Accounting for Intangible Assets under NZ IAS 38

This article discusses the accounting requirements for intangible assets under NZ IAS 38. It covers the recognition, measurement, and disclosure requirements for intangible assets. The article also highlights the shortcomings of the standard and the challenges posed by intangibles for the IASB. Additionally, it discusses how reporting entities from across the world are overcoming the limitations of international accounting standards.

1
“Intangible assets”
“Accounting for intangible assets”

2
“Intangible assets”
Introduction
Intangible assets are those assets of the entity which lacks any physical substance and
includes copywriters, patents, goodwill, trademark, franchise, trade names and general
interpretation. The NZ IAS 38 outlines the entire accounting requirement for the treatment of
intangible asset in the books of accounts. This accounting standard applies to all the intangible
assets except the assets which are already within the scope of any other standard, financial assets,
those intangible assets which arise from the insurance companies, evaluation and exploration
assets, development and extraction of natural gases, mineral oil, and other related resources
expenditure. As per the NZ IAS 38, the “intangible assets are an identifiable non-monetary asset
without any physical substance”. The asset is identifiable when it is competent of being
estranged from other asset and arises out of the legal or contractual right (Chalmers, et. al.,
2008).
This standard recognizes intangible asset only if it provides future economic benefit to
the company and the price of the asset can be reliably calculated. Here, the potential economic
benefits mean that the revenue will be generated from the sale of the service or product, the asset
will lead to cost saving and it will provide other benefits from its use such as the reduction in the
future cost of production. The measurement principles of the intangible asset are studied in the
case of initial measurement, subsequent expenditure, carrying amount and amortization in this
standard.
Accounting for intangibles under NZ IAS 38
The intangible assets are recorded as the long-term assets in the book of accounts of the
company. The accounting for intangible assets is same as for any other asset. As per NZ IAS 38,
the asset is required to be recognized as self-generated or purchased and they should recognize
the asset in the books of accounts only if the asset is probable to produce future economic profits
and we can reliably measure the cost of the intangible asset. Further, this requirement is applied
when the asset is generated internally or acquired externally.
If the assets do not meet the above-mentioned criteria then the expenditure will be treated
as normal expenditure otherwise the expenditure will be added to the cost of the intangible

3
“Intangible assets”
assets. However if the expenditure does not generate any future economic benefits, then also the
expenditure will be transferred in the income statement of the company. In case of supply of
services and goods, the entity will recognize the expenditure after its occurrence. The other
expenditure which will be recognized as the expense only after its occurrence is expenditure on
the startup activities, expenditure on reorganizing part of the firm, expenditure on promotional or
advertisement activities, and the expenditure on the training activities. If the intangible asset of
the company has a useful life, then the value of the asset has been amortized over the phase of
the life of the asset, exclusive of every class of value (Heirman & Clarysse, 2007).
The cost of those intangle assets which are generated internally is often difficult to find
and distinguish between the cost of enhancing or maintaining the goodwill or operations of the
entity. Thus, the brands which are generated internally are not considered as intangible assets.
The cost of the internally generated intangible assets comprises of all the expenditure which can
be allocated on the consistent and reasonable basis for producing or making the asset. The cost of
an internally generated intangible asset includes the materials and service cost, wages, salaries
and another related cost, directly attributable expenses and the overheads which are necessary for
generation of the intangible asset. However, the entity is required to identify if the expense
incurred in research phase or development phase.
The shortcomings of NZ IAS 38 accounting requirements for intangibles
There are several shortcomings of the NZ IAS 38 accounting requirements for intangible
assets such as it does not apply to all the entities and those intangible assets which are covered by
other accounting standards. In addition to this, this accounting standard does not apply to the
financial assets such as the cash, contractual rights of receiving cash and another financial asset,
ownership interest and contractual right it exchange the financial instrument and it also does not
applies to the mineral rights, development, and extraction of minerals, non regenerative
resources such as oils and natural gases. This standard also does not apply to the intangible assets
which arise in the insurance companies from the contracts with the holders of policy and the
termination benefits. This standard applies research and development activities but it does not
clearly define the cost which can be amortized in the value of the asset. This standard also
applies to the rights regarding the licensing agreement (Secundo, et. al., 2007).

