IAS 38 -

Intangibles
Intangibles Page 7
Executive summary
IFRS permits periodic revaluation of intangible assets (except for goodwill) to fair value.
US GAAP does not allow revaluation.
IFRS requires that development costs are capitalized when technical and economic feasibility
of a project can be demonstrated in accordance with specific criteria. Under US GAAP, most
types of development costs are expensed as incurred.
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Progress on convergence
In 2006, the FASB and the IASB agreed to converge their
standards on intangible assets. However, in 2007 both
Boards agreed not to add a project to their joint agenda. In
2008, the FASB indicated that it will consider in the future
whether to undertake a project to eliminate the differences
in the accounting for research and development costs by
fully adopting IAS 38 at some point in the future.

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Characteristics
The definition of intangible assets is non-
monetary assets without physical substance.
The recognition criteria require there be
probable future economic benefits and costs
that can be reliably measured.
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IFRS US GAAP
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Acquisition of intangibles
Purchased intangibles
In general, intangible assets that are acquired
outside of a business combination are
recognized at fair value at the time of
acquisition.
Direct costs of securing a patent, including an
acquisition from others, are included in the cost.
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IFRS US GAAP
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Acquisition of intangibles
Purchased intangibles
IFRS
These costs would be expensed, except in
the rare circumstance that they improve
future economic benefit.
US GAAP
Permits certain costs incurred subsequent
to its initial recognition (e.g., legal costs to
defend a patent infringement) to be
capitalized.
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Acquisition of intangibles
Internally created intangibles
Internally generated assets other than goodwill,
brands, mastheads, publishing titles,
newspapers and customer lists may be
recognized as assets if certain additional
criteria are met. These additional criteria will be
discussed in research and development.
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IFRS US GAAP
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Types of intangibles
Market-related intangible assets.
Customer-related intangible assets.
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Artistic-related intangible assets these
ownership rights are protected by copyrights.
IFRS US GAAP
Contract-related intangible assets a common
form is a franchise.
Technology-related intangible assets.
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Periodic revaluation
Carrying value
Assuming no impairment, intangible assets are
valued at cost less any accumulated
amortization.
Similar
IFRS US GAAP
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Periodic valuation
Carrying value
IFRS
Revaluation to the fair value of intangible assets other than goodwill is
an allowable alternative treatment:
Because this requires reference to an active market for the specific type of
intangible, it is relatively uncommon in practice.
Increases in value should be credited to the account revaluation surplus.
Revaluation surplus is an account that is included in accumulated OCI.
Increases in value are not recorded in the revaluation surplus account if the
increase reverses a loss that was previously expensed; that portion may be
credited to an unrealized gain account which will flow through net income.
Any decrease in value should be included as an unrealized loss in income
unless it reverses the revaluation surplus relating to the same asset; that
portion can be debited to revaluation surplus (OCI).
US GAAP
Revaluation is
not permitted.
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Periodic valuation
Carrying value
IFRS
Revaluation (continued):
If the revalued basis of an asset exceeds the cost basis, there will be an
increase in the annual amortization. To the extent there is an increase in
amortization expense, per IAS 38, paragraph 87, an entity may reverse the
portion of reserve surplus related to this increase by debiting revaluation
surplus and crediting retained earnings. Alternatively, this transfer may be
completed upon disposal of the asset.
When an asset is disposed of, any remaining revaluation surplus related to
that asset can be transferred to retained earnings.
US GAAP
Revaluation is
not permitted.
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Periodic valuation
Carrying value
IFRS
Revaluation (continued):
If an intangible asset is revalued, an entity can account for the accumulated
amortization at the date of revaluation by:
Amortization elimination method: the accumulated amortization can be
eliminated against the intangible asset itself.
Proportionate restatement method: the accumulated amortization can be
restated proportionately with the change in the gross carrying amount of
the asset so that the carrying amount of the asset after revaluation equals
its revalued amount. The proportionate restatement method is rarely
used in practice, thus no example is provided.

