What methods are used to value intangible assets after first recognition?

IAS 38 sets out the criteria for recognising and measuring intangible assets and requires disclosures about them. An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights. Separable assets can be sold, transferred, licensed, etc. Examples of intangible assets include computer software, licences, trademarks, patents, films, copyrights and import quotas. Goodwill acquired in a business combination is accounted for in accordance with IFRS 3 and is outside the scope of IAS 38. Internally generated goodwill is within the scope of IAS 38 but is not recognised as an asset because it is not an identifiable resource.

Expenditure for an intangible item is recognised as an expense, unless the item meets the definition of an intangible asset, and:

• it is probable that there will be future economic benefits from the asset; and
• the cost of the asset can be reliably measured.

The cost of generating an intangible asset internally is often difficult to distinguish from the cost of maintaining or enhancing the entity’s operations or goodwill. For this reason, internally generated brands, mastheads, publishing titles, customer lists and similar items are not recognised as intangible assets. The costs of generating other internally generated intangible assets are classified into whether they arise in a research phase or a development phase. Research expenditure is recognised as an expense. Development expenditure that meets specified criteria is recognised as the cost of an intangible asset.

Intangible assets are measured initially at cost. After initial recognition, an entity usually measures an intangible asset at cost less accumulated amortisation. It may choose to measure the asset at fair value in rare cases when fair value can be determined by reference to an active market.

An intangible asset with a finite useful life is amortised and is subject to impairment testing. An intangible asset with an indefinite useful life is not amortised, but is tested annually for impairment. When an intangible asset is disposed of, the gain or loss on disposal is included in profit or loss.

An intangible asset is a non-physical asset that has a useful life of greater than one year. Examples of intangible assets are trademarks, customer lists, motion pictures, franchise agreements, and computer software. More extensive examples of intangible assets are noted below.

Artistic Assets

Artistic assets can include photos, videos, paintings, movies, and audio recordings.

Defensive Assets

You may acquire an intangible asset so that others may not use it. Its useful life is the period over which it is of value in being withheld from the competition.

Leasehold Improvements

Leasehold improvements are improvements to a leaseholding, where the landlord takes ownership of the improvements. You amortize these improvements over the shorter of their useful lives or the lease term.

Software Developed for Internal Use

Software developed for internal use is the cost of software developed for internal use, with no plan to market it externally. You amortize these costs over the useful life of the asset.

Internally Developed and Not Specifically Identifiable

If there is not a specifically identifiable intangible asset, then charge its cost to expense in the period incurred.

Goodwill

When an entity acquires another entity, goodwill is the difference between the purchase price and the amount of the price not assigned to assets and liabilities acquired in the acquisition that are specifically identified. Goodwill does not independently generate cash flows.

Initial Recognition of Intangible Assets

A business should initially recognize acquired intangibles at their fair values. You should initially recognize the cost of software developed internally and leasehold improvements at their cost. The cost of all other intangible assets developed internally should be charged to expense in the period incurred.

Amortization of Intangible Assets

If an intangible asset has a finite useful life, then amortize it over that useful life. The amount to be amortized is its recorded cost, less any residual value. However, intangible assets are usually not considered to have any residual value, so the full amount of the asset is typically amortized. If there is any pattern of economic benefits to be gained from the intangible asset, then adopt an amortization method that approximates that pattern. If not, the customary approach is to amortize it using the straight-line method.

If an intangible asset is subsequently impaired (see below), you will likely have to adjust the amortization level to take into account the reduced carrying amount of the asset, and possibly a reduced useful life. For example, if the carrying amount of an asset is reduced through impairment recognition from $1,000,000 to $100,000 and its useful life is compressed from 5 years to two years, then the annual rate of amortization would change from $200,000 per year to $50,000 per year.

If the useful life of the asset is instead indefinite, then it cannot be amortized. Instead, periodically evaluate the asset to see if it now has a determinable useful life. If so, begin amortizing it over that period. Alternatively, if the asset continues to have an indefinite useful life, periodically evaluate it to see if its value has become impaired.

Impairment Testing for Intangible Assets

You should test for an impairment loss whenever circumstances indicate that an intangible asset’s carrying amount may not be recoverable, or at least once a year. Examples of such instances are:

• Significant decrease in the asset’s market price

• Significant adverse change in the asset’s manner of use

• Significant adverse change in legal factors or the business climate that could affect the asset’s value

• Excessive costs incurred to acquire or construct the asset

• Historical and projected operating or cash flow losses associated with the asset

• The asset is more than 50% likely to be sold or otherwise disposed of significantly before the end of its previously estimated useful life

If there is an impairment of intangible assets, you must recognize an impairment loss. This will be a debit to an impairment loss account and a credit to the intangible assets account.

The new carrying amount of the intangible asset is its former carrying amount, less the impairment loss. This means that you should alter the amortization of that asset to factor in its now-reduced carrying amount. It may also be necessary to adjust the remaining useful life of the asset, based on the information obtained during the testing process.

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