The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets :
- the definition of an intangible assets (par. 8-17 of IAS 38); and
- the recognition criteria (par. 21-23 of IAS 38)
Entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or system, licenses, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licenses, import quotas, franchises, customer or supplier relationship, customer loyalty, market share and market rights (IAS 38 par. 9).
Not all the items described above meet the definition of an intangible asset, ie identifiability, control over a resource and existence of future economic benefits. If an item within the scope of this Standard (IAS 38) does not meet the definition of an intangible asset, expenditure to acquire it or generate it internally is recognised as an expense when it is incurred. However, if the item is acquired in a business combination, it forms part of the goodwill recognised at the acquisition date (IAS 38 par. 10).
Identifiability. The definition of an intangible asset requires an intangible asset to be identifiable to distinguish it from goodwill.
IAS 38 states that an asset is identifiable if it either :
- is separable, ie 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, asset or liability); 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
Control. An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. Normally, enterprises register patents, copyrights, etc to ensure control over these intangible assets, although entities often have to engage in litigation to preserve that control.
Future Economic Benefits. Generally an asset is recognised only if it is probable that future economic benefits specifically associated therewith will flow to the reporting entity, and the cost of the asset can be measured reliably.
Par. 21 of IAS 38 states that an intangible asset shall be recognised if, and only if :
- it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
- the cost of the asset can be measured reliably.
An entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset (IAS 38 par. 22).
An entity uses judgment to assess the degree of certainty attached to the flow of future economic benefits that are attributable to the use of the asset on the basis of the evidence available at the time of initial recognition, giving greater weight to external evidence (IAS 38 par. 23) (Hrd).