After initial recognition, intangible asset can be recorded either at cost model or revaluation model. When choosing to apply revaluation model, the model must be consistently applied to all intangible assets in the same class unless there is no active market for that asset.

If an intangible asset in a class of revalued assets cannot be revalued because there is no active market for this asset, the asset is then separately recorded at cost model while the remaining assets are continued being recorded under revaluation if satisfied. [IAS 38.81]

A class of assets is a group of assets having a similar nature and use in an entity’s operation.

1. Cost model

You might be very familiar with cost model which is commonly applied in VAS. Under Cost model, an intangible asset is carried at its costs less accumulated amortization and any accumulated impairment losses.

Under VAS, fixed asset is measured at its costs less accumulated amortization, without taking into account impairment factor because impairment recognition is not yet applied in VAS.

2. Revaluation model

Frequency of revaluation depends on volatility of the asset’s fair value. Annual revaluation is necessary for those assets whose value significantly changes and is volatile over time. While revaluation every 03 or 05 years is more relevant for assets whose value is more stable. However, it is not very common to find an active market for intangible asset because of its unique nature. Therefore revaluation model is less applied for intangible asset as tangible asset.

Approach to record revaluated amount

When an intangible asset is revalued, carrying amount of the intangible asset is adjusted to the revalued amount. At the date of revaluation, the asset is treated in one of following ways: [IAS 38.80]

(i) Adjust gross carrying amount and accumulated amortization in a manner that is consistent with the revaluation of carrying amount of the asset. After the adjustment, revised net carrying amount is equal to the revalued amount of the asset.

(ii) The accumulated amortization is eliminated against the gross carrying amount of the asset (means writing off accumulated amortization before the revaluation) and then restate the net carrying amount of the asset to its new revalued amount.

This treatment is similar to guidance applied for tangible asset under IAS 16 – Properly Plant and Equipment.

Accounting records for revalued adjustment

Similar to tangible asset under IAS 16 – PPE, [IAS 38.85] & [IAS 38.86] said the rule that: revaluation increase is recorded in revaluation surplus while revaluation decrease is recorded immediately in PL account. Unless the revaluation increase and decrease are used to revert the previously recognized revaluation of the asset, revaluation increase is then recorded in PL account to offset the old decrease and revaluation decrease is recorded in valuation surplus to offset the old increase. However remaining amount exceeding the reversion is still recorded in BS and PL based on the primary rule.

3. Other matters of intangible asset under IAS 38

Useful life

An intangible asset with finite useful life is amortized over its useful life. It can be amortized under straight-line method, diminishing balance method or unit of production based method. While an intangible asset with indefinite useful life is not amortized. It is annually tested for impairment losses instead.

Useful life of an asset (either intangible or tangible) is determined by either legal or economic factors. The useful life for accounting purpose is the shorter of the periods determined by these factors.

Useful life of an intangible asset arises from contractual or legal rights shall not exceed the period of the contract or legal right protection, but it might be shorter depending on the period over which the entity expect to use the asset. It means that the ultimate base to determine useful life of an asset is the period over which the asset generates inflow economic benefits for the company. [IAS 38. 94].

Useful life of intangible asset with renewal rights shall include the renewal period only if there is evidence to support the company to renew the rights without significant costs.

Useful life and amortization method should be reviewed at each financial year-end to determine whether there is change needed. Such changes if any are normally accounted for as changes in accounting estimates in accordance with IAS 8 except for the case when there was misstatement occurred.

Under VAS and Vietnamese accounting regime, there are some specific guidance on limitation to determine useful life of an intangible asset. For example, Cir 202/2014 guiding on consolidation reporting, goodwill acquired in a business combination is amortized over a period not exceeding 10 years, while under IAS 38 and IAS 36 goodwill is not amortized over a definite time. It is annually tested for impairment losses however. Or according to VAS 04 – Intangible fixed asset, useful life of an intangible fixed asset should not exceed 20 years but this rule is not said in IFRSs.

Impairment tests of indefinite intangible asset

As earlier said, an indefinite intangible asset is not amortized because the period for amortization is undeterminable. According to IAS 36 – Impairment of asset, this asset is subject to annual impairment test instead.

Impairment loss of the indefinite intangible asset (if any) shall be recorded in PL account when incurs.

De-recognition

It is clear that when an asset is disposed it is de-recognized (removed) from accounting records. However, it cannot be derecognized from accounting books only because of not being used. In this case, the amortization should be continued until being disposed or classified to held for sale group in accordance with IFRS 5.

References

- IAS 38 – Intangible assets

- Training documents on IAS 38 composed by ACCA Vietnam