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Intangible Assets: IAS 38 (IFRS)

Updated: Sep 23, 2020

In this article we review the definition of Intangible Assets under IFRS (IAS 38) criteria.

In general, Intangible Assets are property that does not have a physical form but can be recognized on the Statement of Financial Position an asset. Examples include: software, patents, research and development, brand names, licences, etc…

In order for an intangible to be considered an asset, several criteria must be met. We discuss these criteria in the sections below. If the criteria are not met, then the expenses incurred should be added to the Statement of Profit/Loss under the "Expense" section. For example - if software is created, but no future economic benefit is deemed from this software, then the costs incurred to create this software would simply be considered an expense (i.e. the costs would not be capitalized into an asset). This is true in most cases if the definition criteria are not met, unless the item is later acquired as part of a business combination. In this situation, the expense would be considered part of “Goodwill”, which we describe in a later article.

Definition Criteria:

IAS 38, stipulates that the following must be true in order to recognize an Intangible Asset in an entity’s Statement of Financial Position:

  1. The asset must be IDENTIFIABLE. In order for the asset to be identifiable, the following must we true:

    1. Asset is capable of being separated from the entity. For example - the item can be transferred, sold, licensed, exchanged, rented, leased, etc... either by itself or in combination with other contracts; OR

    2. The asset “arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.” (IAS 38, paragraph 12)

  2. CONTROL. The entity must have control over the intangible in order for it to be considered an asset. Control typically arises when the entity is capable of extracting future economic benefits from the asset. Legal rights to the intangible often signal that the entity has control, however, this is not necessarily required. For example - technical knowledge which can give rise to future economic benefits may be controlled by an entity through copyrights, confidentiality agreements, etc.. However, staff technical talent - in and of itself - is not considered controllable by an entity and would therefore not be considered an Intangible Asset.

  3. FUTURE ECONOMIC BENEFITS. The entity should expect to be able to garner future economic benefits from the asset, such as sales revenues, cost savings, etc..


Once we have established that an intangible meets the definition of an Intangible Asset under IAS 38, we must then ensure that a) we can recognize the asset, and b) we recognize the asset at the correct value. The recognition criteria is found under IAS 38, paragraphs 21-24.

Can we Recognize the Asset?

The Intangible Asset can be recognized only if both of the following conditions are met:

  1. Future Economic Benefits from the asset are likely (“it is probable”) to flow to the entity. This is a matter of judgement, with more weight given to external evidence. For example: if an entity is undergoing bankruptcy proceedings and it is unlikely that software code produced by the entity will ever result in economic benefits to the entity, then we cannot recognize this as an Intangible Asset. AND

  2. The cost of the Asset can be measured reliably. (IAS 38, paragraph 21).

How to value the asset?

IAS 38, paragraph 24 states that Intangible Assets must be initially recognized at cost.

When Intangible Assets are purchased by an entity, they are recognized based on the manner in which they have been purchased. This is described below.

Separable Intangible asset

If an Intangible Asset is purchased separately from a business, then it is capitalized at cost. In other words - the Intangible Asset is listed in the Statement of Financial Position at its purchase cost.

Note that purchasing the intangible, in and of itself, demonstrates that it meets the definition criteria of an Intangible Asset. 1. It is clearly identifiable, since it was purchased separately from the rest of the business. 2. The new entity now has control over the asset - by means of purchasing it. And 3. the buyer is unlikely to have purchased the Intangible Asset if it were unlikely to bring future economic benefits.

Costs include:

  • The cost of the Intangible Asset includes the same items as are included for standard Property, Plant and Equipment (click here for more information). Example of costs include: the initial purchase price (less discounts and rebates), import duties, non-refundable taxes, and any costs directly attributable to preparing the asset for its intended use.

  • If the entity acquired the asset through an exchange, then the same rules of exchange also apply, as for Property, Plant and Equipment (click here for more information).

Non-separable Intangible Asset: Asset is bought together with a Business Combination

If the Intangible Asset is purchased as part of a business combination, the asset is valued based on its fair value - which, in most cases, is the same as the cost at which it was purchased. The fair value of the asset would be its market value - and by extension the price at which the asset was purchased, assuming parties had an arm's length relationship. In order to establish its cost, the fair value of the Intangible Asset alone must be able to be separately evaluated. As with all Intangible Assets, the asset must a) meet the definition of an Intangible Asset and b) is identifiable and separable. Remember that cost includes initial purchase price, import duties, etc... as described in the section above.

If no fair value can be separately attributed to the intangible asset, then the cost of the asset should be included in "Goodwill."

Separable Intangible Assets, that only work in combination with Tangible Assets

There are situations where an Intangible Asset can be separated, but only works in combination with other assets. For example: it might be difficult to separate a trade secret recipe from the tangible assets which make up the recipe (like the production facility for a spicy sauce).

In these situations, we treat the intangible as part of the group of assets. The buyer can treat the group of assets as one "Asset" as long as all assets in the group have similar useful lives.

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