What you need to know about IAS 38
IAS 38 specifies the standards for identifying and valuing intangible assets as well as the disclosures that must be made. According to International Financial Reporting Standards, an intangible asset is an identified, non-financial asset without physical substance. Non-physical assets known as intangible assets, like software, goodwill, intellectual property, and brand recognition, can be exchanged for cash based on their value. Intangible assets may be created internally, purchased separately, or obtained through a business combination. It is crucial to distinguish between the three groups since the classification will dictate how the expenses should be treated in accounting.
IAS 38 was updated in March 2004 and is now applicable to intangible assets acquired through business combinations that happen on or after that date as well as to other intangibles for annual periods starting on or after that date.
IAS 38 – Measurements of intangible assets
According to IAS 38, an entity must only recognize an intangible asset, whether it was purchased or created internally if it is certain that:
- For an entity, future economic gains will flow.
- The asset’s cost can be measured with accuracy.
- If these requirements are not met, the entire expense will be written off.
Measurement of intangible assets according to IAS 38 can be grouped into two, which are initial measurements where intangible assets are measured at cost and intangible assets which are measured after acquisition.
For measurements after the acquisition, a company can choose either the revaluation model or cost model for each intangible asset. Using the cost model, an intangible asset must be carried at cost, less any accumulated amortization and any accumulated impairment losses, after initial recognition. Using the revaluation model, intangible assets may be carried out using this model only if fair value can be established by an active market. Revaluations must be performed on an ongoing basis to ensure that the carrying amount of an asset does not materially deviate from its fair value at the end of the reporting period. If a revaluation increases an intangible asset’s carrying amount, the increase must be recorded in other comprehensive income and retained in equity under the category of revaluation surplus. If a revaluation results in a decrease in an intangible asset’s carrying amount, the decrease must be included in profit or loss.
Intangible assets based on useful life are grouped into indefinite life and finite life. The period during which an asset is anticipated to be usable by an entity is known as its useful life. For indefinite life, the asset is expected to continue to generate net cash inflows indefinitely for the entity, while for finite life, the period is limited.
Know more about IAS 38 intangible assets from annual reporting
Annual reporting is a website that has a vast knowledge base for IAS 38 intangible assets. The website covers topics on asset definition, IFRS vs US GAAP intangible assets, and others. It has the standards issued by the International Accounting Standards Board (IASB). The website guides readers about accounting fundamentals. There are also different chapters on different IFRS topics arranged alphabetically which makes it easy for users to access them. If you would like more information on IAS 38 and other standards, you should visit their website: annualreporting.info.
