An entity can only apply the revaluation model if the fair value can be determined by
reference to an active market. [IAS 38.75, 81-82]. An active market will rarely exist for
intangible assets (see 8.2.1 below). [IAS 38.78].
After initial recognition an intangible asset should be carried at a revalued amount,
which is its fair value at the date of the revaluation less any subsequent accumulated
amortisation and any subsequent accumulated impairment losses. [IAS 38.75]. To prevent
an entity from circumventing the recognition rules of the standard, the revaluation
model does not allow:
• the revaluation of intangible assets that have not previously been recognised as
assets; or
• the initial recognition of intangible assets at amounts other than cost. [IAS 38.76].
1254 Chapter 17
These rules are designed to prevent an entity from recognising at a ‘revalued’
amount an intangible asset that was never recorded because its costs were expensed
as they did not at the time meet the recognition rules. As noted at 6.3.1 above, IAS 38
does not permit recognition of past expenses as an intangible asset at a later date.
[IAS 38.71].
However, it is permitted to apply the revaluation model to the whole of an intangible
asset even if only part of its cost was originally recognised as an asset because it did not
meet the criteria for recognition until part of the way through the process. [IAS 38.77].
Since the prohibition on initial recognition of intangible assets at amounts other than
cost would also prevent the revaluation of quotas and permits allocated by governments
and similar bodies – which are amongst the few intangible assets that do have an active
market – the standard specifically makes an exception and allows the revaluation model
to be applied to ‘an intangible asset that was received by way of a government grant and
recognised at a nominal amount’. [IAS 38.77].
The example below illustrates how this would work in practice.
Example 17.8: Application of revaluation model to intangible assets that are
partially recognised or received by way of government grant
Entity C spent €12,000,000 in preparing its application for a number of taxi licences, which it expensed
because of the uncertain outcome of the process. The application was successful and C was granted a number
of freely transferable taxi licences and paid a nominal registration fee of €50,000, which it recognised as an
asset. There is an active and liquid market in these taxi licences.
C can apply the revaluation model under IAS 38 to these taxi licences, because it previously recognised the
licence (even if it only recognised part of the costs as an asset) and there is an active market in these licences.
Entity D obtained a number of freely transferable fishing quotas free of charge, which it recognised at a
nominal amount as permitted under IAS 20. There is an active and liquid market in these quotas.
D can apply the revaluation model under IAS 38 to these fishing quotas, because it previously recognised the
quota (even if it only recognised it at a nominal amount) and there is an active market in these quotas.
8.2.1
Revaluation is only allowed if there is an active market
An entity can only elect to apply the revaluation model if the fair value can be
determined by reference to an active market for the intangible asset. [IAS 38.81-82]. An
active market is defined in IFRS 13 as one in which transactions for the item take place
with sufficient frequency and volume to provide pricing information on an ongoing
basis. [IFRS 13 Appendix A].
Few intangible assets will be eligible for revaluation and indeed the standard
concedes that such an active market would be uncommon. Nevertheless, in some
jurisdictions, an active market may exist for freely transferable taxi licences, fishing
licences or production quotas. [IAS 38.78]. However, by their very nature most
intangible assets are unique or entity-specific. The standard lists brands, newspaper
mastheads, music and film publishing rights, patents or trademarks as items that are
ineligible for revaluation because each such asset is unique. [IAS 38.78]. The existence
of a previous sale and purchase transaction is not sufficient evidence for the market
to be regarded as active because of the requirement in the definition for a sufficient
frequency and volume of transactions to allow the provision of ongoing pricing
information. The standard notes that where contracts are negotiated between
Intangible
assets
1255
individual buyers and sellers or when transactions are relatively infrequent, the
price of a previous transaction for one intangible asset may not provide sufficient
evidence of the fair value of another. In addition, if prices are not available to the
public, this is taken as evidence that an active market does not exist. [IAS 38.78].
An entity should stop revaluing an asset if the market used to determine its fair value
ceases to meet the criteria for an active market. The valuation is ‘frozen’ from that date,
and reduced thereafter by subsequent amortisation and any subsequent impairment
losses. [IAS 38.82]. The IASB believes that the disappearance of a previously active market
may indicate that the asset needs to be tested for impairment in accordance with IAS 36.
