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Measurement After Recognition Of Intangible Asset [IAS 38]



Following on my previous entry [Accounting For Intangible Asset], this post discuss measurement after recognition of an intangible asset [adapted from IAS 38, Intangible Asset]. The Standard states that; after recognition, intangible assets may be measured using either a cost model or a revaluation model. However, if the revaluation model is used, then all assets in the same class are to be treated alike unless there is no active market for those assets. “Classes of intangible assets” refers to groupings of similar items, such as patents and trademarks, concession rights, or brands.

Assets in each class must be treated alike in order to avoid mixes of costs and values:


  • If the cost model is selected, then after initial recognition, an intangible asset shall be carried at cost less accumulated amortization and impairment losses.
  • If the revaluation model is selected, the intangible asset shall be carried at its fair value less subsequent accumulated amortization and impairment losses. Fair values are to be determined from an active market and are to be reassessed with regularity sufficient to ensure that, at the balance sheet date, the carrying amount does not differ materially from its fair value.


Revaluations are to be determined only by reference to an active market. Use of valuation models and other techniques IS NOT permitted. In this respect, an active market is one in which the items traded are homogeneous, willing buyers and sellers can be found at any time, and prices are available to the public.

Therefore, in most instances, the revaluation model will not be a realistically usable model. Brands, trademarks, film titles, and the like are all individually unique and therefore fail on the homogeneity criterion.

If the revaluation model is used, at the date of the revaluation, accumulated amortization and impairment losses are either eliminated against the cost and then the net amount is up-lifted to the revalued amount or are restated proportionately to the restatement of the gross carrying amount such that the net amount is equal to the fair value.


Case Example: Lie Dharma Inc. owns a freely transferable taxi operator’s license, which it acquired on January 1, 20X8, at an initial cost of $10,000. The useful life of the license is five years (based on the date it is valid for). The entity uses the straight-line method to amortize the intangible. Such licenses are frequently traded either between existing operators or with aspiring operators. At the balance sheet date, on December 31, 20X9, due to a government-permitted increase in fixed taxi fares, the traded values of such a license was $12,000. The accumulated amortization on December 31, 20X9, amounted to $4,000.

The Question are: What journal entries are required at December 31, 20X9, to reflect the increase/decrease in carrying value (cost or revaluated amount less accumulated depreciation) on the revaluation of the operating license based on the traded values of similar license? Also, what would be the resultant carrying value of the intangible asset after the revaluation?


The journal entries to be recorded in the books of account are:

[Debit] Intangible asset—accumulated amortization = $4,000
[Credit] Intangible asset—cost = $4,000
(Note: Being elimination of accumulated depreciation against the cost of the asset)

[Debit] Intangible asset—cost = $6,000
[Credit] Revaluation reserve = $6,000
(Note: Being up-lift of net book value to revalued amount)

The net result is that the asset has a revised carrying amount of $12,000 (=$10,000 – $4,000 + $6,000).


A revaluation increase is to be classified as a part of equity unless it reverses a previously recognized impairment loss, in which case it is credited to the income statement. If, in subsequent years, revaluation decreases on the same asset occur, such decreases may be deducted from the revaluation reserve applicable to that asset. Otherwise the reduction is to be charged against profit.

Any revaluation reserve in respect of a particular intangible asset is transferred to retained earnings when it is realized. This could be on disposal, although it is permitted to treat the additional amortization resulting from the revaluation as a realization of that surplus and transfer this amount from revaluation reserve to retained earnings. Under no circumstances can the revaluation reserve, or part thereof, be credited to the income statement.


Useful Life Of Intangible Asset

The useful life of an intangible asset must be assessed on recognition as either indefinite or finite. If the assessment determines the life to be finite, then the length of life or number of units to be produced must be determined also. An indefinite useful life may be determined when there is no foreseeable limit to the period over which the entity will continue to receive economic benefit from the asset. All relevant factors must be considered in this assessment and may include:

  • Expected usage by the entity and whether it could be used by new management teams
  • Product life cycles
  • Rates of technical or commercial change
  • Industry stability
  • Likely actions by competitors
  • Legal restrictions
  • Whether the useful life is dependent on the useful lives of other assets


Indefinite” DOES NOT MEANT “infinite”. Additionally, assessments should not be made based on levels of future expenditure over and above that which would normally be required to maintain the asset at it initial standard of performance.


Amortization Of Intangible Asset

The depreciable amount of tangible assets with finite useful lives is to be allocated over its useful life. The depreciable amount is the cost of the asset (or other amount substituted for cost, e.g., in a revaluation model) less its residual value. Amortization shall commence when the asset is ready for use and shall cease when it is derecognized or is reclassified as held for sale under IFRS 5.

