INTANGIBLE NON-CURRENT ASSETS UNDER IAS 38: RECOGNITION, MEASUREMENT, AMORTIZATION, IMPAIRMENT AND ACCOUNTING TREATMENT
Intangible assets are the invisible engines of modern business. They include brands, patents, software, and customer relationships. Unlike physical assets like buildings or machinery, intangible assets have no physical substance. Yet they often represent a significant portion of a company’s value. Understanding how to account for them under IAS 38 is essential for accurate financial reporting and informed decision-making.
Get this wrong, and your financial statements will be misleading. You may overstate or understate assets, misrepresent profitability, and face regulatory scrutiny. Get it right, and you provide a clear, transparent picture of your company’s value, building trust with investors and stakeholders. This guide breaks down everything: the definition of intangible assets, recognition criteria, initial and subsequent measurement, amortization, impairment, and disclosure requirements under IAS 38. Let us get into it.
The Pain Points: Why Businesses Struggle with Intangible Assets Accounting
The Identification Challenge
One of the biggest challenges businesses face is determining whether an item meets the definition of an intangible asset. An intangible asset is an identifiable non-monetary asset without physical substance. It is identifiable when it is separable or when it arises from contractual or other legal rights. But applying this definition in practice can be difficult.
For example, is a customer list an intangible asset? It depends on whether it is separable from the business and can be sold, transferred, or licensed. If a customer list is acquired as part of a business combination, it may be recognized as an intangible asset. But if it is internally generated, it cannot be recognized. The distinction is not always clear, and making the wrong judgment can lead to significant misstatements in financial reporting.
The Research vs. Development Dilemma
For internally generated intangible assets, businesses must distinguish between the research phase and the development phase. Research expenditure is always expensed as incurred. Development expenditure may be capitalized if it meets specific criteria. But distinguishing between research and development can be subjective and challenging.
Consider a pharmaceutical company developing a new drug. Early-stage exploration and testing are research activities. But once the drug reaches a stage where it is technically feasible and the company intends to complete it, development begins. Determining exactly when this transition occurs requires significant judgment. A wrong decision could result in either understating or overstating assets and profits.
The Cost Measurement Problem
Measuring the cost of an internally generated intangible asset is another challenge. The cost is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria. But expenditure incurred before that date cannot be capitalized. This requires careful tracking of costs and precise determination of the date when the recognition criteria are met. Many businesses lack the systems to track costs at this level of granularity.
The Indefinite Useful Life Assessment
Determining whether an intangible asset has a finite or indefinite useful life is critical. An asset with a finite useful life is amortized. An asset with an indefinite useful life is not amortized but is tested annually for impairment. But assessing whether a useful life is indefinite requires judgment.
For example, a broadcasting licence that is renewable indefinitely may have an indefinite useful life if there is evidence to support the entity’s ability to renew it. But if the licensing authority changes its policy and no longer renews licences, the useful life becomes finite. These judgments can have a significant impact on the financial statements, affecting both profit or loss and the balance sheet.
The Impairment Testing Burden
Intangible assets with indefinite useful lives must be tested for impairment annually. This requires estimating the recoverable amount of the asset, which is the higher of its fair value less costs of disposal and its value in use. Estimating value in use requires forecasting future cash flows and selecting an appropriate discount rate. This is a complex and subjective process.
The subjective nature of impairment testing requires companies to exercise judgement and utilise estimates in their valuation models, such as growth rates, inflation and discount rate, adding another layer of complexity. Misjudging or manipulating impairment can lead to mispricing of a company’s shares in the market.
The Cost of Getting It Wrong
A technology company in Lagos incorrectly capitalized research expenditure as development costs. The error was identified during an audit. The company had to restate its financial statements, which caused a drop in its share price and damaged investor confidence. The cost of getting it wrong was significant. Another company in Abuja correctly applied IAS 38, providing transparent financial statements that helped attract investment. The difference was clear. Getting it right pays off in investor confidence and regulatory compliance.
What Are Intangible Assets?
