Structure of standard 38 intangible assets. Recognition and assessment of intangible assets according to IFRS and RAS. Methods for assessing intangible assets in financial statements
Intangible asset - is an identifiable non-monetary asset that has no physical form, which is contained:
For use in the production or provision of goods and services;
Renting to other companies;
Administrative purposes.
Examples of intangible assets according to IAS 38 Intangible Assets are:
licenses;
intellectual property (for example, technical knowledge obtained as a result of research and development activities);
trademarks, including brands and publication names;
films and videos.
Recognition of an intangible asset.
Like any asset, an intangible asset must meet recognition criteria: it must be identified as an independent object of accounting, controlled by the organization, bring economic benefits (or there must be reason to expect them), and have a reliable estimate.
IFRS 38 pays serious attention to the possibility of identifying an intangible asset. It is needed so that the intangible asset can be distinguished from goodwill, i.e. business reputation of the company. Separability is a sufficient condition for identifiability, but is not required under IAS 38. The asset is considered separable, if an entity can lease, sell, exchange, or distribute the future economic benefits of owning the asset without giving up other assets or the future economic benefits expected from owning them.
An intangible asset can be identified in other ways. For example, if it is acquired as part of other assets, it can be separated by the legal rights attached to it.
According to IFRS 38, an intangible asset is considered identifiable when the following three conditions are met:
1) future economic benefits from the use of the asset can be reasonably separated from the benefits derived from goodwill;
2) receipt of an asset is a consequence of a specific business transaction;
3) the asset is separable, i.e. its disposal (lease, sale or exchange) will not result in the disposal of future economic benefits arising from other assets used in the same income-generating activities.
Control intangible asset means:
The company's right to receive future economic benefits from the use of a given asset;
The ability to prohibit other companies from accessing this asset.
Receipt of future economic benefits from the use of the asset is to ensure net cash flow, including increased income, or cost savings.
Goodwill, created by the organization itself, in most cases is not recognized as an intangible asset, since it is not identified and it is impossible to reliably determine its value. A similar approach is provided for by RAS.
According to IFRS organizational expenses are recognized as expenses at the time of their actual occurrence, except in cases where they are subject to inclusion in the cost of fixed assets or other assets. Expenses incurred during the establishment of a legal entity, recognized in accordance with the constituent documents as part of the contribution of participants to the authorized capital of the organization, are not included in intangible assets.
For intangible assets created by the company independently,
IFRS 38 introduces additional recognition criteria. The process of creating an asset is divided into two stages: the research phase (research and development) and the development phase (development work).
Research works include:
activities aimed at obtaining new knowledge;
search, evaluation and final selection of ways to apply the obtained research results;
search for alternative materials, raw materials, devices, technologies, systems or services;
formulating, designing, evaluating and ultimately selecting possible alternatives for new or improved materials, devices, technologies, systems or services.
At the research stage, the company does not yet have an intangible asset that can bring future economic benefits. Therefore, research costs incurred are recognized in the financial statements not as an asset, but as expenses of the period.
Development stage intangible asset includes;
design, construction and testing of prototypes and models;
design of tools, templates, forms and stamps, the use of which is provided for by new technology;
design, construction and operation of a pilot plant;
design, construction and testing of selected alternative materials, devices, technologies, systems or services.
The cost of work performed at the development stage of an intangible asset is recognized as an intangible asset and is taken into account when assessing it if the company is able to demonstrate:
1) intention to complete the development of an intangible asset;
2) the availability of sufficient technical, financial, intellectual and other resources for this;
3) the ability to use the created intangible asset to extract future economic benefits or sell;
4) technical capabilities to complete the creation of an intangible asset;
5) the ability of an intangible asset to bring future economic benefits;
6) the ability to reliably estimate the costs related to the created intangible asset.
If a project to create an intangible asset cannot be separated into research and development phases, it is treated entirely as research and therefore is not recognized as an intangible asset in the financial statements.
