IAS 38, or International Accounting Standard 38, “Intangible Assets,” is an accounting standard issued by the International Accounting Standards Board (IASB) that provides guidance on the recognition, measurement, and disclosure of intangible assets. Intangible assets are non-monetary assets that lack physical substance and are identifiable, meaning they are capable of being separated from the entity and sold, transferred, or licensed. Here are some examples of how IAS 38 may be applied in practice:
- Example 1: XYZ Inc, a software development company, develops a new software program with expected future economic benefits.
XYZ Inc recognizes the costs incurred in developing the software program as an intangible asset in accordance with IAS 38. The costs incurred, such as research and development costs, are capitalized as an intangible asset if certain criteria are met, including the technical and commercial feasibility of completing the software program, the intention to use or sell the software program, and the ability to measure reliably the costs incurred. The capitalized costs are amortized over the expected useful life of the software program, and any impairment of the intangible asset is assessed in accordance with IAS 36, “Impairment of Assets.”
- Example 2: ABC Corp, a pharmaceutical company, acquires a patent for a new drug through a business combination.
ABC Corp recognizes the fair value of the acquired patent as an intangible asset in accordance with IAS 38. The fair value of the patent is determined based on market-based evidence or other reliable estimates of the expected future economic benefits that will flow to the entity. The patent is amortized over its expected useful life, which is determined based on the estimated economic benefits that will be derived from the patent. Any impairment of the intangible asset is assessed in accordance with IAS 36.
- Example 3: DEF Ltd, a media company, acquires a license to use a popular brand name for its products.
DEF Ltd recognizes the cost of the acquired license as an intangible asset in accordance with IAS 38. The license is amortized over its expected useful life, which is determined based on the terms of the license agreement or other relevant factors. Any impairment of the intangible asset is assessed in accordance with IAS 36. If the license has an indefinite useful life, it is not amortized but instead tested for impairment annually or when there are indicators of impairment.
It’s important to note that the specific application of IAS 38 may vary depending on the individual circumstances and accounting policies of each entity. Professional judgment and expertise may be required to properly apply the recognition, measurement, and disclosure requirements in IAS 38 and ensure compliance with the applicable accounting standards and regulations in the accounting for intangible assets.