Definition
An intangible asset is an identifiable non-monetary asset without physical substance. It is a resource controlled by an entity as a result of past events, from which future economic benefits are expected to flow to the entity. The definition has three key components that must all be satisfied.
Key Characteristics:
Identifiable: The asset can be separated from the entity and sold, licensed, rented, or exchanged, or it arises from contractual or other legal rights. Identifiability is what distinguishes intangible assets from goodwill. An asset is identifiable if it is separable, meaning it can be sold or transferred, or if it arises from legal rights, such as patents, licences, or trademarks.
Non-monetary: The asset is not cash or a claim to cash. Monetary assets include cash and receivables. Non-monetary assets include intangible assets, property, plant and equipment, and inventories. This distinction is important because monetary assets are generally measured differently from non-monetary assets.
Without physical substance: The asset has no physical form. This is the defining characteristic of intangible assets. They are not physical objects like machinery or buildings. They are rights, relationships, or intellectual property.
Examples of Intangible Assets
Common examples include computer software, licences, trademarks, patents, films, copyrights, and import quotas. Other examples include customer lists, broadcasting rights, and franchise agreements. The diversity of intangible assets means that the accounting treatment can vary significantly depending on the nature of the asset.
What Is Not an Intangible Asset?
Goodwill acquired in a business combination is accounted for under IFRS 3 and is outside the scope of IAS 38. Internally generated goodwill is not recognized as an asset because it is not an identifiable resource. Goodwill represents the excess of the purchase consideration over the fair value of the identifiable net assets acquired. It is not an asset that can be separately identified and recognized.
Scope Exclusions
IAS 38 does not apply to financial assets (covered by IAS 32 and IFRS 9), exploration and evaluation assets (covered by IFRS 6), goodwill (covered by IFRS 3), deferred tax assets (covered by IAS 12), lease assets (covered by IFRS 16), insurance contract assets (covered by IFRS 4), and assets held for sale (covered by IFRS 5). Understanding the scope exclusions is important to ensure that the correct accounting standard is applied to each asset.
Recognition and Initial Measurement
Recognition Criteria
An intangible asset is recognized only if it meets the definition of an intangible asset, it is probable that future economic benefits will flow to the entity, and the cost of the asset can be measured reliably. The recognition criteria apply to all intangible assets, whether acquired separately, acquired in a business combination, or internally generated.
Initial Measurement
Intangible assets are initially measured at cost. The cost includes the purchase price and any directly attributable costs of preparing the asset for its intended use. The concept of cost is central to the initial measurement of intangible assets. Unlike property, plant, and equipment, which may be measured using a revaluation model, intangible assets are generally measured at cost.
Separate Acquisition
When an intangible asset is acquired separately, the cost is the purchase price plus any directly attributable costs. This includes legal fees, registration fees, and other costs directly attributable to the acquisition. The cost is relatively straightforward to determine because it is based on the transaction price.
Acquisition as Part of a Business Combination
When an intangible asset is acquired in a business combination, it is recognized at its fair value at the acquisition date. This applies even if the intangible asset was not previously recognized by the acquired business because it had been internally generated. The fair value must be measured reliably. This is a significant departure from the general rule that internally generated assets cannot be recognized. In a business combination, the acquirer can recognize intangible assets that the acquiree could not recognize because they were internally generated.
Exchange of Assets
If an intangible asset is acquired in exchange for a non-monetary asset, it is measured at fair value. If the fair value cannot be measured reliably, the cost is measured at the carrying amount of the asset given up. This is consistent with the general principle that assets acquired in exchange are measured at fair value unless fair value cannot be determined.
Internally Generated Intangible Assets
The accounting treatment for internally generated intangible assets depends on whether they arise from the research phase or the development phase. This distinction is one of the most challenging aspects of IAS 38.
Research Phase
Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Expenditure on research is recognized as an expense when it is incurred. No intangible asset arising from research is recognized. This is because the future economic benefits of research are uncertain.
Development Phase
Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use. An intangible asset arising from development is recognized if all of the following criteria are met:
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The technical feasibility of completing the intangible asset so that it will be available for use or sale.