[IAS 38.83].
If an active market for the previously revalued asset emerges at a later date, the entity
is required to apply the revaluation model from that date. [IAS 38.84].
8.2.2
Frequency of revaluations
IAS 38 requires revaluations to be performed ‘with such regularity that at the end of the
reporting period the carrying amount of the asset does not differ materially from its fair
value’. [IAS 38.75]. The standard lets entities judge for themselves the frequency of
revaluations depending on the volatility of the fair values of the underlying intangible
assets. Significant and volatile movements in fair value would necessitate annual
revaluation, whereas a less frequent update would be required for intangibles whose
price is subject only to insignificant movements. [IAS 38.79]. Nevertheless, since an entity
can only revalue assets for which a price is quoted in an active market, there should be
no impediment to updating that valuation at each reporting date. As noted above, when
an entity has a number of items in the same class of intangible assets, the standard
requires that they are all valued at the same time. [IAS 38.73].
8.2.3 Accounting
for
revaluations
Increases in an intangible asset’s carrying amount as a result of a revaluation should be
credited to other comprehensive income under the heading of revaluation surplus,
except to the extent that the revaluation reverses a revaluation decrease of the same
asset that was previously recognised in profit or loss. [IAS 38.85]. Conversely, decreases in
an intangible asset’s carrying amount as a result of a revaluation should be recognised in
profit or loss, unless the decrease reverses an earlier upward revaluation, in which case
the decrease should first be recognised in other comprehensive income to extinguish
the revaluation surplus in respect of the asset. [IAS 38.86]. The example be
low illustrates
how this works.
Example 17.9: Accounting for upward and downward revaluations
Entity E acquired an intangible asset that it accounts for under the revaluation model. The fair value of the
asset changes as follows:
£
£
Change
Acquisition 530
–
Date A
550
+20
Date B
520
–30
Date C
510
–10
Date D
555
+45
1256 Chapter 17
The table below shows how entity E should account for the upward and downward revaluations.
Revaluation
recognised in other
Revaluation
Value of
Cumulative
comprehensive
recognised in
asset revaluation reserve
income
profit or loss
£
£
£
£
Acquisition
530
–
–
–
Date A
550
20
20
–
Date B
520
–
(20)
(10)
Date C
510
–
–
(10)
Date D
555
25
25
20
The diagram below summarises this information (the impact of amortisation on the carrying amount and
revaluation surplus has been ignored in this example for the sake of simplicity).
Amount
560
550
540
20
(20)
25
530
(10)
520
20
(10)
510
A
B
C
D
Timeline
The upward revaluation at Date A is accounted for in other comprehensive income. The downward
revaluation at Date B first reduces the revaluation reserve for that asset to nil and the excess of £10 is
recognised as a loss in profit or loss. The second downward revaluation at Date C is recognised as a loss in
profit or loss. The upward revaluation at Date D first reverses the cumulative loss recognised in profit or loss
and the excess is accounted for in other comprehensive income.
In the example above, the impact of amortisation on the carrying amount of the assets and
the revaluation surplus was ignored for the sake of simplicity. However, the cumulative
revaluation surplus included in other comprehensive income may be transferred directly
to retained earnings when the surplus is realised, which happens either on the retirement
or disposal of the asset, or as the asset is used by the entity. [IAS 38.87]. In the latter case, the
amount of the surplus regarded as realised is the amount of amortisation in excess of what
would have been charged based on the asset’s historical cost. [IAS 38.87]. See Chapter 18
at 6.2 for an example. In practice this means two things:
• an entity applying the revaluation model would need to track both the historical
cost and revalued amount of an asset to determine how much of the revaluation
surplus has been realised; and
• any revaluation surplus is amortised over the life of the related asset. Therefore, in
the case of a significant downward revaluation there is a smaller revaluation
surplus available against which the downward revaluation can be offset before
recognition in the statement of profit or loss.
Intangible
assets
1257
The transfer from revaluation surplus to retained earnings is not made through profit or
loss. [IAS 38.87]. It is not the same as recycling a gain or loss previously recognised in other
comprehensive income. Accordingly, the transfer will appear as a line item in the
Statement of Changes in Equity rather than in other comprehensive income.