IFRS does not allow capitalization (recognition as non-current assets) in subsequent reporting periods of R&D costs that were previously expensed.
Topic: IFRS 38 Intangible Assets
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1. IFRS 38 Intangible assets 3
1.1. Basic definitions of standard terms and recognition criteria for an element in financial statements 3
1.2. Methods for assessing intangible assets in financial statements 5
1.3. Disclosure of information in financial statements 10
2. Features of constructing a cash flow statement in accordance with IFRS 12
2.1. Basic concepts, purpose and principles of IFRS 7 12
2.2. Classification of cash flows by type of company activity 14
2.3. Methods for preparing an operating activity report 15
3. Problem 21
References 23
IFRS 38 INTANGIBLE ASSETS
Basic definitions of standard terms and recognition criteria for an element in financial statements
Accounting for intangible assets (hereinafter referred to as intangible assets) according to international financial reporting standards is regulated by IAS 38 “Intangible assets”. The current version of IAS 38 was adopted in 2004 and is applicable to the accounting for intangible assets for annual periods beginning on or after 31 March 2004.
The purpose of this standard is to provide accounting treatment for intangible assets that are not specifically addressed in other standards. The standard also establishes procedures for measuring the carrying amount of intangible assets and requires certain disclosures about intangible assets.
IFRS 38 provides the following basic concepts, intangible asset - it is an identifiable non-monetary asset that has no tangible form. Examples of intangible assets, according to IAS 38, are patents, copyrights (for example, software), licenses, intellectual property (for example, technical knowledge obtained through research and development), trade marks, including brands and publication titles, motion pictures and videos.
First of all, a company recognizes intangible assets based on criteria common to all assets. They are set out in the Principles for the Preparation and Presentation of Financial Statements in accordance with IFRS. Like any asset, an intangible asset is subject to recognition and included in the company’s balance sheet if two conditions are simultaneously met: 1) there is a high probability that the company will receive economic benefits from the use of the asset in the future; 2) the value of the asset can be reliably estimated.
This standard requires an entity to recognize an intangible asset when and only when certain criteria are met. From the point of view of recognition of intangible assets, the main difficulty lies in the need to identify such assets and estimate their value. An intangible asset must be identified as an independent accounting object, controlled by the organization and bring economic benefits (or there must be reason to expect them), and have a reliable assessment.
Identifiability . An intangible asset must be separable from other company assets. According to IAS 38, an intangible asset is considered to be identifiable when the following conditions are met: 1) specific future economic benefits from the use of the asset can be reasonably separated from the benefits derived from the goodwill of the entity; 2) receipt of an asset is a consequence of a specific business transaction; 3) the asset is separable, i.e. its disposal (lease, sale or exchange) will not result in the disposal of future economic benefits arising from other assets used in the same income-generating activities.
Intangible assets can also be identified in other ways. For example, if it is acquired as part of other assets, it can be separated by the legal rights attached to it.
Company control . Control of an intangible asset means that an entity has the right to obtain future economic benefits from the use of the asset and has the ability to prevent other companies from accessing the asset. An entity's ability to control the future economic benefits of an intangible asset usually arises from legal rights that can be exercised in in court. In the absence of legal rights, demonstrating control is much more difficult. An example is a company's technical knowledge, which is protected by patents.
Future economic benefits . An intangible asset can be reflected in the company's reporting if its use will allow in the future to obtain a net cash inflow, additional profit, reduce costs, increase sales, etc. It is important to note that the possibility of obtaining such economic benefits by an enterprise is determined on the basis of professional judgment , supported by appropriate justification .
Methods for assessing intangible assets in financial statements
Upon initial recognition, intangible assets are accounted for at cost. The composition of expenses that can be attributed to the cost of an intangible asset at its initial valuation depends on method of acquiring intangible assets.
A company can acquire intangible assets in different ways: separate acquisition (for a fee); as a result of exchange; through government subsidies; as part of a business combination; through independent creation within the company.
