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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.

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