International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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unless an entity can demonstrate that the website is used directly in the income-generating
process, for example where customers can place orders on the entity’s website. [SIC-32.8].
The following stages of a website’s development are identified by the interpretation:
[SIC-32.2, 9]
(a) planning includes undertaking feasibility studies, defining objectives and
specifications, evaluating alternatives and selecting preferences. Expenditures
incurred in this stage are similar in nature to the research phase and should be
recognised as an expense when they are incurred;
(b) application and infrastructure development includes obtaining a domain name,
purchasing and developing hardware and operating software, installing developed
applications and stress testing. The requirements of IAS 16 are applied to
expenditure on physical assets. Other costs are recognised as an expense, unless
they can be directly attributed, or allocated on a reasonable and consistent basis,
to preparing the website for its intended use and the project to develop the website
meets the SIC-32 criteria for recognition as an intangible asset;
(c) graphical design development includes designing the appearance of web pages. Costs
incurred at this stage should be accounted for in the same way as expenditure incurred
in the ‘application and infrastructure development’ stage described under (b) above;
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(d) content development includes creating, purchasing, preparing and uploading
information, either textual or graphical in nature, on the website before the
completion of the website’s development. The costs of content developed to
advertise and promote an entity’s own products and services are always expensed as
incurred. Other costs incurred in this stage should be recognised as an expense
unless the criteria for recognition as an asset described in (b) above are satisfied; and
(e) the
operating stage, which starts after completion of the development of a website,
when an entity maintains and enhances the applications, infrastructure, graphical
design and content of the website. [SIC-32.3]. Expenditure incurred in this stage should
be expensed as incurred unless it meets the asset recognition criteria in IAS 38.
In making these assessments, the entity should evaluate the nature of each activity for which
expenditure is incurred, independently of its consideration of the website’s stage of
development. [SIC-32.9]. This means that even where a project has been determined to qualify
for recognition as an intangible asset, not all costs incurred in relation to a qualifying stage of
development are eligible for capitalisation. For example, whilst the direct costs of developing
an online ordering system might qualify for recognition as an asset, the costs of training staff
to operate that system should be expensed because training costs are deemed not necessary
to creating, producing or preparing the website for it to be capable of operating (see 6.3
above). [IAS 38.67]. Examples of other costs that would be recognised as an expense regardless
of the stage of the project are given in the Illustrative Example to SIC-32, including:
(a) selling, administrative and other general overhead expenditure unless it can be
directly attributed to preparing the web site for use to operate in the manner
intended by management;
(b) clearly identified inefficiencies in the project, such as those relating to alternative
solutions explored and rejected; and
(c) initial operating losses incurred before the web site achieves planned performance.
A website qualifying for recognition as an intangible asset should be measured after
initial recognition by applying the cost model or the revaluation model in IAS 38 as
discussed at 8.1 and 8.2 below. In respect of the useful life of website assets, the
expectation is that it should be short. [SIC-32.10].
The criteria for recognition as an asset are restrictive. On-line fashion retailer, ASOS,
does not capitalise website development costs, as demonstrated in the extract below.
Extract 17.8: ASOS plc (2017)
NOTES TO THE FINANCIAL STATEMENTS
For the year to 31 August 2017 [extract]
24 ACCOUNTING POLICIES [extract]
j) Other intangible assets [extract]
The costs of acquiring and developing software that is not integral to the related hardware is capitalised separately as
an intangible asset. This does not include internal website development and maintenance costs which are expensed
as incurred unless representing a technological advance leading to future economic benefit. Capitalised software costs
include external direct costs of material and services and the payroll and payroll-related costs for employees who are
directly associated with the project.
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6.3
Cost of an internally generated intangible asset
On initial recognition, an intangible asset should be measured at cost, [IAS 38.24], which
the standard defines as the amount of cash or cash equivalents paid or the fair value of
other consideration given to acquire an asset at the time of its acquisition or
construction. When applicable, cost is the amount attributed to that asset when initially
recognised in accordance with the specific requirements of other IFRSs, e.g. IFRS 2.
[IAS 38.8]. It is important to ensure that cost includes only the expenditure incurred after
the recognition criteria are met and to confirm that only costs directly related to the
creation of the asset are capitalised.