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The intention to complete the intangible asset and use or sell it.
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The ability to use or sell the intangible asset.
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How the intangible asset will generate probable future economic benefits.
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The availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset.
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The ability to measure reliably the expenditure attributable to the intangible asset during its development.
What Cannot Be Recognized
Even if the recognition criteria are met, internally generated brands, mastheads, publishing titles, customer lists, and similar items shall not be recognized as intangible assets. These are specifically disallowed by IAS 38. This is a significant limitation on the recognition of internally generated intangible assets. Even if a brand is valuable, it cannot be recognized on the balance sheet if it was internally generated.
Past Expenditure
Expenditure that was previously recognized as an expense cannot subsequently be capitalized as an intangible asset at a later date. This is a strict rule that prevents entities from retrospectively capitalizing research expenditure.
Subsequent Measurement
After initial recognition, an entity must choose either the cost model or the revaluation model for each class of intangible assets. The choice of model is an accounting policy decision that must be applied consistently to all assets in the same class.
Cost Model
Under the cost model, an intangible asset is measured at its cost less any accumulated amortization and any accumulated impairment losses. This is the most commonly used model. The cost model is simpler and more objective than the revaluation model.
Revaluation Model
Under the revaluation model, an intangible asset is measured at its fair value at the date of revaluation less any subsequent accumulated amortization and subsequent accumulated impairment losses. The revaluation model can only be applied if there is an active market for the intangible asset. It is uncommon for there to be an active market for intangible assets. This is because intangible assets are often unique and not traded in an active market.
Key Features of the Revaluation Model:
Revaluations should be carried out regularly to ensure the carrying amount does not differ materially from fair value. Any surplus arising on revaluation is recognized in other comprehensive income (OCI) and accumulated in a separate reserve within equity, unless it reverses a previous decrease on the same asset recognized as an expense. Any deficit arising on revaluation is recognized in profit or loss, except to the extent that it reverses a previous revaluation surplus on the same asset, in which case it is recognized in OCI.
Amortization
Definition
Amortization is the systematic allocation of the depreciable amount of an intangible asset over its useful life. It reflects the pattern in which the entity consumes the asset’s economic benefits. The concept of amortization is similar to depreciation for tangible assets.
Finite Useful Life
An intangible asset with a finite useful life is amortized. The useful life is either the period over which the asset is expected to be available for use or the number of production or similar units expected to be obtained from the asset.
Key Points:
Amortization begins when the asset is available for use. Amortization ceases at the earlier of the date the asset is classified as held for sale and the date the asset is derecognized. The amortization method should reflect the expected pattern of consumption of economic benefits. There is a rebuttable presumption that an amortization method based on revenue is not appropriate. There is a rebuttable presumption that the residual value of an intangible asset is nil. This means that most intangible assets are amortized to zero over their useful lives.
Indefinite Useful Life
An intangible asset with an indefinite useful life is not amortized. However, the useful life is reassessed each year to ensure that the indefinite life assumption remains appropriate. If the useful life is no longer indefinite, the asset is amortized from that date. This is a critical area of judgment because the assessment of indefinite useful life has a significant impact on profit or loss. Assets with indefinite useful lives do not have amortization expense, which increases profit.
Examples of Useful Life Determination
Example 1: Acquired Customer List:
A direct-mail marketing company acquires a customer list and expects to derive benefit from the information on the list for at least one year, but no more than three years. The customer list is amortized over management’s best estimate of its useful life, say 18 months.
Example 2: Acquired Patent with 15-Year Legal Life:
The product protected by the patented technology is expected to be a source of net cash inflows for at least 15 years. The entity has a commitment from a third party to purchase the patent in five years for 60% of its fair value at the acquisition date. The patent is amortized over its five-year useful life to the entity, with a residual value equal to the present value of 60% of the patent’s fair value at the acquisition date.
Example 3: Acquired Copyright with 50-Year Legal Life:
An analysis of consumer habits and market trends provides evidence that the copyrighted material will generate net cash inflows for only 30 more years. The copyright is amortized over its 30-year estimated useful life.
