IAS 38: A Comprehensive Guide to Accounting for Intangible Assets

In today's economy, the value of many businesses lies not in their physical assets, but in their intangible assets such as patents, trademarks, and customer relationships. To accurately reflect the value of these assets on the balance sheet, companies must follow the guidelines set out in International Accounting Standard (IAS) 38.

IAS 38 defines an intangible asset as "an identifiable non-monetary asset without physical substance". Examples of intangible assets include patents, trademarks, copyrights, licenses, and goodwill.

Recognition and Measurement:

Under IAS 38, an intangible asset is recognized on the balance sheet if it is probable that future economic benefits will flow to the entity and the cost of the asset can be reliably measured. Intangible assets can be acquired through purchase or developed internally.

If an intangible asset is acquired through purchase, it should be initially recognized at its cost, including any directly attributable costs of acquiring the asset. If an intangible asset is developed internally, it should only be recognized if it meets certain criteria, including that the technical feasibility of completing the asset has been demonstrated, the entity has the intention to complete the asset, and the entity has the ability to use or sell the asset.

Subsequent Measurement:

After initial recognition, intangible assets are measured either at cost or revalued amount. The choice between these two methods depends on whether there is an active market for the asset. If there is an active market, the asset should be revalued to fair value at the end of each reporting period. If there is no active market, the asset should be measured at cost less accumulated amortization and accumulated impairment losses.

Amortization:

Intangible assets with a finite useful life should be amortized over that useful life. The amortization method should reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity.

Impairment:

Intangible assets should be reviewed for impairment whenever there is an indication that the asset may be impaired. The impairment test compares the asset's carrying amount to its recoverable amount, which is the higher of the asset's fair value less costs to sell and its value in use. If the carrying amount exceeds the recoverable amount, the asset is impaired and should be written down to its recoverable amount.

Disclosures:

IAS 38 requires companies to disclose certain information about their intangible assets in the financial statements. This includes the carrying amount of each class of intangible asset, the amortization method used, and the amount of amortization expense recognized during the period.

Conclusion:

IAS 38 provides a comprehensive framework for accounting for intangible assets. By following these guidelines, companies can ensure that their financial statements accurately reflect the value of their intangible assets. Proper accounting for intangible assets is essential for making informed business decisions, and for providing investors and other stakeholders with a clear understanding of a company's financial position.