When an intangible asset is revalued, the carrying amount of that asset is adjusted to the
revalued amount. At the date of the revaluation, the asset is treated in one of the
following ways:
(a) the gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount of the asset. For example, the gross carrying
amount may be restated by reference to observable market data or it may be
restated proportionately to the change in the carrying amount. The accumulated
amortisation at the date of the revaluation is adjusted to equal the difference
between the gross carrying amount and the carrying amount of the asset after
taking into account accumulated impairment losses; or
(b) the accumulated amortisation is eliminated against the gross carrying amount of
the asset. [IAS 38.80].
The example below illustrates how the adjustments are calculated.
Example 17.10: Restatement of accumulated amortisation after a revaluation
Entity F revalued an intangible asset from its carrying amount of £120 to its fair value of £150. The gross
carrying amount is adjusted to £345 by reference to the observable market data. The adjustment is in a manner
consistent with the revaluation of the intangible asset. Under the observable market data approach (in the
column, approach (a)), the accumulated depreciation is adjusted to £195, which is the difference between the
gross revalued amount of £345 and the net revalued amount of £150. The proportionate restatement approach
(in the column, approach (b)) leads to grossing up of both gross carrying amount and the accumulated
amortisation. The elimination approach (in the column, approach (c)) results in elimination of the
accumulated amortisation.
Before revaluation
After revaluation
Observable
Proportionate
Eliminating
market data
restatement
amortisation
(a)
(b)
(c)
£
£
£
£
Gross carrying amount 300
345
375
150
Accumulated amortisation
(180)
(195)
(225)
–
Net carrying amount 120
150
150
150
9
AMORTISATION OF INTANGIBLE ASSETS
9.1
Assessing the useful life of an intangible asset as finite or
indefinite
IAS 38 defines the useful life of an intangible asset as:
(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset
by an entity. [IAS 38.8].
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The standard requires an entity to assess whether the useful life of an intangible asset is
finite or indefinite. [IAS 38.88]. An intangible asset with a finite useful life is amortised over
its useful life or the number of production units (or similar units) constituting that useful
life, whereas an intangible asset with an indef
inite useful life is not amortised. [IAS 38.89].
The standard requires an intangible asset to be classified as having an indefinite useful life
‘when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the
period over which the asset is expected to generate net cash inflows for the entity’.
[IAS 38.88]. Therefore, for this purpose the term ‘indefinite’ does not mean ‘infinite’. [IAS 38.91].
Entities should not confuse the absence of a foreseeable limit to an asset’s life with an
ability to renew, refresh or upgrade an asset to ensure it continues to generate future
cash flows. Some intangible assets are based on legal rights that are conveyed in
perpetuity rather than for finite terms, whether or not those terms are renewable. If the
cash flows are expected to continue indefinitely, the useful life is indefinite. [IAS 38.BC62].
An important underlying assumption in making the assessment of the useful life of an
intangible asset is that it ‘reflects only that level of future maintenance expenditure required
to maintain the asset at its standard of performance assessed at the time of estimating the
asset’s useful life, and the entity’s ability and intention to reach such a level. A conclusion
that the useful life of an intangible asset is indefinite should not depend on planned future
expenditure in excess of that required to maintain the asset at that standard of performance.’
[IAS 38.91]. Determining exactly what constitutes the level of expenditure ‘required to
maintain the asset at that standard of performance’ is a matter of judgement. However, a
clear distinction exists between this type of expenditure and costs that might be incurred to
renew, refresh or upgrade an asset to ensure it continues to generate future cash flows.
Expenditure to ensure that an intangible asset does not become obsolete is not the type of
maintenance expenditure that, though very necessary to ensure continuing future cash
flows, would be indicative of an indefinite life. Indeed, the standard asserts that assets
subject to technological change would be expected to have a short useful life. [IAS 38.92].
9.1.1
Factors affecting the useful life
The standard identifies a number of factors that may affect the useful life of an
intangible asset:
(a) the expected usage of the asset by the entity and whether the asset could be
managed efficiently by another management team;
(b) typical product life cycles for the asset and public information on estimates of
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 248
