IFRS Round Table IAS 38: Intangible Assets

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IFRS Round TableIAS 38 Intangible Assets

• David Jones
• Head of Finance
• 24th 27th September 2007

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Summary of IAS 38 Intangible Assets (1)

• Definition of Intangible Asset
• An identifiable non-monetary asset without
  physical substance
• Recognition Criteria
• Must be separable from the underlying business
  (ie. the asset must be capable of being sold,
  licensed or rented)
• Must have legal or contractual control over the
  asset
• Must deliver future economic benefits
• Must be able to reliably measure the cost of the
  asset
• Must be technically feasible and
• Must demonstrate that the asset will be resourced
  to completion / bring into service.

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Summary of IAS 38 Intangible Assets (2)

• Measurement Criteria
• Bring onto the balance sheet at cost, including
• Direct Materials/ contractor services
• Direct Staff costs
• Direct Legal costs
• Overhead allocation, where appropriate
• Subsequently carry on the balance sheet at cost
  or valuation
• Amortise over useful economic life
• Apply impairment test to ensure continuing
  economic benefit.
• First-time Adoption of IAS 38
• Prospective recognition (in accordance with IFRS
  1)

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Application of IAS 38 by Private Sector since
2005

• Research Development Expenditure IAS 38
  removes the SSAP13 choice as to whether to
  capitalise development expenditure. Eg Rolls
  Royce plc capitalise applied engineering and
  certification fees.
• Data Information Assets
• Reuters plc capitalise expenditure on new or
  substantially improved data products.
• GUS plc (Experian) recognise data purchase and
  data capture costs of internally developed
  databases.
• Software capitalise as intangible if separately
  identifiable from the associated hardware. Both
  purchased and internally developed.
• Websites capitalise only where directly
  income-generating (SIC 32).
• Other goodwill, brands, customer relationships
  (eg. WPP Group plc)

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Interpretation in the Draft I-FReM

• I-FReM has adopted IAS 38 in full with the
  following adaptations
• Option to carry asset at cost has been withdrawn.
  Intangible Assets must be re-valued at each
  balance sheet date following their initial
  capitalisation at cost.
• Where there is no active market to enable the
  valuation of the intangible asset, Depreciated
  Replacement Cost (DRC) may be used as a proxy for
  fair value.
• Indices may be used to assess DRC.

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IAS 38 Issues for Public Sector

• Recognition
• Determining the date from which recognition
  criteria are met
• Develop internal governance structures over
  programmes or development activities (eg
  Investment Boards)
• Identifying direct economic benefits of an asset
  where there are no income streams
• Classifying expenditure between enhancement and
  routine maintenance.
• Measurement of Cost / Valuation
• May require revisions to internal accounting such
  as project costing, to enable capture of discrete
  cost categories such as staff costs, contractors,
  overhead allocation
• Annual valuation often there will be no active
  market for public sector assets, so DRC needs to
  be captured and indices applied.
• First-time Adoption
• Recognition and disclosure of possible Prior-Year
  Adjustments to 2007/08 comparatives
• Stakeholder understanding of change in accounting
  policy.

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References

• Draft I-FReM
• IAS 38 Intangible Assets
• IAS 16 Property, Plant and Equipment
• IFRS 1 First-Time Adoption of IFRS
• SIC 32 Intangible Assets - Website costs
• Annual Reports Accounts
• Reuters Group plc
• GUS plc (Experian)
• Rolls Royce plc
• WPP Group plc