IFRS 38

Definition

IFRS 38 is an international financial reporting standard that provides guidelines for the recognition, measurement, and disclosure of intangible assets. It emphasizes that intangible assets should be identified separately from tangible assets and sets out specific criteria for their recognition, including the requirement that the asset is identifiable, controlled by the entity, and expected to provide future economic benefits.

5 Must Know Facts For Your Next Test

1. IFRS 38 requires that an intangible asset must be recognized if it is probable that future economic benefits will flow to the entity and its cost can be reliably measured.
2. The standard distinguishes between internally generated intangible assets and those acquired externally, with stricter criteria for recognizing internally generated ones.
3. Intangible assets must be amortized over their useful lives unless they are deemed to have indefinite lives, in which case they are tested annually for impairment.
4. Research costs are generally expensed as incurred, while development costs can be capitalized if certain criteria are met under IFRS 38.
5. IFRS 38 mandates extensive disclosures regarding intangible assets in the financial statements, including the nature and useful life of each asset, as well as the amortization methods used.

Review Questions

• Explain how IFRS 38 differentiates between types of intangible assets and their recognition criteria.
  • IFRS 38 distinguishes between intangible assets that are acquired externally and those that are internally generated. For an intangible asset to be recognized, it must meet specific criteria: it must be identifiable, controlled by the entity, and expected to provide future economic benefits. The standard sets more rigorous requirements for internally generated assets, often requiring evidence of technical feasibility and intent to complete the asset before recognition.
• Discuss the treatment of research and development costs under IFRS 38 and how they affect financial statements.
  • Under IFRS 38, research costs are always expensed as incurred, reflecting their uncertain nature and immediate consumption. In contrast, development costs can be capitalized if they meet certain criteria related to feasibility and future economic benefits. This differentiation impacts financial statements by affecting asset valuations on the balance sheet and influencing profit margins in the income statement based on whether costs are capitalized or expensed.
• Evaluate the implications of IFRS 38 on financial reporting for companies engaged in R&D activities.
  • The implications of IFRS 38 on financial reporting for R&D-focused companies are significant. Since research costs must be expensed immediately, this can lead to lower reported profits in the short term, affecting investor perceptions. However, if development costs meet capitalization criteria, this can enhance asset values on the balance sheet, providing a more favorable view of financial health. Overall, this standard pushes companies to manage their R&D activities efficiently while ensuring transparency in reporting their intangible assets.

Related terms

Intangible Assets: Non-physical assets that provide long-term value to a company, such as patents, trademarks, copyrights, and goodwill.

Amortization:

The process of gradually reducing the cost value of an intangible asset over its useful life through systematic allocation.

Research and Development (R&D): Activities directed toward the innovation, introduction, and improvement of products and processes, which may lead to the creation of intangible assets.