IAS 38 Intangible assets
The standard defines an intangible asset as “an identifiable non-monetary asset without physical
substance”.
Identifiable means that the potential intangible must be separable. Separability implies that you are
able to sell or license the intangible separately from the business as a whole. This is a difficult
criterion to apply as trade names that form part of branding can even be separated from the
business. For example, consider a company that operates 5 different product lines each with their
own brand name. A competitor could purchase one of the product lines. The company would still
have 4 product lines and would still be able to continue. Conversely, advertising expenditure is not
separable because the advert encapsulates everything about the brand such as the sounds, tone and
colours that leaves a distinctive subliminal message about the business. As the advert relates to
selling the company’s products and nothing else, it would not make sense for the entity to “sell” their
adverts to anyone.
The second requirement of identifiability is that the intangible arises out of a contractual or other
legal right. The standard briefly explains that while legal protection and enforceability are very
important, the entity may have other rights such as copyright relating to their particular branding
style that arises out of the long-term operating of the business.
Control is another necessary condition to recognize an intangible asset.
Control is when the entity can use the asset to their own advantage while others are restricted or
cannot use the intangible. An intangible could either be knowledge of how to invent a new product
(Scientific knowledge), or how to modify an existing product to improve it. (technical knowledge)
The standard mentions examples that may qualify as intangible assets relating to the control
criterion. Patents allow for control as they prevent others from selling a product similar to the
entity’s. Trademarks and copyrights have the same effect as a patent.
Examples that don’t meet the control criterion include skilled employees. This is because they are
able to leave the company and the firm does not have control. However, there are exceptions if
employees are tied to long term contracts or have a restraint of trade agreement with the firm. The
entity thus has long term “use” of the skilled employees that are bound legally.
Whilst customer loyalty is a valuable attribute, customer loyalty does not meet the control
requirement as customers have the freedom to switch to a competitor even when tied to a contract
and would instead qualify as brand equity (internal goodwill).
Customer information (customer lists) on a company’s database would on the other hand meet the
requirements to be qualified as an intangible asset. This is because they can be sold to a buyer that
would want to sell or promote their products to new clients. Take note that internally generated
customer lists cannot be capitalized. Only acquired ones.
A very important distinction must be made between internally generated intangibles and purchased
intangible assets.
Internally generated intangibles are not capitalized for 2 reasons:
a) Firstly, there is difficulty in assessing when and whether there will be future economic
benefits associated with the intangible item. For example, if a company trademark is made,
The standard defines an intangible asset as “an identifiable non-monetary asset without physical
substance”.
Identifiable means that the potential intangible must be separable. Separability implies that you are
able to sell or license the intangible separately from the business as a whole. This is a difficult
criterion to apply as trade names that form part of branding can even be separated from the
business. For example, consider a company that operates 5 different product lines each with their
own brand name. A competitor could purchase one of the product lines. The company would still
have 4 product lines and would still be able to continue. Conversely, advertising expenditure is not
separable because the advert encapsulates everything about the brand such as the sounds, tone and
colours that leaves a distinctive subliminal message about the business. As the advert relates to
selling the company’s products and nothing else, it would not make sense for the entity to “sell” their
adverts to anyone.
The second requirement of identifiability is that the intangible arises out of a contractual or other
legal right. The standard briefly explains that while legal protection and enforceability are very
important, the entity may have other rights such as copyright relating to their particular branding
style that arises out of the long-term operating of the business.
Control is another necessary condition to recognize an intangible asset.
Control is when the entity can use the asset to their own advantage while others are restricted or
cannot use the intangible. An intangible could either be knowledge of how to invent a new product
(Scientific knowledge), or how to modify an existing product to improve it. (technical knowledge)
The standard mentions examples that may qualify as intangible assets relating to the control
criterion. Patents allow for control as they prevent others from selling a product similar to the
entity’s. Trademarks and copyrights have the same effect as a patent.
Examples that don’t meet the control criterion include skilled employees. This is because they are
able to leave the company and the firm does not have control. However, there are exceptions if
employees are tied to long term contracts or have a restraint of trade agreement with the firm. The
entity thus has long term “use” of the skilled employees that are bound legally.
Whilst customer loyalty is a valuable attribute, customer loyalty does not meet the control
requirement as customers have the freedom to switch to a competitor even when tied to a contract
and would instead qualify as brand equity (internal goodwill).
Customer information (customer lists) on a company’s database would on the other hand meet the
requirements to be qualified as an intangible asset. This is because they can be sold to a buyer that
would want to sell or promote their products to new clients. Take note that internally generated
customer lists cannot be capitalized. Only acquired ones.
A very important distinction must be made between internally generated intangibles and purchased
intangible assets.
Internally generated intangibles are not capitalized for 2 reasons:
a) Firstly, there is difficulty in assessing when and whether there will be future economic
benefits associated with the intangible item. For example, if a company trademark is made,
