uses cookies to provide you with a more responsive and personalised service. Paragraph 18.4 of FRS 102 says that an entity shall recognise an … On the same day, it paid and advance of $0.3m to the printing house. Requirements specific to intangible assets only are discussed below. All the paragraphs have equal authority. The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another IFRS. [IAS 38.63]. On 1 May, Entity A recognised a prepayment of $0.3m as an asset. Note that IFRS 15 covers capitalisation of costs to obtain and fulfil a contract with a customer. Apart from meeting the above definition, the Framework has advised the following recognition criteria that ought to be met before an asset is recognized in the financial statements. recognition criteria Identifiable if: Arises from contractual or other legal rights, or Is separable Recognition criteria always considered to be met Probable flow of economic benefits –implicit in fair value Capable of reliable measurement –if identifiable, sufficient information exists to … control over the future economic benefits. When an expenditure on an intangible item does not meet the recognition criteria of IAS 38, it should be expensed in P/L as incurred unless it forms part of the goodwill recognised under IFRS 3 (IAS 38.68). The mere fact that a service contributing to an intangible asset is acquired from a third party does not automatically warrant capitalisation of such expenditure – it needs to be assessed against the general criteria for capitalisation of internally generated intangible assets. The changes being introduced to FRS 102 will mean that companies must recognise any intangible assets that arise from legal or contractual rights and are separable (although there remains an option to recognise assets that meet only one of the two criteria). Business combinations. The objective of IAS 38 is to prescribe the accounting treatment for in­tan­gi­ble assets that are not dealt with specif­i­cally in another IFRS. Post them on our Forum, Control over the future economic benefits, Separate acquisition of intangible assets, Acquisition as part of a business combination, Framework for recognition of internally generated intangible assets, Internally generated goodwill, brands, customer lists and similar items, Cost of internally generated intangible assets, acquisition as part of a business combination, IAS 38 Intangible Assets: Scope, Definitions and Disclosure, IAS 38: Recognition and Cost of Intangible Assets, IAS 16 and IAS 38: Depreciation and Amortisation of Property, Plant and Equipment and Intangible Assets, IAS 16 and IAS 38: Revaluation Model for Property Plant and Equipment and Intangible Assets. Identifies the separate performance obligations. [IAS 38.54], Development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have been established. Example: rent-free period. In addition, it is often difficult to attribute subsequent expenditure directly to a particular intangible asset rather than to the business as a whole. In such a case, the requirements for internally generated intangible assets apply. General concept of probability of future economic benefits is discussed in the Conceptual Framework for Financial Reporting. This is the first true revenue recognition standard provided in UK GAAP; the previous standard was part of the application guidance to FRS 5. IAS 38 requires an entity to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if: [IAS 38.21]. the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. Financial Reporting for Micro-entities 🔒 Steve Collings, Bloomsbury Professional (2018) IAS 38 has more stringent requirements concerning capitalisation of subsequent expenditure on intangible assets. Expenditures on research or on research phase of an internal project must be expensed in P/L as incurred as an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits (IAS 38.54-55). patented technology, computer software, databases and trade secrets, trademarks, trade dress, newspaper mastheads, internet domains, video and audiovisual material (e.g. 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. Expenditures on development or on development phase of an internal project are recognised as intangible assets if, and only if, an entity can demonstrate all of the following (IAS 38.57): The above criteria are not easily translated into intangible assets generated by entities for their internal use, e.g. The amortisation period should be reviewed at least annually. Unfortunately, IAS 38 does not provide any specific guidance for such intangible assets. The asset should also be assessed for impairment in accordance with IAS 36. According to the IFRS criteria, for revenue to be recognized, the following conditions must be satisfied: 1. In particular, subsequent expenditure on brands, mastheads, publishing titles, customer lists and items similar in substance (whether externally acquired or internally generated) is always recognised in profit or loss as incurred. past expenses are not to be recognised as an asset. [IAS 38.85], Intangible assets are classified as: [IAS 38.88], The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life: [IAS 38.97], Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. The cost/value can be measured reliably. FRS 101 paragraph 8 (f) states that a qualifying entity is exempt from the requirement to disclose a reconciliation of the carrying amount of intangible assets at the beginning and end of the comparative period. Interpretation SIC-32 Website Costs provides specific guidance on expenditure on an internally generated website. 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. The Standard requires an entity to recognise an in­tan­gi­ble asset if, and only if, certain criteria are met. Initial recognition of agricultural produce (FRS 41) 8. [IAS 38.34], Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets. Expenditure on an intangible item shall be recognised as an expense when it is incurred unless: (a) it forms part of the cost of an intangible asset that meets the recognition criteria; or Insurance contracts (FRS 104) 4. recognition criteria at cost with cost determined as the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria; i.e. Charge all research cost to expense. IAS 38 was revised in March 2004 and applies to intangible assets acquired in business combinations occurring on or after 31 March 2004, or otherwise to other intangible assets for annual periods beginning on or after 31 March 2004. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. More on recognition of intangible assets acquired as part of a business combination can be found in IFRS 3. [IAS 38.71]. Initial recognition and changes in value of biological assets (FRS 41) 7. [IAS 38.78] 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 they reverse a revaluation decrease previously recognised in profit and loss. Please see par. The standard contains a rebuttable presumption that a revenue-based amortisation method for intangible assets is inappropriate. 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. 