IAS 38 Intangible assets deals with the recognition and subsequent measurement of intangible assets.
Required:
a. Explain the term ‘intangible asset’, and state the intangible assets that fall within the scope of IAS 38. (2 marks)
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An intangible asset is an identifiable non-monetary asset without physical substance. Intangible assets comprise expenditure on computer software, research and development, advertising, brands, etc. It also includes rights under licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights.
b. Explain the FOUR (4) criteria that need to be satisfied before expenditure can be recognised as an intangible asset under IAS 38. (8 marks)
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Recognition criteria for intangible asset:
1) The asset needs to be ‘identifiable’
An asset is identifiable either if it is separable (can be sold without disposing of the business as a whole) or if it arises from contractual or other legal rights, irrespective of separability.
2) Control over the economic benefits derivable from the asset
Control involves the power to obtain the future economic benefits flowing from the asset and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits would normally, but not necessarily, stem from legal rights that are enforceable in a court of law.
3) Future economic benefits flowing to the entity
These benefits may include revenue from the sale of products or services, but could also include cost savings or other benefits arising from the use of the asset by the entity.
4) Cost can be measured reliably
‘Cost’ will often be the cost of purchasing or developing the asset. In the case of an asset acquired in a business combination, ‘cost’ will be the fair value of the asset at the date of acquisition, assuming this fair value can be reliably measured.