6.3.1
Establishing the time from which costs can be capitalised
The cost of an internally generated intangible asset is the sum of the expenditure
incurred from the date when the intangible asset first meets the recognition criteria of
the standard, [IAS 38.65], and meets the detailed conditions for recognition of
development phase costs as an asset (see 6.2.2 above).
Costs incurred before these criteria are met are expensed, [IAS 38.68], and cannot be
reinstated retrospectively, [IAS 38.65], because IAS 38 does not permit recognition of past
expenses as an intangible asset at a later date. [IAS 38.71].
The following example, which is taken from IAS 38, illustrates how these above rules
should be applied in practice.
Example 17.7: Recognition of internally generated intangible assets
An entity is developing a new production process. During 2018, expenditure incurred was €1,000, of which
€900 was incurred before 1 December 2018 and €100 was incurred between 1 December 2018 and
31 December 2018. The entity is able to demonstrate that, at 1 December 2018, the production process
met the criteria for recognition as an intangible asset. The recoverable amount of the know-how embodied
in the process (including future cash outflows to complete the process before it is available for use) is
estimated to be €500.
At the end of 2018, the production process is recognised as an intangible asset at a cost of €100 (expenditure
incurred since the date when the recognition criteria were met, that is, 1 December 2018). The €900
expenditure incurred before 1 December 2018 is recognised as an expense because the recognition criteria
were not met until 1 December 2
018. This expenditure does not form part of the cost of the production process
recognised in the statement of financial position.
During 2019, expenditure incurred is €2,000. At the end of 2019, the recoverable amount of the know-how
embodied in the process (including future cash outflows to complete the process before it is available for use)
is estimated to be €1,900.
At the end of 2019, the cost of the production process is €2,100 (€100 expenditure recognised at the end of
2018 plus €2,000 expenditure recognised in 2019). The entity recognises an impairment loss of €200 to adjust
the carrying amount of the process before impairment loss (€2,100) to its recoverable amount (€1,900). This
impairment loss will be reversed in a subsequent period if the requirements for the reversal of an impairment
loss in IAS 36 are met.
6.3.2
Determining the costs eligible for capitalisation
The cost of an internally generated intangible asset comprises all directly
attributable costs necessary to create, produce, and prepare the asset to be capable
of operating in the manner intended by management. Examples of directly
attributable costs are:
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(a) costs of materials and services used or consumed in generating the intangible asset;
(b) costs of employee benefits arising from the generation of the intangible asset;
(c) fees to register a legal right;
(d) amortisation of patents and licences that are used to generate the intangible asset;
and
(e) borrowing costs that meet the criteria under IAS 23 for recognition as an element
of cost. [IAS 38.66].
Indirect costs and general overheads, even if they can be allocated on a reasonable and
consistent basis to the development project, cannot be recognised as part of the cost of
any intangible asset. The standard also specifically prohibits recognition of the following
items as a component of cost:
(a) selling, administrative and other general overhead expenditure unless this
expenditure can be directly attributed to preparing the asset for use;
(b) identified inefficiencies and initial operating losses incurred before the asset
achieves planned performance; and
(c) expenditure on training staff to operate the asset. [IAS 38.67].
For these purposes it does not make any difference whether the costs are incurred
directly by the entity or relate to services provided by third parties.
7
RECOGNITION OF AN EXPENSE
Unless expenditure is incurred in connection with an item that meets the criteria for
recognition as an intangible asset, and is an eligible component of cost, it should be
expensed. The only exception is in connection with a business combination, where the
cost of an item that cannot be recognised as an intangible asset will form part of the
carrying amount of goodwill at the acquisition date. [IAS 38.68].
Some of the ineligible components of cost are identified at 4.3 and 6.3 above and include
costs that are not directly related to the creation of the asset, such as costs of introducing
a new product or costs incurred to redeploy an asset. IAS 38 provides other examples
of expenditure that is recognised as an expense when incurred:
(a) start-up costs, unless they qualify for recognition as part of the cost of property, plant
and equipment under IAS 16 (see Chapter 18). Start-up costs recognised as an
expense may consist of establishment costs such as legal and secretarial costs
incurred in setting up a legal entity, expenditure to open a new facility or business or
expenditures for starting new operations or launching new products or processes;
(b) training
costs;
(c) advertising and promotional activities (including mail order catalogues); and
(d) relocation or reorganisation costs. [IAS 38.69].
