Examples of intangibles under IFRS

Intangibles under IFRS can be classified into five parts.

  • The separate acquisition of intangibles.

  • Internally generated intangibles.

  • Acquisition as part of a business combination.

    Acquisition through a government grant.

  • Intangible due to exchange assets.

  •  

We will see several examples of each classification.

Example separate acquisition of Intangibles in IFRS

According to paragraph 27 of IAS 38, the cost of an intangible asset acquired separately comprises:

Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

Any directly attributable cost of preparing the asset for its intended use.

EXAMPLE 1 :

In January of year 1, an entity acquired facial recognition software to improve security within the company; the cost of the asset is as follows:

Acquisition price: 200,000

Recoverable taxes: 15,000

Non-recoverable taxes: 20,000

Discounts: 35,000

For the intangible to work properly, it is necessary to perform a calibration; this costs 12,000

As part of the staff training in software management, the company incurred 8,000.

What is the total cost of the asset?

The calculation is shown below.

Acquisition price: 200,000

Non-recoverable taxes: 20,000.

Discounts: (35,000)

Software calibration: 12,000

Total asset cost: 197,000

The total intangible cost does not include the recoverable taxes, since paragraph 27 of IAS 38 prohibits the accounting recognition of this element as a higher value of the asset.

Besides, the paragraph of this standard also leaves outside the costs of introducing a new product or service, including costs of advertising and promotional activities.

Costs of conducting business in a new location or with a new class of customers, including staff training costs.

And administration and other general overhead costs

EXAMPLE 2 :

An entity acquired a commercial brand worth 500,000 from its competition company.

With this acquisition, the company seeks to increase its sales by 20% and its share in the market.

The brand is legally registered in the entity’s name as of its acquisition.

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The previous example corresponds to an intangible for the following reasons:

The first is that the asset has no physical appearance and is non-monetary.

A non-monetary asset is an asset that is held in currency or an asset that will receive a fixed or specified amount of money.

The second reason is that the asset is identifiable; that is, the entity has control of the intangible.

Besides, the company is expected to obtain the economic benefits associated with purchasing the asset.

When we refer to an identifiable asset, it means that it is separable.

In other words, it can be separated or spun off from the entity and sold, transferred, put into operation, leased, or exchanged.

The separability concept explains why a trademark generated internally by an entity is not recognized as an intangible, while the acquired brand is recognized in the financial statements.

Then, when an entity purchases an intangible, the separability requirement is met for the company acquiring the asset.

And on the other hand, the identifiability concept is related to the fact that acquiring an asset with these characteristics must arise from legal rights.

In the example, we see that the brand is registered.

This means that the economic benefits resulting from the use of the asset are exclusive to the buyer.

If, for example, the brand were in the public domain, it would not meet the definition of intangible because the economic benefits would share with the community.

In addition to the above, the asset must comply with the control concept.

The legal registration of the brand proves control.

And finally, it must bring economic benefits to the acquiring entity.

This element is evidenced because the company expects to increase its sales and participation in the market.

Example Internally generated intangibles in IFRS

Internally generated intangible assets must meet two stages, the research phase and the development phase.

The costs associated with the research phase must always be recognized in profit and loss.

In contrast, the development costs must be capitalized as long as they meet the requirements of paragraph 57 of IAS 38.

EXAMPLE 3 :

In January of year 1, a pharmaceutical company began the studies to develop a vaccine against the common cold.

Investigation expenses of 700,000 are incurred during the year.

In August, the entity evaluates the project, obtaining the following results:

The entity estimates that once the project is completed, it will have the necessary production to respond to demand.

The vaccine is expected to be ready in March of year 2.

The pharmaceutical company has contracts for the sale of 100 million doses.

The company, for now, does not have all the funding to complete the project.

During year 1, 500,000 are incurred in development expenses.

On January 2, the company finally obtained the financing to complete the project and incurred 2 million in development expenses.

Based on the above information, what is the cost of the asset?

The total cost of the asset amounts to 2,000,000.

Research expenses should be recognized in profit and loss, as we said previously.

 Now, what about the development expenses in year 1?

Should recognize these in profit or loss under paragraph 57 of IAS 38 since all the requirements contemplated in this paragraph are not met.