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. In other words, such expenses cannot be spread over time in P/L even if they are incurred to provide future economic benefits to an entity. Revaluation model. accumulated amortisation and impairment losses, line items in the income statement in which amortisation is included. As mentioned earlier, IAS 38 provides application guidance for separate acquisition of intangible assets (IAS 38.25-32) and acquisition as part of a business combination (IAS 38.33-37). As said before, most requirements relating to elements of cost of a separately acquired intangible asset mirror those included in IAS 16. Such an asset represents the right to receive goods or services. [IAS 38.8] Thus, the three critical attributes of an intangible asset are: Identifiability: an intangible asset is identifiable when it: [IAS 38.12], Recognition criteria. This requirement applies whether an intangible asset is acquired externally or generated internally. Changes in the values of current assets (various) 6. (c) the qualifying criteria (paragraphs 22-43) for the reporting exemption; (d) guidance on transitioning from a different GAAP to SME-FRF and FRS (paragraphs 44-45); and (e) guidance on the extent to which profits or losses recognised under the SME-FRF and FRS may be regarded as realized profits or losses for the purposes of making a Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights. 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. Intangible asset: an identifiable non-monetary asset without physical substance. IAS 38 states that an intangible asset is to be recognised if, and only if, the following criteria are met: it is probable that future economic benefits from the asset will flow to the entity the cost of the asset can be reliably measured. A chapter on the micro-entities legislation and financial statements, written by a specialist on small company reporting issues. Cost of intangible asset. An exception relates to website costs that are covered by SIC-32 and it might be useful to look into SIC-32 to look for analogies to other intangible assets generated for internal purposes. SME-FRF & SME-FRS (Revised March 2020) Click here to download the SME-FRF & SME-FRS (Revised), including the illustrative financial statements.. Each word should be on a separate line. Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). However, in this case, I’m not sure whether you can meet all these 6 criteria… S. hyphenated at the specified hyphenation points. 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 IAS 38 for recognising such expenditure as an intangible asset). The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. [IAS 38.57], Operating system for hardware: include in hardware cost. [IAS 38.68]. [IAS 38.75] Such active markets are expected to be uncommon for intangible assets. It does not matter when they will be delivered to customers at a later date (IAS 38.69A). If the revalued intangible has a finite life and is, therefore, being amortised (see below) the revalued amount is amortised. The cost of a separately acquired intangible asset can usually be measured reliably (IAS 38.26). Most requirements relating to elements of cost of a separately acquired intangible asset mirror those included in IAS 16. It sometimes happens that a lease starts with a rent-free period. The inflow of economic benefits to entity is probable. IAS 16 and IAS 38: Depreciation and Amortisation of Property, Plant and Equipment and Intangible Assets 3. 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. [IAS 18.92]. [IAS 38.63], For each class of intangible asset, disclose: [IAS 38.118 and 38.122]. the technical feasibility of completing the intangible asset so that it will be available for use or sale. Questions or comments? Such a transfer from P/L to assets would mean that it is a correction of error and it should be accounted for under IAS 8, subject to materiality. Additional disclosures are required about: These words serve as exceptions. By using this site you agree to our use of cookies. provides reduced disclosures for small entities that meet the conditions specified below and therefore do not have to follow the detailed disclosures specified in Sections 4 to 35 of FRS 102 The cost of internally generated intangible asset includes expenditure incurred from the date when all the criteria for recognition of intangible asset are met, including distinction between research and development costs (IAS 38.65). Examples of research activities are given in paragraph IAS 38.56 and include obtaining new knowledge or searching for alternative solutions. recognition criteria in paragraphs 21, 22 and 57. [IAS 38.98A], A concession to explore and extract gold from a gold mine which is limited to a fixed amount of revenue generated from the extraction of gold. [IAS 38.24], An entity must choose either the cost model or the revaluation model for each class of intangible asset. its ability to measure reliably the expenditure attributable to the intangible asset during its development. 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. Identifies whether there is a contract with a customer. IFRS 15 and INCOTERMS ( Revenue Recognition of Export Sale) Published on April 27, 2017 April 27, 2017 • 74 Likes • 16 Comments. Separate acquisition of intangible assets is not to be confused with acquisition of services that are used by the entity do develop an intangible asset internally. As noted earlier, intangible assets can be generated internally with input from external parties. 57 of IAS 38, but in short: technical feasibility, intention to complete, ability to use/sell, how the future economic benefits are generated, availability of resources to complete, ability to measure expenditure reliably. After initial recognition intangible assets should be carried at cost less accumulated amortisation and impairment losses. In general, the planning phase should be treated as research phase under IAS 38 and expensed in P/L. If the pattern cannot be determined reliably, amortise by the straight-line method. FRS 102 - Business combinations and changes to recognition criteria for intangible assets Business combination accounting is required where a company acquires control of another business. Software as a Service (SaaS) solutions cannot be recognised as intangible assets because in SaaS model, the customer does not have the power to obtain the future economic benefits flowing from the software itself and to restrict others’ access to those benefits. The collection of paymentSales and Collection CycleThe Sales and Collection Cycle, also known as the revenue, receivables, and receipts (RRR) cycle, comprises of various classes of transactions. A company incorporated under the Hong Kong Companies Ordinance qualifies for reporting under the SME-FRF & SME-FRS if it satisfies the … However, there are limited circumstances when the presumption can be overcome: Note: The guidance on expected future reductions in selling prices and the clarification regarding the revenue-based depreciation method were introduced by Clarification of Acceptable Methods of Depreciation and Amortisation, which applies to annual periods beginning on or after 1 January 2016. [IAS 38.107], 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. b) a brief description of significant intangible assets controlled by the entity but not recognised as assets because they did not meet the recognition criteria in this Standard or because they were acquired or generated before the version of FRS 38 Intangible Assets issued in 2003 was effective. Generated internally with input from external parties IAS 38.26 ) assessed for impairment in accordance with 36... Intention to complete the development and to use or sell the intangible is. Expenditures will be recognized at once as expenses, since they reflect the Charge! Official information concerning IFRS Standards come from the seller to the intangible asset with indefinite... Are discussed, along with helpful real-life examples benefits is discussed in the statement. 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