Separate acquisition of intangible assets . When purchasing intangible assets, the cost of a separately acquired intangible asset includes: the purchase price of the intangible asset, including import duties and non-refundable purchase taxes, after deducting trade discounts and purchase rebates; any costs directly related to preparing the asset for its intended use. For example, if an enterprise classified an information system as an intangible asset, then the costs of its implementation and setup will also be included in the cost of intangible assets.
Costs associated with the introduction of new products or services (including costs of advertising and promotional activities), costs associated with conducting business in a new location or with a new category of clients (including costs of personnel training), as well as administrative and other general overhead costs cannot be attributed to the cost of intangible assets. For example, if a company has acquired the rights to use a trademark, then the costs of promoting it in new markets will not form its value.
As a result of the exchange. When receiving intangible assets by exchange, two cases are possible: 1) an exchange is made for a dissimilar asset, the received asset is valued at the fair value of the transferred asset plus (minus) the transferred (received) funds; 2) an intangible asset was received in exchange for a similar asset with similar technical characteristics and fair value. In this case, the asset is recognized at the carrying amount of the asset received. Profits (losses) on such transactions should not be recognized.
Purchasing with government subsidy. In some cases, an intangible asset may be obtained by a company free of charge or for a nominal fee through government grants. This can happen when the government transfers or allocates intangible assets to an enterprise, such as airport landing rights, radio and television licenses, import licenses or quotas, or pollution quotas. In this case, according to IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, the intangible asset is measured at fair value or at cost (which may be zero).
In accordance with IFRS 3 Business Combinations n intangible assets, acquired as a result of a business combination , must be accounted for at fair value at the acquisition date. Intangible assets whose fair value can be measured reliably and will reflect market expectations regarding the likelihood of future economic benefits embodied in the asset flowing to the entity should be accounted for separately from goodwill. In this case, the company is obliged to determine the fair value of the acquired intangible assets, even if they were not reflected in the financial statements of the acquired company. In many cases, there is no market for intangible assets, so the discounted cash flow method is often used to determine their fair value.
By independently creating it within the company. For intangible assets created independently by a company, IFRS 38 introduces additional recognition criteria. The process of creating intangible materials is divided into two stages - research (research and development) and development (experimental design work).
Under research refers to planned work aimed at obtaining new scientific and technical knowledge, activities to select the scope of application of the results obtained, as well as the search for alternative materials, devices, products, processes, systems, services, etc.
Expenditures incurred during the research stage are not capitalized but are recognized as expenses in the period in which they are incurred because at the research stage the company does not yet have the intangible asset and cannot demonstrate certainty of future economic benefits.
Developments- this stage includes: design, construction and testing of prototypes and models; design of tools, templates, forms and stamps, the use of which is provided for by new technology; design, construction and operation of a pilot plant, etc.
Costs arising during the development stage can be included in the cost of the created intangible asset from the moment the following conditions are met: 1) the creation of intangible assets is technically feasible, the company plans to complete the development stage and has the necessary resources for this; 2) the created asset can be used by the company or sold; 3) there is a justification for how the company will receive economic benefits from the asset being created; 4) the costs of creating intangible assets during the development phase can be reliably estimated.
All costs incurred before the above conditions are met and written off as period expenses cannot be restored and taken into account in the cost of intangible assets.
If the project for the creation of intangible assets cannot be divided into research and development stages, it is completely considered as research, which means that the intangible asset is not recognized in the financial statements. Costs incurred are recognized as expenses of the reporting period.
Subsequent assessment (revaluation) of intangible assets. The need for revaluation of intangible assets is explained by changes in their market prices. The standard provides for two models for subsequent accounting of intangible assets.
Actual cost accounting model: intangible assets are recorded at cost less accumulated depreciation and impairment losses;
Model of accounting for revalued value: Intangible assets are reflected on the company's balance sheet at fair value less depreciation and impairment losses (in practice, this model is used extremely rarely, since it is applicable only in the presence of an active market). Revaluation should be carried out with such regularity that at the end of the reporting period the book value of the asset did not differ materially from its fair value.
