What does IAS 38 mean?
IAS 38, you may never have heard of it. It is a term you will not easily come across in daily life. And describing it is also more complicated than you think. You have to deal with it when you have a business in which you purchase, take over or pay for something that is subject to rights. There is a value attached to this, which must be included on the balance sheet. But that is a bit short-sighted, which is why you can read more about it here.
What is IAS 38?
IAS 38 is the defined criteria for recognising and valuing intangible assets, including the information about them. An intangible asset is identifiable but has no physical substance. It is identifiable when it is separable or when it arises from contractual or other legal rights. It is possible to sell and transfer separable assets. Intangible assets can be divided into three broad categories: rights, relationships and intellectual property. You can think of:
- computer software
- import quotas
Identifiable intangible assets as defined by IAS 38 are therefore those that can be separated or sold, transferred, rented or exchanged. It is in a contractual form or arises from contractual rights, regardless of whether those rights are transferable or separable from the entity or from other obligations and rights. The intangible assets included in a balance sheet are only a part of what is usually considered to be an ‘intangible asset’.
However, the overview has improved since the year 2001. That is when IFRS 3 in Europe and FAS 141 in the United States started requiring companies to break down the value of these intangible assets, which the companies acquired as a result of an acquisition, into five categories. Previously, they were all grouped together under the collective term ‘Goodwill’.
However, the picture of the value of the company can be skewed, because only acquired intangible assets are included in the balance sheet. And the value of the assets may only remain the same or be adjusted downwards every year. Thus, the additional value that the new manager should receive is not properly reflected.
The purpose of IAS 38
What is the purpose of IAS38? You will read that in this part of the article. IAS 38 ensures that the correct accounting treatment for intangible assets, which is not covered in the other IFRS, has been adopted. This standard requires that a certain criteria must be met before it is recognised as an intangible asset. It also specifies how the carrying amount of the intangible asset should be measured and the related disclosures.
IAS 38 applies to intangible activities, with the exception of financial assets, exploration and evaluation assets, expenditure on the extraction and development of oil, natural gas, minerals, intangible assets arising from insurance contracts and intangible assets covered by another IFRS. Want to know more about IAS 38? Then a visit to the website annualreporting.info is a smart move. Here you will find everything about this and the other IAS and IFRS.