The residual value is to be assumed to be zero UNLESS there is a commitment by a third party to acquire the asset at the end of its useful life or there is an active market for the asset and the residual value can be determined by reference to that market, and it is probable that an active market will continue to exist at the end of the asset’s useful life.

Therefore, an asset with a residual value at anything other than zero assumes that the entity will dispose of the asset prior to the end of the asset’s economic life.


The Standard requires that the residual value be reassessed at each balance sheet date. Any changes are to be treated as changes in accounting estimates. In practice, this is unlikely to have any impact in view of the basic presumption of a zero residual value. Similarly, the useful life is to be reassessed annually. Any changes are also to be treated as changes in accounting estimates.

Intangible assets with indefinite useful lives are not to be amortized. However, the asset must be tested for impairment annually and whenever there is an indication that it may be impaired. IAS 36 provides guidance on impairment. Additionally, the determination of an indefinite useful life must be reassessed at each balance sheet date. If the assessment changes, it is to be treated as a change in accounting estimate.


Impairment Of Intangible Asset

Entities are to apply the provisions of IAS 36 in assessing the recoverable amount of intangible assets and when and how to determine whether an asset is impaired.


Retirements And Disposals Of Intangible Asset

Intangible assets shall be derecognized on disposal or when no future economic benefits are expected to be derived from their use or disposal. Any gain or loss on de-recognition amounts to the difference between the net disposal proceeds, if any, less the carrying amount of the asset. The gain or loss is to be recognized in the income statement.


Disclosures Of Intangible Asset

The Standard requires these disclosures for each class of intangible asset, distinguishing between internally generated and other assets:

  • Whether useful lives are indefinite or finite and, if finite, the useful lives or amortization rates used
  • The amortization methods used
  • The gross carrying amount and accumulated amortization and impairment losses at the beginning and end of the period
  • The line items in the income statement in which amortization is included
  • Additions, separately showing those internally generated, those acquired separately, and those acquired through business combinations
  • Assets classified as held for sale under IFRS 5
  • Increases or decreases during the period resulting from revaluations
  • Impairment losses
  • Reversals of impairment losses
  • Amortization recognized during the period
  • Net exchange differences on retranslation
  • Other changes during the period
  • For assets with indefinite useful lives, the carrying amount of the asset and the reasons supporting such an assessment
  • Description, carrying amount, and remaining amortization period of any intangible assets that are material to the entity’s financial statements
  • The existence and carrying amounts of intangible assets whose tile is restricted or pledged as security for liabilities
  • Contractual commitments for the acquisition of intangible assets
  • Intangible assets acquired by way of government grant and initially recognized at fair value, including their fair values, their carrying amounts, and whether subsequently carried under the cost or revaluation model
  • The amount of research and development expenditure expensed during the period


If intangible assets are stated at revalued amounts, then these points are to be disclosed:

  • For each class of asset
  • The effective date of revaluation
  • The carrying amount
  • The carrying amount that would have been recognized had the cost model been used
  • The revaluation surplus that relates to intangible assets at the beginning and end of the period, indicating changes during the period and any restrictions on distributions to shareholders
  • The methods and significant assumptions used in estimating fair values


In addition to the preceding disclosures, entities are encouraged to disclose the description of any fully amortized intangible assets that are still in use and of any significant intangible assets controlled by the entity but are not recognized as assets as they failed to meet the recognition criteria.



  1. kerrie

    Mar 16, 2009 at 4:02 am

    Hello Putra
    Your post was very helpful to understand the IAS 38.
    I work as a specialist of Accoounting Standards and Guidelines.
    Therefore my duty is to prepare practical guide and work on how to implementing IAS in Mongolia. Now I am working on preparing guide for Ias 38 Intangible Assets. I got a good idea from your post and think its structure and cases are really good and also simple. I am really interested to ask you more things about IAS and more, Can I?
    Also. You can visit to our website and get more information

  2. Sylvia

    Mar 23, 2009 at 11:41 am

    Hi Putra,

    The information posted here had been very helpful to me in understanding the IAS38. However, I just want to clarify the statement “amortization shall begin when the asset is available for use”. For application software which still undergoes customization and testing prior to implementation, would it still be possible to start amortization immediately upon booking, even if the system is still under testing. Please advise. thank you.

  3. em2

    May 13, 2009 at 3:47 am

    Thanks for the info. I’m just a student working on an assignment.

