Accounting recognition of brands according to IFRS

Internally generated brands should not be recognized as intangibles.

However, brands acquired in a purchase transaction or acquired through a business combination should be recognized as intangibles.

Paragraph 63 of IAS 38 states the following:

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognized as intangible assets.

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Why are the brands internally generated not recognized as intangible?​

An intangible must meet three requirements to be recognized in the financial statements:

Non-monetary in nature
No physical appearance
Identifiable

An asset is identifiable if it’s separable; this means that it can be separated or divided from the entity and sold, transferred, licensed, leased, or exchanged, either individually or together with a contract.

Y It arises from contractual rights or other legal rights.

The main obstacle to recognizing an internally generated brand as an intangible is that they do not meet with the concept of separability.

In other words, it is not possible to distinguish which part of the disbursements incurred by an entity is directly associated with the construction of a brand and which part corresponds to developing the business as such.

For example, big brands like Coca-Cola – Google, and Apple invest hundreds of millions of dollars in advertising, property, plant, equipment, research, and human talent, among other aspects.

All these elements mentioned above undoubtedly help generate a remembrance and a commercial reputation among the clients.

However, it is not possible to distinguish which part of these disbursements is associated with the development of the business and which part is related to the generation of the brand.

Therefore, the IASB in paragraph BCZ45 of the Basis for Conclusions on IAS 38 states the following:

IAS 38 expressly prohibits the recognition as intangible assets of brands, newspaper headlines, publication titles, customer lists, and essentially similar elements that are generated internally.

The IASB considered that internally-generated intangibles of this type rarely or perhaps never meet the recognition criteria in IAS 38.

However, to avoid any misinterpretations, the IASB decided to draw that it prohibited the recognition of brands internally generated.

Brands recognized as part of a purchase transaction

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A brand acquired in a purchase transaction must meet the following requirements to be recognized as an intangible:

  • No physical appearance.

  • Identifiable.

  • Demonstrate control.

  • Demonstrate future economic benefits.

 The moment an entity acquires a brand from another company, this company must demonstrate control.

Control can be demonstrated when the respective registration of the brand is made before the regulatory entities.

In addition, the company must demonstrate the future economic benefits associated with this asset.

Paragraph 25 of IAS 38 states that the separate acquisition of an intangible will always reflect expectations about the probability that future economic benefits will flow to the entity of this asset.

 This means that acquiring an intangible in a purchase transaction is sufficient evidence to determine that this acquisition will bring economic benefits to the company.

 And on the other hand, it is identifiable because it arises from legal rights.

In other words, it is the result of the negotiation between two or more companies.

Brands recognized as part of a business combination.

A business combination is a union of two or more separate entities or businesses into a single reporting entity.

An entity must recognize all intangible assets acquired in a business combination at fair value.

Paragraph 13 of IFRS 3 states that there may be a series of assets and liabilities that the acquiree entity has not recognized in its financial statement.

Inside these assets, we find trade names, lists of clients, and brands, among others, that do not meet the condition to be recognized as intangibles because they are internally generated.

However, in a business combination, the acquirer must recognize these assets.

This is so because all the intangibles’ assets acquired the separability characteristic when carrying out a business combination process.

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