IAS 38 defines the accounting treatment for intangible assets— which are non-monetary assets without physical substance. To qualify as an intangible asset, it must possess three critical attributes:

(1) Identifiability – either being separable or arising from contractual or other legal rights)

(2) Control – meaning the entity has the power to obtain benefits from the asset, and

(3) Future economic benefits – such as revenues or reduced future cost.

Scope of IAS 38:

IAS 38 applies to the accounting for all intangible assets, except those covered by other specific IFRS standards. The standard provides guidance on recognizing, measuring, and disclosing intangible assets that are not dealt with elsewhere.

The following items are outside the scope of IAS 38:

• Financial instruments (covered by IAS 32, IFRS 9)
• Exploration and evaluation of mineral resources (IFRS 6)
• Goodwill acquired in a business combination (IFRS 3)
• Leases of intangible assets (IFRS 16)
• Deferred tax assets (IAS 12)
• Employee benefits (IAS 19)
• Insurance contracts (IFRS 17)
• Non-current assets held for sale (IFRS 5)

Initial Recognition of Intangible Assets:

An intangible asset is recognized in the financial statements only if it meets both of the following criteria:

1. Probable future economic benefits will flow to the entity, and
2. The cost of the asset can be measured reliably.

IAS 38 places strict rules on recognizing intangible assets that are developed internally.

These are evaluated in two distinct phases:

1. Research Phase

Costs incurred during the research phase must be expensed as incurred.

Reason: At this stage, future economic benefits are uncertain.

2. Development Phase

Costs incurred in development may be capitalized as an intangible asset, but only if the following conditions are all met:

• Technical feasibility of completing the asset
• Intention to complete and use/sell it
• Ability to use/sell it
• How the asset will generate future economic benefits
• Availability of resources to complete the project
• Reliable measurement of costs

If any of these conditions are not met, the costs must be expensed.

Internally generated goodwill, brands, customer lists, and similar items can never be recognized as assets.

Subsequent Measurement of Intangible Assets:

After the initial recognition of an intangible asset, IAS 38 provides two models for subsequent measurement – the Cost Model and the Revaluation Model. The choice between these two depends on the specific nature of the intangible asset and whether it has an active market.

Cost Model

Under the Cost Model, after initial recognition, an intangible asset is carried at cost less accumulated amortization and accumulated impairment losses.

• Amortization is applied to intangible assets with a finite useful life. The asset is depreciated over its useful life, starting from the date of recognition, unless the asset is impaired.
• Intangible assets with indefinite useful lives are not amortized but are tested for impairment annually.

Example:If a company acquires a patent for $1,000,000, and the patent has a useful life of 10 years:

• The asset would be amortized over 10 years (e.g., $100,000 per year).
• After 3 years, the carrying amount would be $700,000 ($1,000,000 – 3 years’ amortization).

Revaluation Model

The Revaluation Model allows intangible assets to be carried at their fair value at the date of revaluation, less subsequent amortization and impairment losses. However, the Revaluation Model can only be applied if there is an active market for the asset.

An active market for an intangible asset is relatively rare, as most intangible assets do not have an observable market (e.g., patents or trademarks). Therefore, this model is less commonly used.

Disclosure requirements under IAS 38:

For each category of intangible asset, disclose:

1. The useful life or the amortization rate applied.
2. The amortization method used.
3. The gross carrying amount of the asset.
4. The accumulated amortization and impairment losses at the reporting date.
5. The line items in the income statement in which amortization of intangible assets is included.
6. A reconciliation of the carrying amount of intangible assets at the beginning and end of the period, showing additions, disposals, amortization, impairments, and any other relevant movements.
7. The basis for determining that an intangible asset has an indefinite useful life, if applicable.
8. A description and the carrying amount of any individually material intangible assets.
9. Specific disclosures regarding intangible assets acquired through government grants, including their nature and conditions.
10. Information about intangible assets whose title is restricted, including the nature of the restrictions.
11. Details of contractual commitments to acquire intangible assets in the future.

In addition, the following additional disclosures are required:

• For intangible assets carried at revalued amounts, entities must disclosethe carrying amount under the revaluation model, and the revaluation surplus, if any.
• The total amount of research and development expenditure recognized as an expense during the period.