Analysis of IAS 38: Intangible Assets and Accounting Implications

This report provides a comprehensive analysis of IAS 38, the International Accounting Standard for intangible assets. It outlines the standard's purpose, which is to prescribe the accounting treatment for intangible assets, including recognition, measurement, and required disclosures. The report defines intangible assets, differentiating them from physical assets and goodwill, and explains the applicability of IAS 38. It covers key concepts like the cost model and revaluation model for measuring intangible assets after initial recognition, and highlights the differences between IAS 38 and Italian law. The report further discusses the useful life and amortization of intangible assets, as well as impairment of losses. It concludes with recommendations for companies to properly implement IAS 38, emphasizing the importance of training for finance departments to ensure accurate understanding and application of the standard. The report underscores the significance of IAS 38 in shaping the accounting treatment of intangible assets within businesses worldwide, and is a resource for students studying finance.

ACCOUNTING THEORIES
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TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................3
INTRODUCTION AND PURPOSE...............................................................................................3
TASKS.............................................................................................................................................4
Concept of IAS 38.......................................................................................................................4
Applicability................................................................................................................................4
Exchange of asset........................................................................................................................5
Measurement after the recognition..............................................................................................5
Difference in between IAS and Italian law..................................................................................5
Useful life and the process of amortization.................................................................................6
Impairment of losses....................................................................................................................6
CONCLUSION................................................................................................................................7
RECOMMENDATIONS.................................................................................................................7
References........................................................................................................................................8
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EXECUTIVE SUMMARY
IAS 38 has been introduced with the motive to measure and recognize intangible assets,
and it needs disclosure about them. Further, in accordance with the standard, it is necessary for
the enterprise to recognize intangible asset. The main examples of intangible assets are the
trademark, patent, license, computer software, etc. The goodwill that has been developed within
the business internally is considered within the scope of IAS 38, but it is not considered as the
asset as it is not the identifiable resource. Considering the applicability part, IAS 38 applies to all
the intangible assets that organizations hold around the globe. The rule of IAS 38 states that all
the intangible assets generated internally are a part of expense when they are incurred. IAS 38
requires different type of organizations to deliver series of disclosures.
It is possible for the entities to acquire an intangible asset in exchange for nonmonetary
one. Considering the overall practice of IAS 38 organization must select either cost model or the
revaluation model as its accounting policy. There is a wide difference in between IAS 38 and the
Italian law. The first basic difference is that IAS 38 deals with the intangible assets and in case of
Italian law long term costs are considered on the basis of different conditions. The entire study
carried out has supported in knowing about IAS 38. Further, it has directly changed the
accounting treatment of intangible assets which every company operating in the market has to
undertake. It is recommended to companies to provide proper training to the finance department
so that they can understand the concept of IAS38 in proper manner so that it may not be
misunderstood.
INTRODUCTION AND PURPOSE
International accounting standard 38 has been developed with the motive to prescribe the
accounting treatment for the intangible assets. Further, in accordance with the standard, it is
necessary for the enterprise to recognize intangible asset (Christensen et al. 2015). The range of
standards present also allows in specifying how to measure the carrying amount of intangible
assets and requires specified disclosure linked with intangible assets. It is mandatory to apply
this standard to intangible assets only. The main purpose behind carrying out the present report
carried is to analyze the impact of adoption of IAS 38 around the world. Further, the key
principles associated with IAS 38 have been highlighted in the study along with the areas that are
affected due to this concept.
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TASKS
Concept of IAS 38
IAS 38 has been introduced with the motive to measure and recognize intangible assets,
and it needs disclosure about them. Further, any type of intangible asset is considered as the non
monetary asset without any physical substance. It is possible to sale, transfer and license of the
separable assets. The main examples of intangible assets are the trademark, patent, license,
computer software, etc. The goodwill that has been developed within the business internally is
considered within the scope of IAS 38, but it is not considered as the asset as it is not the
identifiable resource (Crawford et al. 2014). Any type of expenditure that is associated with the
intangible item is undertaken as an expense unless the item lies under the criteria of an intangible
asset. For treating any type of intangible assets, its overall cost is undertaken. After recognition,
any type of organization measures intangible asset at cost less accumulated amortization. In case
of research expenditure it is undertaken as an expense and on the other hand development
expense that meets any specific criteria is considered as the cost of the intangible asset.
In case if any organization adopt the practice of IAS 38 then in such case treatment of
intangible asset will be influenced through this. Further, considering the measurement of an
intangible asset, it totally relies upon whether it has been acquired separately or not as other
situations is present where the asset can be acquired as an integral part of the business
combination or was generated internally (Bamber & McMeeking 2016). Considering the overall
practice of IAS 38, it is not possible for the companies to revaluate intangible assets unless the
active market is present in which transactions associates with asset and liability can take place
frequently and in proper volume so as to deliver effective pricing information on the continuous
basis. Apart from this, the overall value of business goodwill is measured as a residual on the
actual data when it has been acquired.
Applicability
Considering the applicability part, IAS 38 applies to all the intangible assets that
organizations hold around the globe. The rule of IAS 38 states that all the intangible assets
generated internally are a part of expense when they are incurred. Further, as per the IAS 38 rule
goodwill is not at all considered as an asset as it is not at all identifiable resource. Generally,
goodwill is not included in the list of an intangible asset (Daske et al. 2013). Apart from this,
customer list, publishing title, generated brands, etc. are not considered as the intangible asset. In
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case if any type of intangible asset is acquired in business combination than its fair value at
acquisition date is considered to be overall cost of intangible asset.