For these purposes no distinction is made between costs that are incurred directly by
the entity and those that relate to services provided by third parties. However, the
standard does not prevent an entity from recording a prepayment if it pays for the
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delivery of goods before obtaining a right to access those goods. Similarly, a prepayment
can be recognised when payment is made before the services are received. [IAS 38.70].
7.1
Catalogues and other advertising costs
The Board considers that advertising and promotional activities do not qualify for
recognition as an intangible asset because their purpose is to enhance or create
internally generated brands or customer relationships, which themselves cannot be
recognised as intangible assets. [IAS 38.BC46B]. An entity has a different asset, a
prepayment, if it has paid for goods or services before they are provided, as described
above. However, the Board did not believe this justified an asset being recognised
beyond the point at which the entity gained the right to access the related goods or
received the related services. [IAS 38.BC46D]. Entities cannot, therefore maintain a
prepayment asset and defer recognising an expense in the period between receiving the
material from a supplier and delivery to its customers or potential customers.
[IAS 38.BC46E].
Accordingly, the IASB is deliberate in using the phrase ‘obtaining the right to access
those goods’ when it defines the point that an expense is recognised. This is because the
date of physical delivery could be altered without affecting the substance of the
commercial arrangement with the supplier. [IAS 38.BC46E]. Recognition is determined by
the point when the goods have been constructed by the supplier in accordance with the
terms of the customer contract and the entity could demand delivery in return for
payment. [IAS 38.69A]. Therefore an entity must recognise an expense for customer
catalogues once they are ready for delivery from the printer, even if the entity has
arranged for the printer to send catalogues directly to customers when advised by the
entity’s sales department. Similarly in the case of services, an expense is recognised
when those services are received by the entity, and not deferred until the entity uses
them in the delivery of another service, for example, to deliver an advertisement to its
customers. [IAS 38.69A].
The Board rejected calls to make a special case for mail order catalogues, where it
was argued that they created a distribution network, on the grounds that their
primary objective was to advertise goods to customers. [IAS 38.BC46G]. For this
reason the wording in the standard cites mail order catalogues as an example of
expenditure on advertising and promotional activities that is recognised as an
expense. [IAS 38.69].
8
MEASUREMENT AFTER INITIAL RECOGNITION
IAS 38, in common with a number of other standards, provides an entity the option to
choose between two alternative treatments: [IAS 38.72]
• the cost model, which requires measurement at cost less any accumulated
amortisation and any accumulated impairment losses; [IAS 38.74] or
• the revaluation model, which requires measurement at a revalued amount, being
its fair value at the date of the revaluation, less any subsequent accumulated
amortisation and any subsequent accumulated impairment losses. [IAS 38.75].
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The revaluation option is only available if there is an active market for the intangible
asset. [IAS 38.75, 81-82]. Active market is defined by IFRS 13; see Chapter 14 at 3. There are
no provisions in IAS 38 that allow fair value to be determined indirectly, for example by
using the techniques and financial models applied to estimate the fair value of intangible
assets acquired in a business combination. Therefore, in accordance with IFRS 13, an
entity must measure the fair value of an intangible under the revaluation model using
the price in an active market for an identical asset, i.e. a Level 1 price. For further
guidance on the price in an active market, see Chapter 14 at 17. If an entity chooses an
accounting policy to measure an intangible asset at revalued amount, it must apply the
revaluation model to all the assets in that class, unless there is no active market for those
other assets. [IAS 38.72]. A class of intangible assets is a grouping of assets of a similar
nature and use in an entity’s operations. [IAS 38.73]. Examples of separate classes of
intangible asset include:
(a) brand
names;
(b) mastheads and publishing titles;
(c) computer
software;
(d) licences and franchises;
(e) copyrights, patents and other industrial property rights, service and operating rights;
(f) recipes,
formulae,
models, designs and prototypes; and
(g) intangible assets under development. [IAS 38.119].
The standard requires assets in the same class to be revalued at the same time, as to do
otherwise would allow selective revaluation of assets and the reporting of a mixture of
costs and values as at different dates within the same asset class. [IAS 38.73].
8.1
Cost model for measurement of intangible assets
Under the cost model, after initial recognition, the carrying amount of an intangible asset
is its cost less any accumulated amortisation and accumulated impairment losses.
[IAS 38.74]. The rules on amortisation of intangible assets are discussed at 9.2 and 9.3
below; and impairment is discussed at 9.4 below.
8.2
Revaluation model for measurement of intangible assets