Example 4: Broadcasting Licence with Indefinite Renewal:
A broadcasting licence is renewable indefinitely at little cost and the entity intends to renew it indefinitely. The technology used in broadcasting is not expected to be replaced by another technology at any time in the foreseeable future. The licence has an indefinite useful life and is not amortized. It is tested annually for impairment.
Example 5: Broadcasting Licence No Longer Renewable:
The licensing authority subsequently decides it will no longer renew broadcasting licences. The entity’s licence has three years until it expires. The useful life is no longer indefinite. The licence is amortized over its remaining three-year useful life and tested for impairment immediately.
Impairment
Impairment Testing
All intangible assets are subject to impairment testing in accordance with IAS 36 Impairment of Assets. Impairment testing ensures that intangible assets are not carried at more than their recoverable amount.
Finite Useful Life: Intangible assets with a finite useful life are tested for impairment whenever there is an indication that the asset may be impaired. This requires management to identify indicators of impairment, such as a decline in market value, adverse changes in technology, or a significant decrease in cash flows.
Indefinite Useful Life: Intangible assets with an indefinite useful life are tested for impairment annually. They are also tested whenever there is an indication that they may be impaired. The annual impairment test is a significant burden for entities with large intangible assets.
Impairment Loss
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of fair value less costs of disposal and value in use. Impairment losses are recognized in profit or loss. Value in use is calculated by discounting future cash flows expected to be derived from the asset. This is a complex and subjective process that requires significant judgment. The impairment of intangible assets can significantly impact a company’s earnings and market valuation.
Derecognition
An intangible asset is derecognized on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss on disposal is included in profit or loss and is calculated as the difference between the net disposal proceeds and the carrying amount of the asset. Derecognition is the final stage of the accounting lifecycle for intangible assets.
Disclosure Requirements
IAS 38 requires entities to disclose information about their intangible assets, including:
The accounting policies applied.
The useful lives or amortization rates used.
The amortization methods used.
The gross carrying amount and accumulated amortization at the beginning and end of the period.
A reconciliation of the carrying amount at the beginning and end of the period.
The amount of impairment losses recognized in the period.
The amount of impairment losses reversed in the period.
The amount of research and development expenditure recognized as an expense.
For each class of intangible assets, entities must distinguish between internally generated intangible assets and other intangible assets. Entities must also disclose the line item(s) of the statement of comprehensive income in which any amortization of intangible assets is included. These disclosures provide users with information about the nature, amount, and risks associated with intangible assets.
How Qeeva Advisory Helps You Navigate Intangible Assets Accounting
We understand that intangible assets accounting can be complex. Many businesses struggle with identification, recognition, measurement, and impairment testing. Our professionals specialise in financial reporting, auditing, and advisory services.
Our Advisory Services Nigeria help you understand the complexities of IAS 38. We assist with identification, recognition, measurement, and disclosure requirements for intangible assets.
Our Financial Advisory services help you structure transactions involving intangible assets, including acquisitions, disposals, and business combinations.
Our Risk Management services help you identify and manage risks associated with intangible assets, including impairment risk and valuation risk.
Our Bookkeeping Services ensure your financial records are accurate and complete, supporting your intangible assets accounting.
Our Internal Control Services help you strengthen internal controls over intangible assets, including identification, valuation, and impairment testing.
Our Valuation Services help you determine the fair value of intangible assets for initial recognition, business combinations, impairment testing, and financial reporting purposes. Accurate valuation is essential for compliance with IAS 38 and for providing transparent financial statements.
Our Service Methodology
We do not do generic. We do thorough, transparent, and actionable.
Step 1: Intangible Assets Identification
We help you identify all intangible assets that meet the definition and recognition criteria under IAS 38. We assess separability, contractual rights, and control.
Step 2: Recognition and Measurement
We help you recognize and measure intangible assets at initial recognition, including the treatment of separately acquired assets, business combinations, and internally generated assets.
