Intangible Assets
INTANGIBLE ASSETS UNDER IFRS AND GAPSME
Author: Paul Zammit
FINANCIAL REPORTING PREPARERS NEED TO BE AWARE OF SIGNIFICANT DIFFERENCES BETWEEN IFRS AND GAPSME WHEN COMPANIES OWN INTANGIBLE ASSETS. IN RESPECT OF INTANGIBLE ASSETS, IFRS FINANCIAL STATEMENTS ARE GOVERNED BY IAS 38 ‘INTANGIBLE ASSETS’ WHILST GAPSME FINANCIAL STATEMENTS ARE REGULATED BY SECTION 11 OF THE LEGISLATION, NAMELY ‘INTANGIBLE ASSETS OTHER THAN GOODWILL’. The principles to follow when recognising intangible assets are the same, irrespective of the accounting framework adopted. In fact, both frameworks define intangible assets in the same way:
“An intangible asset is an identifiable non-monetary asset without physical substance”. This means that a number of criteria need to be met for an expenditure event to result in the recognition of the item of expenditure in question as an intangible asset: • • • • • • •
The item is identifiable. The item of expenditure is non-monetary, rather than monetary. The entity controls the item. The entity will probably enjoy future economic benefits from the item. The entity can reliably measure the item. The item lacks physical substance. The item is within scope of IAS 38 (GAPSME does not specify which assets are in scope, but the same principles apply under both accounting frameworks).
A challenging area is the treatment of research and development expenditure. Preparers are challenged when deciding whether to recognise an expense or an intangible asset. The accounting treatment is identical under IFRS and GAPSME. All research expenditure is expensed, whereas development costs are capitalised (that is, recognised as intangible assets) only from the point in time when six criteria are met. These criteria are listed under both IFRS and GAPSME,
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and are commonly referred to as the ‘PIRATE’ criteria:
1. Probability of generating future economic benefits. 2. Intention to complete the intangible asset. 3. Resources available (technical, financial etc). 4. Ability to use or sell the intangible asset. 5. Technical feasibility of completing the intangible asset. 6. Estimate of development expenditure attributable to the intangible asset can be measured reliably.
Whereas the accounting framework can be disregarded when it comes to recognition, the opposite is true in terms of measurement. When recognising an intangible asset, an entity needs to choose which model it shall apply. IFRS offers a choice between the cost model and the revaluation model – although the latter is available only if the intangible asset is being traded on an active market. It is quite rare that intangible assets are traded on an active market, but cryptocurrency is a significant exception to this. Under the cost model, intangible assets are amortised over their useful life. On the other hand, under the revaluation model, intangible assets are revaluated on a regular basis, and subsequently amortised (and possibly also impaired). >>
