What is IAS 38 and how does it affect intangible asset reporting?

Full Explanation

IAS 38 is the IFRS standard governing recognition, measurement, and disclosure of intangible assets — it requires assets to be identifiable, create future benefits, and allow reliable measurement.

Under IAS 38, an intangible asset is recognised on the balance sheet only if: (1) it is identifiable (separable or legally/contractually defined), (2) the company controls the resource, (3) it is probable future economic benefits will flow to the company, and (4) cost can be measured reliably. Acquired intangibles in M&A transactions are always recognised at fair value under IFRS 3. Internally developed intangibles face stricter criteria: development costs can only be capitalised if technical feasibility, intent to complete, ability to use/sell, probable future benefits, and adequate resources and cost measurement are all demonstrated. Research costs must always be expensed. This asymmetry (acquired intangibles always capitalised, internally developed facing obstacles) means companies that grow organically have understated balance sheets relative to companies that grow through acquisition. Intangible assets are amortised over useful life or tested for impairment if indefinite. IAS 38 also requires extensive disclosures: useful lives, amortisation policies, impairment testing results, and major intangible asset holdings. For companies planning acquisition, IAS 38 and IFRS 3 drive the valuation process — all identifiable intangibles must be separately valued and recognised at fair value, or allocated to goodwill.

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