Recognition criteria

Learning objectives

• Identify the two recognition criteria for an intangible asset in addition to the definition.L1
• Assess whether expenditure meets the definition and the recognition criteria.L2, L3
• Explain why the recognition criteria are always considered to be satisfied for a separately acquired intangible asset.L1, L2

Normative references

• IAS 38 §18Recognition requires the entity to demonstrate that the item meets the definition and the recognition criteria; this applies to costs incurred initially and to costs incurred subsequently to add to, replace part of, or service the asset.
• IAS 38 §21Recognition if, and only if, it is probable that the expected future economic benefits attributable to the asset will flow to the entity and the cost of the asset can be measured reliably.
• IAS 38 §22To assess whether the expected future economic benefits are probable, the entity uses reasonable and supportable assumptions that represent management's best estimate of the set of economic conditions that will exist over the asset's useful life; it uses judgement to assess the degree of certainty of the flow of benefits on the basis of the evidence available at initial recognition, giving greater weight to external evidence (paras. 22 and 23).
• IAS 38 §25For a separately acquired intangible asset, the price paid normally reflects the entity's expectations about the probability that the future economic benefits will flow to it: the entity expects an inflow of benefits even if there is uncertainty about its timing or amount. The probability criterion in paragraph 21(a) is therefore always considered to be satisfied for a separate acquisition.
• IAS 38 §26The cost of a separately acquired intangible asset can usually be measured reliably (criterion in paragraph 21(b)), particularly when the purchase consideration is in the form of cash or other monetary assets.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

16 questions

• True or false? In addition to meeting the definition, an intangible asset is recognised only if it is probable that the attributable future economic benefits will flow to the entity and its cost can be measured reliably.L1
• Kelvara separately buys two items from a competitor: a health authorisation to operate a laboratory, which regulations make non-transferable, and an unprotected file of prescribers, which Kelvara does not intend to resell but which the market would allow it to rent out. The internal auditor considers that neither item is identifiable: the authorisation because it cannot be transferred, and the file because no right protects it and Kelvara wants to keep it. Write a memo analysing the identifiability of the two items.L3
• True or false? As soon as an item meets the definition of an intangible asset, it is recognised as an asset with no further condition.L1
• True or false? The recognition requirements of IAS 38 cover only the initial cost of acquiring or creating an intangible asset, not the costs incurred afterwards to add to it, replace part of it or service it.L1
• True or false? Expenditure whose cost cannot be measured reliably cannot be recognised as an intangible asset, even if it is probable that it will generate future economic benefits.L2
• In addition to the definition of an intangible asset, what are the two recognition criteria set by IAS 38?L1
• Pellane opens a new regional branch. It incurs legal costs for setting up the branch and start-up costs for the branch's activity. The finance director proposes to capitalise them, because the branch will be profitable and the invoices allow the cost to be measured reliably. What should be concluded?L2
• Ferlane believes that its reputation and organisation will bring it significant future benefits. Why can it not recognise this internally generated goodwill?L2
• Which of the following must the entity demonstrate before recognising an intangible asset?L1
• The Orvino group is listing its expenditure for the year. Which items can be recognised as intangible assets?L3
• Trevalia is developing a planning tool internally. All the development-phase criteria are demonstrated except one: developers' hours are not tracked by project and are buried in the IT department's overheads, with no documented allocation key. Management proposes to capitalise a lump sum estimated at half of the department's cost. What should be concluded?L2
• Calvenor pays a lump sum to a marketing agency to win new individual customers, who are free to buy elsewhere and bound by no contract; no sale of similar customer relationships is observed in the industry. The finance director notes that the invoice allows the cost to be measured reliably and that additional sales are probable; he proposes to capitalise the amount. Which analysis should be retained?L3
• Mardelle, a commodity trader, acquires for a fixed price an exclusive three-year contractual right to a market data feed: the supplier undertakes not to sell this feed to any other player in the region. Mardelle expects to derive probable trading gains from it. It also organises, at its own expense, training for its traders on using the feed. Write a memo concluding on the accounting for these two items of expenditure.L3
• A year ago, Elmora acquired a cosmetics brand, recognised as an intangible asset. This year, it hires an agency to reposition the brand: a positioning study, a new logo and new graphic guidelines for the packaging. The marketing director believes this work durably strengthens the value of the brand and asks for it to be added to the brand's carrying amount. What should be concluded?L3
• True or false? When an entity acquires an intangible asset separately, the criterion relating to the probability of future economic benefits is regarded as met, even if the amount or timing of those benefits remains uncertain.L1
• Quintarel buys from an inventor, for a cash payment of 120,000, a patent on a filtration system. The amount and timing of future sales of the products using the patent are uncertain. Why are both recognition criteria regarded as met?L2