Question 6: Ias 38 Intangible Assets: Page 1 of 2

IAS 38 Question 6
QUESTION 6: IAS 38 INTANGIBLE ASSETS
(a) Discuss the criteria that should be used while recognizing intangible assets arising from
research and development work.
(b) Raisin International (RI) is planning to expand its line of products. The related information
for the year ended 31 December 2015 is as follows:
(i) Research and development of a new product commenced on 1 January 2015. On 1

October 2015, the recognition criteria for capitalization of an internally generated
intangible asset were met. It is estimated that the product would have a useful life of
7 years. Details of expenditures incurred are as follows:
$m
Research work 4.50
Development work 9.00
Training of production staff 0.50
Cost of trial run 0.80
Total costs 14.80
(ii) The right to manufacture a well-established product under a patent for a period of
five years was purchased on 1 March 2015 for $17 million. The patent has an
expected remaining useful life of 10 years. RI has the option to renew the patent for
a further period of five years for a sum of $12 million.
(iii) RI has acquired a brand at a cost of $ 2 million. The cost was incurred in the month
of June 2015. The life of the brand is expected to be 10 years. Currently, there is no
active market for this brand. However, RI is planning to launch an aggressive
marketing campaign in February 2016.
(iv) In September 2014, RI developed a new production process and capitalized it as an

intangible asset at $7 million. The new process is expected to have an indefinite
useful life. During 2015, RI incurred further development expenditure of Rs. 3 million
on the new process which meets the recognition criteria for capitalization of an
intangible asset.
Required:
In the light of International Financial Reporting Standards, explain how each of the above
transaction should be accounted for in the financial statements of Raisin International for the year
ended 31 December 2015.
Page 1 of 2 (kashifadeel.com)
IAS 38 Question 6
ANSWER – QUESTION 7: IAS 38 INTANGIBLE ASSETS

Part (a)
Following are the criteria that should be used while recognizing intangible assets from research
and development work.
(i) No intangible asset arising from research shall be recognized.
(ii) An intangible arising from development shall be recognized if, and only if , an entity can
demonstrate all of the following:
 The technical feasibility of completing the intangible asset so that it will be available
for use or sale.
 Its intention to complete the intangible asset and use or sell it.
 Its ability to use or sell the intangible asset.
 How the in tangible asset will generate probable future economic benefits. Among
other things, the entity can demonstrate the existence of a market for the output of
the intangible asset or the intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset.
 The availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
 Its ability to measure reliably the expenditure attributable to the intangible asset
during its development.
Part (b)
(i) Since the product met all the criteria for the development of the product, it should be
recognized as an intangible in the statement of financial position (SOFP) of the company.
However, RI should capitalize only the development work (i.e. $9 million) as intangible
asset. IAS-38 does not allow capitalization of cost relating to the research work, training of
staff and cost of trial run. Since the product has a useful life of 7 years, the amortization
expense amounting to $0.32 million ($9 million × 3/12 ÷ 7 years) should be recorded in the
statement of profit or loss.
(ii) This purchasing of right to manufacture should be recognized as an intangible in the SOFP
because:
 It is for an established product which would generate future economic benefits.
 Cost of the patent can be measured reliably.
Since there is a finite life, the patent must be amortized over its useful life. The useful
life will be shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years. The
amortization to be recorded in SOCI is $2.83 million ($17 million × 10/12 ÷ 5).
(iii) The acquired brand should be recognized as an intangible in the SOFP because acquisition
price is a reliable measure of its value. The amortization to be recorded in SOCI is $0.12
million ($2 million ÷ 10 years x 7/12).
(iv) The carrying value of the intangible asset should be increased to $10 million in the SOFP.
Since there is an indefinite useful life of the intangible assets, it should not be amortized.
Instead, RI should test the intangible asset for impairment by comparing its recoverable
amount with its carrying amount.
Page 2 of 2 (kashifadeel.com)

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IAS 38 Question 6

QUESTION 6: IAS 38 INTANGIBLE ASSETS

(i) Research and development of a new product commenced on 1 January 2015. On 1

(iv) In September 2014, RI developed a new production process and capitalized it as an

ANSWER – QUESTION 7: IAS 38 INTANGIBLE ASSETS

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