4
“Intangible assets”
The training which is provided to the staff in order to activate the asset and the initial in-
service losses before the asset achieves the premeditated performance is not capitalized in the
cost of an intangible asset according to this standard. Further, any expenditure which is primarily
recognized as the expense cannot be further recognized as the asset at the later date. In addition
to this, the internally generated brand and the publishing titles are also not acknowledged as the
intangible asset under this standard.
The challenges posed by intangibles for the IASB
since the measurements of the intangible assets are relatively unreliable, there is high
need of verification of whether the challenge with the approach of the balance sheet of reporting
with fair values match to the relevance of the intangible asset and the extent to which the
intangible asset disclosure can be capitalized in the company’s balance sheet. The recent debate
of reliable and relevant accounting focuses on this study. It is necessary that the imperative
approach of the valuation of an intangible asset is to be prearranged under the fair value
accounting. The intangible assets reporting are forward-looking and the estimates are subject to
high manipulation by the managers which may be hard to validate. This is a major challenge for
the standard regulators and setters to amend the statement in the light of corporate governance
and corporate needs. These interpretations intensify the debate the creditability and reliability.
How reporting entities from across the world are overcoming the shortcomings of IAS
Accounting standards are beneficial for reliability and comparability as it assists the
comparison of the financial statements of different enterprises. However, there are certain
limitations of international accounting standards which are required to be overcome by the
reporting entities around the world (Penman, 2009). Some of those limitations are as follows:
 Each alternative solution to the accounting problems has certain benefits and by eliminating such
choices among different alternatives brings rigidity and takes away the flexibility in the
application of the accounting principle. In addition to this, every alternative has their own
argument and the selection of best one is not an easy task.

5
“Intangible assets”
 The statue cannot be overwritten by the accounting standards and required to be framed with the
ambit of the prevailing statutes.
The significant challenge is in the regard to the acceptance of the national accounting
standards and the international accounting standard. The national accounting standards are
particularly controlled by the government and majorly the financial statements are mandatory to
be submitted to the finance ministry (Dischinger & Riedel, 2011). It has been in the Vietnamese
accounting system, where the accounting data has been primarily indented fro the government
instead of the investors. In the international accounting standards, the investors are major users
and targets of the mechanism of accounting. Another significant challenge in front of the
reporting entities is the lack of professional and adequate personnel with regard to the adoption
of new common accounting system around the world.
Most of the countries are required to prepare the financial statements which match to the
generally accepted accounting principle and these financial statements are audited as per the
generally accepted accounting standards. However, many countries still do no adopt general
principles which create several conflicts.
Disclosure requirements
As per the NZ IAS 38 the asset useful life, rates used and the amortization methods
which are used are required to be disclosed in the books of accounts of the entity. In addition to
this, the accumulated amortization at the starting and the ending of the period and gross carrying
amount are also required to be disclosed (Cohen, 2011). The reconciliation of the carrying
amounts in the starting of the year and the end of years are required to be shown including the
additions in the intangible assets, retirement and disposal, impairment losses which are
recognized or reversed in the profit and loss account, amortization during the year and the other
changes in the carrying amount. There are another several disclosure requirements as per this
standard, such as if the amortization period exceeds ten years then the entity is required to
provide the reasons of rebutting presumptions and the factors which determine the useful life.
Additionally, the other descriptions which are materials from the perspective of the entity and its
stakeholder are required to be disclosed in the books of accounts of the entity.

6
“Intangible assets”
References
Chalmers, K., Clinch, G., & Godfrey, J. M. (2008). Adoption of international financial reporting
standards: impact on the value relevance of intangible assets. Australian Accounting
Review, 18(3), 237-247.
Cohen, J. A. (2011). Intangible assets: valuation and economic benefit (Vol. 273). John Wiley &
Sons.
Dischinger, M., & Riedel, N. (2011). Corporate taxes and the location of intangible assets within
multinational firms. Journal of Public Economics, 95(7-8), 691-707.
Heirman, A., & Clarysse, B. (2007). Which tangible and intangible assets matter for innovation
speed in start‐ups?. Journal of Product Innovation Management, 24(4), 303-315.
Penman, S. H. (2009). Accounting for intangible assets: There is also an income
statement. Abacus, 45(3), 358-371.
Secundo, G., Margherita, A., Elia, G., & Passiante, G. (2010). Intangible assets in higher
education and research: mission, performance or both?. Journal of intellectual
capital, 11(2), 140-157.