US GAAP
Revaluation is
not permitted.
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Carrying value example
Revaluation
Example 1
Intangibles Inc. owns a freely transferable bus operators license, which it acquired on January 1,
2010 at an initial cost of $100,000. The useful life of the license is five years (based on the date
until which it is valid). The entity uses the straight-line method to amortize the intangible.
Such licenses are frequently traded between existing operators. At the balance sheet date,
December 31, 2011, due to a government-permitted increase in fixed bus fares, the traded value
of such a license was $130,000. The accumulated amortization on December 31, 2011,
amounted to $40,000.
What journal entries are required on December 31, 2011, to
reflect the change in carrying value (cost or revalued amount
less accumulated amortization) on the revaluation of the
operating license using US GAAP and IFRS?
What journal entries are required on December 31, 2012, using
US GAAP and IFRS?
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Carrying value example
Revaluation
Example 1 solution:
2011
US GAAP: Revaluation is not permitted.
IFRS:
Accumulated amortization $ 40,000
Intangible asset $ 40,000
Intangible asset $ 70,000
Revaluation surplus intangibles (OCI) $ 70,000

The net result is that the asset has a revised carrying amount of $130,000 ($100,000 $40,000 + $70,000). The accumulated amortization
may alternatively be restated proportionately.

2012
US GAAP:
Amortization expense $ 20,000
Accumulated amortization $ 20,000
IFRS:
Amortization expense $ 43,333
Accumulated amortization $ 43,333

Revaluation surplus intangibles (OCI)$ 23,333
Retained earnings $ 23,333
Note that this journal entry is optional.
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Carrying value example
Revaluation
Example 2
Peters Photography, Inc. (PPI) reports using IFRS and acquires the ownership rights to a
celebrity photograph on December 1, 2010, for $530. PPI accounts for these rights under the
revaluation model. Assume, for the sake of simplicity, that there is no amortization recognized
on this asset. The fair value of the asset changes as follows:
What are the balances in revaluation surplus at the end of each year?
How much revaluation is recognized through OCI each year?
How much revaluation is recognized in income each year?
December 1, 2010 $530
December 31, 2010 $550
December 31, 2011 $520
December 31, 2012 $510
December 31, 2013 $555
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Example 2 solution:










The upward revaluation at A is accounted for in revaluation surplus through OCI. The downward revaluation
at B first reduces revaluation surplus for that asset to zero and the excess of $10 is recognized as a loss in
income. The second downward revaluation at C is recognized as a loss in income. The upward revaluation
at D first reverses the cumulative loss recognized in income and the excess of $25 is accounted for through
OCI in revaluation surplus.
Carrying value example
Revaluation
Value of
asset
End-of-year
balance in the
revaluation
surplus account
Annual effect
on OCI
Annual effect
on net income
December 1, 2010 $530
A December 31, 2010 550 $20 $20
B December 31, 2011 520 (20) $(10)
C December 31, 2012 510 (10)
D December 31, 2013 555 25 25 20
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Carrying value example
Restatement of accumulated amortization at revaluation
Example 3
The Boston Commons Company (BCC) reports using IFRS and owns a franchise of tea shops in
the Boston area named Tea Party. BCC currently carries the franchise rights for Tea Party at
$120,000. In this last year, Tea Partys business has been quite successful due to the demand for
its English tea products. This success resulted in an increase in the market value of the franchise
rights to $150,000. Accordingly, BCC has revalued these rights. The original cost basis of the
rights is $300,000, and the current accumulated amortization is $180,000.
Please provide the journal entries to record the revaluation
of these franchise rights.
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Carrying value example
Restatement of accumulated amortization at revaluation

Example 3 solution:

Amortization elimination:

Accumulated amortization $180,000
Franchise rights $180,000

Franchise rights $30,000
Revaluation surplus franchise (OCI) $30,000


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Periodic valuation
Impairment definition of impairment indicators
Impairment indicators for an asset include such
items as significant change in its use, projected
losses related to its use and a significant
decline in its market value.
Similar
IFRS US GAAP
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Periodic valuation
Impairment recognition

An impaired asset must be written
down and the write-down should be
recorded in net income.