  4. Nikhil

    Jul 10, 2009 at 6:23 am

    Hi Putra

    I am working on a project and your post has been really useful for me. Thanks

    However, I have a question to ask

    Impairment testing for Intangible assets is a mandatory exercise which an entity has to do year on year. Consequently, the impairment losses or the reversal of losses is to be recognized in the profit and loss every year.
    Under measurement after recognition, the entity has an option to apply either the cost model or the revaluation model.

    If an asset has already been impaired and the carrying amount has been brought at par with the recoverable amount, will the option of revaluation model really have any significance?
    In other words can an asset which has been tested for impairment be revalued and what is the difference between revaluation and impairment?

  5. tirthankar mukhopadhyay

    Aug 31, 2009 at 6:37 pm

    Hi Putra
    Thank you very much for your lucid presentation of otherwise a complex subject.
    I think, it would have been better,at least for me, if you wrote a few lines on IFRS on the the related issue especially, stating the differences, if any, between that and IAS 38.
    Besides, I have another quarry … To what extent impairment differs from revaluation? Does it really make any difference if one calls it a revaluation loss rather than impairment loss?

  6. Shelley

    Sep 16, 2009 at 12:43 am

    Hi Putra

    I have a question relating to patents and the accounting treatment of them.

    Company A is looking to purchase company b who are in the business of making chemicals used in a variety of industrial and pharmaceutical products.
    Company b has a patent developed by themselves which if company a purchase company b will give them access to.

    How should company a recognise and measure the patent, should they proceed with the acquisition.


  7. Putra

    Sep 16, 2009 at 2:18 am

    Gidday Shelley,

    While a decision whether to “acquire” or “not to acquire” other businesses needs much greater analysis rather than just a simplified “measuring/valuing” the targeted intangible assets only, basically it is measured at its fair value. SFAS [Statement of Financial Accounting Standards] proposal No. 141R, “Business Combinations” [which is a Replacement of FASB Statement No. 141] may help you rise a more clear picture to start:

    This proposed Statement would require the assets acquired and liabilities assumed to be measured and recognized at their fair values as of the acquisition date, with limited exceptions. However, Statement 141 also provided guidance for measuring some assets and liabilities that was inconsistent with fair value measurement objectives. Thus, those assets or liabilities may not have been recognized at fair value as of the acquisition date in accordance with Statement 141.

    This proposed Statement would require assets and liabilities arising from contingencies that are acquired or assumed as part of a business combination to be measured and recognized at their fair value at the acquisition date if the contingency meets the definition of an asset or a liability in FASB Concepts Statement No. 6, Elements of Financial Statements, even if it does not meet the recognition criteria in Statement 5.

    After initial recognition, contingencies would be accounted for in accordance with applicable generally accepted accounting principles, except for those that would be accounted for in accordance with Statement 5 if they were acquired or incurred in an event other than a business combination. Those contingencies would continue to be measured at fair value with changes in fair value recognized in income in each reporting period. Statement 141 permitted deferral of the recognition of pre-acquisition contingencies until the Statement 5 recognition criteria were met and subsequent changes were recognized as adjustments to goodwill.

    This proposed Statement would require the acquirer in business combinations in which the acquirer holds less than 100 percent of the equity interests in the acquiree at the acquisition date, to recognize the identifiable assets and liabilities at the full amount of their fair values, with limited exceptions, and goodwill as the difference between the fair value of the acquiree, as a whole, and the fair value of the identifiable assets acquired and liabilities assumed. Statement 141 did not change the accounting for a step acquisition described in AICPA Accounting Interpretation 2, ‘‘Goodwill in a Step Acquisition,’’ of APB Opinion No. 17, Intangible Assets. That Interpretation stated that when an entity acquires another entity in a series of purchases, the entity should identify the cost of each investment, the fair value of the underlying assets acquired, and the goodwill for each step acquisition.

    The acquirer would be required to recognize separately from goodwill the acquisition-date fair value of research and development assets acquired in a business combination.

    And on and on….

  8. Shelley

    Sep 17, 2009 at 1:32 am

    Hi Putra

    Can a patent be revalued in subsequesnt years if the cost model has been chosen by the entity?

    Scenario is company A have acquired a patent of which it will be required for a period of 5 years after which they intend on selling the patent.



    Nov 26, 2009 at 3:05 pm


  10. Joshua

    Jun 24, 2010 at 12:26 pm

    How do I decide the useful life of a website?


    Jul 2, 2015 at 10:42 am

    Thank you very much for such an educative and informative material on IAS 38. This is quite important as IAS are changing on a regular basis. However, i have one question to ask which is:

    How should a company treat its newly acquired accounting software. Can it be classified as an definite intangible assets or its a finite intangible asset and why?

    Thank you

  12. ray T S

    Oct 21, 2016 at 1:36 pm

    very helpful indeed. thank you

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