For this reason, it is not possible to capitalize them.

However, could think that these expenses may be capitalized in year two since in this year, the entity obtained the project financing, which was the only requirement that it had pending to capitalize on the development expenses.

However, paragraph 71 of IAS 38 states the following. 

Expenditures on an intangible item that was initially recognized as an expense shall not be recognized as part of the cost of an intangible asset at a later date. 

 Then, the standard does not allow these expenses to be recognized as part of the intangible cost.

 Continuing with the analysis, paragraph 57 of IAS 38 identifies the following requirements to recognize the development expenses as a higher value of the intangible.

 Technically, it is possible to complete the production of the intangible asset to be available for use or sale.

This requirement is met because the entity expects all production in March of year 2.

The entity intends to complete the intangible asset to use or sell it, and it is expected to generate economic benefits:

This requirement is met because the pharmaceutical company has signed contracts to sell 100 million doses.

 The availability of adequate technical, financial, or other resources to complete the development and to use or sell the intangible asset:

This requirement is not met in year 1; for this reason, it is not possible to capitalize on development expenses this year.

 However, in year 2, this requirement is met because the entity obtains financial viability.

So, it is possible to capitalize on these expenses.

 For this reason, the entity must recognize the intangible for 2,000,000.

Finally, it is essential to say that according to paragraph 63 of IAS 38, Internally generated brands, mastheads, publishing titles, and customer lists shall not be recognized as intangible assets.

Example acquisition as part of a business combination in IFRS

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

Most business combinations result in one entity, the acquirer, obtaining control of one or more businesses other than the acquired company.

We will not see the topic of business combinations in this article, as it is a topic that requires a more detailed explanation in another post.

EXAMPLE 4 :

Entity A buys all the shares of Entity B for 66,000.


Company B’s financial statements are shown below:

Intangible examples

The accounting record of the business combination is as follows:

Intangible example2

The acquiring company must always recognize the acquired entity’s assets at fair value in business combinations.

In this way, the recognized value in the property, plant, equipment, and licenses equals 7,000 and 5,000, respectively.

These values correspond to the difference between the fair value and the carrying amount assets entity B.

On the other hand, entity B has a brand.

This brand has not been recognized in the financial statements of entity B due to was generated internally.

However, this brand behaves as an intangible acquired by entity A in the business combinations.

For this reason, it is necessary to recognize it at fair value.

The difference generated between the assets recognized at fair value and the value paid for the shares of entity B shall be recognized as goodwill.

Total consideration paid to acquire the shares: 66,000

Total assets at fair value: 58,000

Goodwill: 8,000

Example acquisition through a government grant in IFRS

Intangible assets acquired through a government grant will be recognized at fair value.

EXAMPLE 4 :

As part of the aid to companies, the city’s local government-issued 100 licenses to store information in the cloud to improve access to technology.

The fair value of each license is 150,000 and allows information to be stored for five years.

The entity must recognize a grant income against an intangible equivalent to 150.000, which must be amortized over five years.

Example Intangible due to an exchange asset in IFRS

Exchanges of intangible assets can be commercial or non-commercial in nature.

An exchange of a commercial nature is one where there is a change in the cash flows of both parties, and the specific value for the companies is modified as a result of the exchange.

In other words, exchanging a software for 105,000 for a license for 80,000 shows that there is a change in the cash flows of each entity, unlike if the change were a list of customers for a license and the two assets have the same commercial value.

And on the other hand, the difference identified is significant when compared with the fair value of the assets exchanged.

Under paragraph 45 of IAS 38, an entity will always measure the cost of the asset received at the fair value of the asset received; if it is not possible to determine this value, it will be recognized at the fair value of the asset given up.

EXAMPLE 5 :

An entity that has a software whose carrying amount is 45,000 and its fair value is 55,000 exchanges this asset for a license that has a fair value of 95,000 and a carrying amount of 75,000.

The entity must recognize the cost of the intangible at the fair value of the asset acquired.

In other words, a license for 95,000.

If the fair value of the license could not have been reliably measured, it would have been recognized for 55,000 which is equal to the fair value of the asset given up.

Now, if the fair value of neither of the two assets is available, the asset received should be recognized for 75,000, which is the carrying amount of the asset acquired.

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