HKAS 38 - Intangible Assets (Condensed)

Objective, Scope & Definitions

Objective (Para 1)

HKAS 38 prescribes accounting treatment for intangible assets not dealt with in another Standard. It requires recognition only if specified criteria are met, measurement of carrying amounts, and specified disclosures.

Scope Exclusions (Paras 2-7)

When an asset has both intangible and tangible elements, judgement determines which is more significant. Computer software integral to hardware is treated as property, plant and equipment (HKAS 16); otherwise, it is an intangible asset.

Key Definitions (Para 8)

Characteristics & Recognition

Three Essential Characteristics (Paras 9-17)

1. Identifiability: Separable OR arises from contractual/legal rights (distinguishes from goodwill).
2. Control: Power to obtain future benefits and restrict others' access (usually from legal rights).
3. Future Economic Benefits: Revenue, cost savings, or other benefits from use.

Recognition Criteria (Para 21)

An intangible asset shall be recognised IF AND ONLY IF:

• (a) Probable future economic benefits will flow to the entity
• (b) Cost can be measured reliably

Initial Measurement (Para 24)

Measured initially at cost. Probability assessment uses reasonable assumptions, with greater weight to external evidence.

Acquisition Methods

Separate Acquisition (Paras 25-32)

Probability criterion is always satisfied because purchase price reflects expectations. Cost includes purchase price and directly attributable costs (employee benefits, professional fees, testing). Excludes advertising, training, administration, and initial operating losses.

Business Combination (Paras 33-43)

Cost = fair value at acquisition date. Both recognition criteria are always satisfied. Recognise separately from goodwill. In-process R&D projects are recognised if they meet the intangible asset definition.

Government Grant & Exchange (Paras 44-47)

Government grant: recognise at fair value or nominal amount. Exchange: measure at fair value unless lacks commercial substance or fair value not reliably measurable.

Internally Generated Assets

Internally Generated Goodwill (Paras 48-50)

Research Phase (Paras 54-56)

All research expenditure is expensed when incurred. Examples: activities to obtain new knowledge, search for applications, formulation of alternatives.

Development Phase (Paras 57-62)

Capitalise only if ALL six criteria are demonstrated:

Cost of Internally Generated Asset (Paras 65-67)

Cost = sum of expenditure from date criteria first met. Previously expensed amounts cannot be reinstated. Includes directly attributable costs (materials, employee benefits, legal fees, amortisation of patents). Excludes selling, administrative, inefficiencies, and training costs.

Recognition of Expense & Measurement After Recognition

Expense Recognition (Paras 68-71)

Expenditure on intangible items is expensed unless it forms part of a recognised intangible asset or goodwill. Examples: start-up costs, training, advertising, relocation. Prepayments are allowed. Past expenses cannot be capitalised later.

Measurement Models (Paras 72-87)

Choose either:

• Cost Model: Cost less accumulated amortisation and impairment.
• Revaluation Model: Fair value (active market required) less subsequent amortisation and impairment. All assets in the same class must use the same model.

Revaluation Accounting

Increases: recognised in OCI (revaluation surplus) unless reversing a previous decrease in profit or loss. Decreases: recognised in profit or loss unless reversing a previous surplus. Surplus transferred to retained earnings when realised (not through profit or loss).

Useful Life & Amortisation

Useful Life Assessment (Paras 88-96)

Assess whether finite or indefinite. Indefinite means no foreseeable limit to net cash inflows. Factors: expected usage, product life cycles, obsolescence, industry stability, competitor actions, maintenance level, legal limits.

Finite Useful Lives (Paras 97-106)

Amortise on a systematic basis over useful life. Begins when asset is available for use; ceases at earlier of held for sale or derecognition. Method reflects consumption pattern; if pattern cannot be determined, use straight-line.

Residual value assumed zero unless third-party commitment to purchase or active market exists. Review amortisation period and method at each year-end.

Indefinite Useful Lives (Paras 107-110)

No amortisation. Test for impairment annually and whenever there is an indication of impairment. Review useful life assessment each period; change to finite is a change in accounting estimate and an impairment indicator.

Impairment, Derecognition & Disclosure

Impairment (Para 111)

Apply HKAS 36 to determine whether an intangible asset is impaired. This covers when and how to review carrying amounts, determine recoverable amount, and recognise or reverse impairment losses.

Derecognition (Paras 112-117)

Derecognise on disposal or when no future economic benefits are expected. Gain or loss = net disposal proceeds less carrying amount, recognised in profit or loss (gains not classified as revenue). Amortisation does not cease when asset is no longer used (unless fully depreciated or held for sale).

Disclosure (Paras 118-128)

For each class of intangible assets (distinguishing internally generated from other):

• Useful lives or amortisation rates
• Amortisation methods
• Gross carrying amount and accumulated amortisation/impairment
• Reconciliation of carrying amount (additions, disposals, revaluations, impairment, amortisation, exchange differences)

Transitional Provisions & Key Takeaways

Transitional Provisions (Paras 130-133)

Intangible assets from business combinations with agreement date on or after 1 January 2005 apply this Standard. All other intangible assets apply prospectively from the first annual period beginning on or after 1 January 2005. Reassess useful lives at that date (change in accounting estimate). Early application encouraged but must also apply HKFRS 3 and HKAS 36.

Key Takeaways Summary