IFRS US GAAP
Similar, although an exception exists
where an intangible asset has been
revalued and the impairment loss is
reversing an accumulated revaluation
surplus balance for that asset. In that
case, the portion of impairment that is
reversing a prior increase in valuation may
be debited to revaluation surplus (thus
decreasing accumulated OCI).
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Cost allocation
Finite-lived intangible assets
Amortization of intangible assets over their
estimated useful lives is generally required.
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IFRS US GAAP
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Cost allocation
Finite-lived intangible assets
IFRS
This method is not prohibited, but it is not
required.
US GAAP
Under ASC 985-20-35, capitalized
software costs are amortized on a product-
by-product basis:
The annual amortization is the greater of
the amount computed using: (a) the ratio
that current gross revenues for a product
bear to the total of the current and
anticipated future gross revenues for that
product; or (b) the straight-line method over
the remaining estimated economic life of the
product, including the period being reported.
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Cost allocation
Indefinite-lived intangible assets
If there is no foreseeable limit to the period
during which an intangible asset is expected to
generate net cash inflows to the entity, the
useful life is considered to be indefinite and is
not amortized.
Similar
IFRS US GAAP
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Goodwill
Goodwill is recognized only as a result of a business
combination. For a 100% acquisition, the acquirer
recognizes the acquirees net identifiable assets (including
any intangible assets) at fair value at the acquisition date
and recognizes goodwill, which represents the excess of the
purchase price over the acquirers interest in the fair value of
the identifiable net assets of the acquiree.
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IFRS
US GAAP
Goodwill is subject to an annual impairment test.
Negative goodwill is recognized immediately as income
(after reassessing the purchase price allocation).
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Research and development
Internal costs related to the research phase of
research and development are expensed as
incurred under both accounting models.
Under converged standards, in-process
research and development is to be recognized
as an indefinite-lived intangible asset
separately from goodwill at its acquisition-date
fair value.
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Similar
IFRS US GAAP
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Research and development

IFRS
Development costs are capitalized when
technical and economic feasibility of a
project can be demonstrated in
accordance with specific criteria. Some of
the criteria include: demonstrating
technical feasibility, intent to complete the
asset and ability to sell the asset in the
future, as well as others.
US GAAP
Development costs are expensed as
incurred, unless addressed by a separate
standard.
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Research and development example

Example 9 Internet Imaging Inc. (Triple I), is working on a project to create a database of picture images which it
intends to sell over the internet. Triple I has identified the following stages and costs incurred in its project:
Research stage
This stage included identifying the system requirements, searching for an appropriate database and other system
materials and images to purchase, gaining the technical knowledge necessary to collect and transfer the images and
overall project feasibility. Costs incurred were $50,000 during the period of January 1, 2010 through March 31, 2010. On
April 1, 2010, Triple I determined that it would complete the intended project. Additional research costs of $75,000 were
incurred during the period of April 1, 2010 through June 30, 2010.
Development stage
This stage included performing market analysis to identify potential demand, acquiring system materials and images to
populate the database; designing the website; and testing a system prototype. During the period of May 1, 2010 through
August 31, 2010, Triple I incurred development costs of $100,000. On August 31, 2010, Triple I determined that its
project was technically feasible. During the period of September 1, 2010 through October 31, 2010, Triple I incurred
development costs of $50,000. On October 31, 2010, Triple I received its results from its market study and determined
that the project was economically feasible. Additional development costs of $200,000 were incurred during the period of
November 1, 2010 through December 31, 2010.
Production stage
Triple I will launch its imaging database on the internet on January 1, 2011.
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Research and development example
Example 9 continued:
Complete the diagram below by inputting the research and development costs for 2010 in the appropriate
periods based on the information above.
Based on the diagram, determine which research and development costs Triple I can capitalize related to
this project during 2010 using US GAAP and IFRS?
Research phase
Development phase
$ $
$ $ $
January 1,
2010
March 31,
2010
April 1,
2010
May 1,
2010
June 30,
2010
August 31,
2010
September 1,
2010
October 31,
2010
November 1,
2010
December 31,
2010
Research
Initiated
Decision to
complete
the project
Development
initiated
Research
completed
Technical
feasibility
reached
Economic
feasibility reached
Development
completed
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Research and development example
Example 9 solution:
Using US GAAP, Triple I cannot capitalize any research and development costs. Using IFRS, Triple I cannot capitalize
any research costs, similar to US GAAP; however, Triple I may capitalize development costs when technical and
economic feasibility of a project can be demonstrated in accordance with specific criteria. Some of the stated criteria
include: demonstrating technical feasibility, intent to complete the asset and ability to sell the asset in the future, as well
as others. As shown in the diagram below, Triple I met these criteria on October 31, 2010; therefore, the $200,000
incurred from November 1, 2010 through December 31, 2010, prior to the product launch on January 1, 2011, may be
capitalized.