Step 3: Subsequent Measurement
We help you choose the appropriate subsequent measurement model (cost or revaluation) for each class of intangible assets.
Step 4: Amortization and Impairment
We help you determine the useful life, amortization method, and impairment testing requirements for intangible assets.
Step 5: Ongoing Monitoring and Support
Intangible assets accounting is not a one-time exercise. We help you monitor changes in the standards, update your accounting policies, and stay current with regulatory developments. We provide ongoing support through our Advisory Services Nigeria and Risk Management services.
Frequently Asked Questions
Q: What is the difference between research and development?
A: Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development is the application of research findings to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services.
Q: Can internally generated brands be recognized as intangible assets?
A: No. Internally generated brands, mastheads, publishing titles, customer lists, and similar items shall not be recognized as intangible assets.
Q: What is the difference between finite and indefinite useful life?
A: An asset with a finite useful life is amortized over its useful life. An asset with an indefinite useful life is not amortized but is tested annually for impairment.
Q: When should amortization begin?
A: Amortization begins when the asset is available for use.
Q: What is the revaluation model?
A: The revaluation model allows an intangible asset to be measured at its fair value less subsequent amortization and impairment. It can only be applied if there is an active market for the intangible asset.
Q: How can Qeeva Advisory help with intangible assets accounting?
A: We provide identification, recognition, measurement, amortization, impairment, and disclosure support to help businesses navigate intangible assets accounting under IAS 38.
The Bottom Line
Intangible assets are a critical part of modern business. Understanding how to recognize, measure, and account for them is essential for accurate financial reporting and informed decision-making.
The key is to understand the definition and recognition criteria. An intangible asset must be identifiable, non-monetary, and without physical substance. It must be probable that future economic benefits will flow to the entity, and the cost must be measurable reliably.
Your job is to be prepared. Understand the definition and recognition criteria. Distinguish between research and development. Choose the appropriate subsequent measurement model. Determine the useful life and amortization method. Test for impairment. Seek professional guidance.
With the right approach and the right partner, you can turn intangible assets from a compliance burden into a clear, transparent measure of your company’s value.
The choice is yours.
Suggested Reading from Our Blog
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Earnings Per Share (IAS 33) – Understand the calculation of basic and diluted EPS.
Financial Instruments: Financial Assets and Financial Liabilities – Understand the classification and measurement of financial instruments.
Preparation and Presentation of Financial Statements of a Simple Group – Understand group financial statements under IFRS.
Related Services
Our Advisory Services Nigeria are staffed by professionals specialising in financial reporting, auditing, and advisory services.
Our Financial Advisory services help you structure transactions involving intangible assets.
Our Risk Management services help you identify and manage risks associated with intangible assets.
Our Bookkeeping Services ensure your financial records are accurate and complete.
Our Internal Control Services help you strengthen internal controls over intangible assets.
Our Valuation Services help you determine the fair value of intangible assets for initial recognition, business combinations, impairment testing, and financial reporting purposes.
Let’s Talk About Your Intangible Assets Accounting
Navigating intangible assets can feel complex. At Qeeva Advisory, we understand the challenges businesses face in accounting for intangible assets under IAS 38.
Whether you need help with identification, recognition, measurement, amortization, or impairment testing, we are here to support you.
📞 Call us: (+234) 802 320 0801, (+234) 807 576 5799
📧 Email: info@qeeva.com
📍 Visit us: 5, Ishola Bello Close, Off Iyalla Street, Alausa, Ikeja, Lagos, Nigeria
Contact us today to schedule a consultation. Let us help you navigate intangible assets with confidence.
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Reference Links / Sources
IFRS Foundation – IAS 38 Intangible Assets (Overview)
FAR Online – IAS 38 Intangible Assets
PKF Littlejohn – An in-depth guide to IAS 38
European Banking Authority – IAS 38 Intangible Assets (paras. 263-266)
ICAB – IAS 38 Intangible Assets (Study Material)
INTHEBLACK – Accounting for intangibles: IAS 38 review explained