IAS 38 requires different type of organizations to deliver series of disclosures (Crawford
et al. 2014). Any specific organization is required to disclose various elements for every class of
intangible asset (a) whether the useful lives are finite or indefinite (b) different techniques of
amortization employed for intangible assets with finite useful live (c) the value of accumulated
amortization and gross carrying amount at beginning and end of every period (d) considering the
different items of the income statement in which amortization of intangible asset is undertaken
(e) reconciliation of the amount that is carried at the beginning and end of the month. Many time
it is possible that organizations are not able to identify real cost of their assets and through
applicability of IAS 38 it is possible to measure cost of asset reliably.
Exchange of asset
It is possible for the entities to acquire an intangible asset in exchange for nonmonetary
one. For determining the fair cost value of the asset is undertaken and in case if fair value is not
considered then cost is determined at the carrying amount (DeFond et al. 2014).
Measurement after the recognition
Considering the overall practice of IAS 38 organization must select either cost model or
the revaluation model as its accounting policy. Considering the cost model which is based on the
belief that intangible asset must be conducted at cost less accumulated amortization and any
other sort of impairment losses.
Apart from this, the revaluation model states that intangible asset must be carried out at
the revalued amount at the date of revaluation where accumulated amortization is deducted. It is
required to measure fair value on the basis of the active market (Gordon et al. 2017). When any
type of intangible asset is revalued then in such case carrying the amount of that particular asset
is adjusted to the revalued amount. On the day when the asset is revalued, then it is treated in
several ways that involve adjustment of gross carrying amount in such a way that is consistent
with the revaluation of the carrying amount, elimination of accumulated amortization against the
gross carrying amount of the asset.
Difference in between IAS and Italian law
There is a wide difference in between IAS 38 and the Italian law. The first basic
difference is that IAS 38 deals with the intangible assets and in case of Italian law long term
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costs are considered on the basis of different conditions. Applicability of two types of model is
possible in IAS 38 that involves cost and revaluation. But on the other hand in case of Italian law
cost model is only undertaken (Sinclair & Keller 2017). Further, in case of IAS 38 basic
differences are present in case of assets with finite life which is subject to amortization and assets
that have the infinite life with the subject to the impairment test. In case if Italian law only assets
with finite life with subject to amortization is undertaken. So, this directly reflects the basic
difference in between IAS 38 and Italian law which companies have to undertake (Oulasvirta
2014). Companies operating in the market have to alter their overall practices due to IAS 38
where they have to treat intangible assets in a different manner. Under IAS 38, the overall
accounting requirements in case of tangibles that are acquired externally are more liberal.
Useful life and the process of amortization
According to the IAS 38 standards, assets are classified into two different categorize
which are assets with finite useful life and assets with indefinite useful life (Yudi et al. 2016).
Furthermore, an amortizable value can be taken into consideration to calculate the useful life of a
particular asset. The difference between entry value and residual value is used for the purpose of
calculating the amortizable value of an asset. The IAS 38 also highlights the fact that straight line
method is the common method which is used to calculate the amortizable value of an asset.
On the contrary of this, the latest up gradation in IAS 38 standards has resulted in raising
issues and concerns linked with intangible assets with the indefinite life (Horton, Serafeim &
Serafeim 2013). For example, in some assets the time limit for providing economic benefit is not
fixed or foreseeable. Thus, it is more suitable to carry out impairment test of intangible assets
once in a year rather than carrying out amortization of these assets.
Impairment of losses
The problems or issues linked with impairment losses of intangible assets are taken care
by Italian Law and International Accounting Standards (Kothari, Ramanna & Skinner 2015). On
the contrary, it can be critically argued that there are two major differences between Italian Law
and International Accounting Standards and these differences needs to be taken into
consideration. The first and key difference is linked with the duration of the impairment test, and
the International Accounting Standards highlights that the test should be carried out at-least for
one time every year (Ahmed, Neel & Wang 2013). The second difference between Italian Law
and International Accounting Standards is associated with the method adopted to carry out the
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test. However, it is not mandatory to carry out the impairment test in Italy, and the main
emphasis is laid on ensuring the fact that each value is entered correctly in the financial
statements.
CONCLUSION
The entire study carried out has supported in knowing about IAS 38. Further, it has
directly changed the accounting treatment of intangible assets which every company operating in
the market has to undertake. It is necessary to recognize the range of intangible assets at cost at
which it has been acquired. The key attributes of an intangible asset that have been identified
involve identifiability, physical substance, and nonmonetary nature. In case if all these
conditions are not at all satisfied then in such case cost associated with the intangible resource
must be shown in the income statement and in case if conditions are satisfied then it can be
treated as the asset and can be shown on the balance sheet.
RECOMMENDATIONS
There are some recommendations to companies so that they can adopt practice of IAS38
in proper manner. Further, it is required to provide proper training to the finance department so
that they can understand the concept of IAS38 in proper manner as many times it is
misunderstood such as category of intangible asset etc. Apart from this internal audit must be
carried out on continuous basis so as to know that company complies with the principles of
IAS38 in proper manner.
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