Research phase
Development phase
$50,000 $75,000
$100,000 $50,000 $200,000
January 1,
2010
March 31,
2010
April 1,
2010
May 1,
2010
June 30,
2010
August 31,
2010
September 1,
2010
October 31,
2010
November 1,
2010
December 31,
2010
Research
Initiated
Decision
to
complete
the project
Developmen
t initiated
Research
completed
Technical
feasibility
reached
Economic
feasibility
reached
Development
completed
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Other costs
Start-up costs, including initial operating losses,
cannot be capitalized.
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IFRS US GAAP
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Other costs
IFRS
Advertising and promotional costs are
expensed as incurred. A prepayment may
be recognized as an asset only when
payment for the goods or services is made
in advance of the entity having access to
the goods or receiving the services.
US GAAP
Advertising and promotional costs are
either expensed as incurred or expensed
when the advertising takes place for the
first time under US GAAP. Direct-response
advertising may be capitalized if the
specific criteria in ASC 340-20-25-4, Other
Assets and Deferred Costs-Capitalized
Advertising Costs-Recognition, are met.
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Disclosures

The disclosure requirements under US GAAP
and IFRS for intangible assets are, in most
respects, similar.
Similar
IFRS US GAAP
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Disclosures
US GAAP
GAAP does not, within a single standard,
address comprehensive disclosure
requirements for intangible assets:
Under SEC rules, SEC registrants are
required to disclose identifiable intangible
assets separately from unidentifiable
intangible assets and goodwill, along with
the method of determining their respective
amounts.
Despite the additional disclosures required
by SEC rules, it is likely that there will be
more disclosures for intangible assets
under IAS 38 than under US GAAP
IFRS
IAS 38 includes a long list of general disclosures
for each class of intangible asset:
Internally generated intangible assets must be
distinguished from other intangible assets.
Separate disclosure is required for intangible assets
being amortized over more than 20 years, for
intangible assets being carried under the allowed
alternative treatment at revalued amounts, and for
research and development expenditures.
IAS 38 encourages disclosure of a description of any
fully amortized intangible asset that is still in use and
disclosure of a description of any intangible asset
that did not meet the recognition criteria.
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Disclosures
IFRS
Requires disclosures about impairment
losses in the aggregate and by class of
asset and reportable segment and, if
material, by individual asset or CGU.

IAS 36 specifies additional reporting
requirements for impairment losses and
the reversal of those impairment losses for
revalued assets.
US GAAP
Requires disclosures about impairment
losses and the circumstances giving rise
to those losses. However, detailed
disclosures by individual asset or CGU are
not required.
Because ASC 360 does not permit the
revaluation of assets, it does not provide
guidance on revaluation.
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Disclosures
IFRS
If an assets recoverable amount is
measured as its value in use, IAS 36
requires disclosure of the discount rate
used in calculating that measure and
encourages, but does not require,
disclosure of the key assumptions used.
US GAAP
If a surrogate for fair value is developed by
discounting an enterprises estimates of an
assets future cash flows, ASC 360
requires disclosure of that fact, but not of
the discount rate or the key assumptions
used.