Useful life of intangible assets. The length of the useful life depends on: a) the period over which the company expects to use the asset; b) on the number of products or similar products that the company expects to receive from the use of intangible assets.
When determining the useful life of an intangible asset, a company must take into account the ability to manage the asset, the dynamics of its life cycle, technological obsolescence, industry stability, competitors’ actions, etc.
The maximum useful life of intangible assets is 20 years. If the period is reasonably longer, it can be increased, and vice versa, if any intangible asset is acquired for a long period, and the expected period of its actual operation is shorter, then the second indicator will be selected as the useful life.
The useful life of intangible assets is determined when they are taken into account. The useful life of an asset is influenced by both economic and legal factors. Economic factors determine the period over which an organization will receive future economic benefits. Legal factors limit the period during which an organization controls access to these benefits. Factors influencing the determination of useful life intangible assets should be disclosed in the notes to the financial statements.
Disclosure of information about intangible assets with certain useful life . Estimating the useful lives of intangible assets is a matter of professional accounting judgment. Therefore, disclosure of estimated useful lives or depreciation rates allows users of financial statements to analyze the policies chosen by management and enable comparisons with other entities.
Disclosure of information about intangible assets with indefinite useful life . An entity should consider an intangible asset to have an indefinite useful life if an analysis of all relevant factors indicates that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows to the entity. Such intangible assets may include brands, trademarks, etc., from which future economic benefits are expected to flow for an indefinite period.
For an intangible asset with an indefinite useful life, information about the carrying amount of this asset is disclosed. In addition, data is provided to suggest that its useful life is uncertain. When providing such data, the organization is required to indicate the factor(s) that played a significant role in determining the useful life of the asset as indefinite.
Amortization is charged over the entire service life of intangible assets. Amortized amount is defined as the difference between the initial and liquidation values of the asset. Unlike fixed assets, for intangible assets it is assumed by default that the liquidation value is zero. It may be different from zero in cases where there is an agreement to purchase intangible assets by a third party to purchase the asset at the end of its useful life or for this type of asset there is an active market that allows the liquidation value to be determined.
In cases where the useful life of intangible assets cannot be determined, depreciation is not accrued.
The standard does not limit the choice of depreciation method for intangible assets; it only lists the possible ones: linear method, declining balance method, write-off method in proportion to production volume.
The depreciation method used by a company must be consistent with the company's schedule for receiving the economic benefits from the asset. If such a schedule cannot be determined reliably, the straight-line method should be used. The period and methods of depreciation should be reviewed at least at the end of each financial year.
A special approach is provided for accounting for goodwill. IFRS 3 requires goodwill to be measured (after initial recognition) at cost less accumulated impairment losses. Under IFRS 3, goodwill is not amortized, but is instead subject to annual (or more frequent) impairment tests.
Depreciation is recognized as an expense unless other IFRSs allow it to be included in the carrying amount of other assets (for example, depreciation on a patent for the production of industrial products may be included in the carrying amount of inventories). Impairment and P derecognition of intangible assets. Impairment of intangible assets is recognized by the company in accordance with IFRS 36 “Impairment of Assets”. The purpose of testing assets for impairment is to ensure that their carrying amount is recoverable.
Intangible assets cease to be reflected in the financial statements in the event of disposal (sale, gratuitous transfer, etc.) or when no economic benefits are expected to flow from the use or disposal of the asset. Income (losses) arising upon derecognition of intangible assets are calculated as the difference between the net cash inflows from the disposal of an intangible asset and its balance sheet value, which is the profit (loss) of the reporting period. In the company's financial statements, it is recognized as income (expense) in the statement of comprehensive income.
Disclosure in financial statements
IAS 38's disclosure requirements for intangible assets are similar to, but more detailed than, those for property, plant and equipment.
The financial statements disclose information for each class of intangible assets. In this case, information about intangible assets created by the enterprise is provided separately. Classes of intangible assets are groups of assets similar in purpose and use in the organization’s operations (brands, licenses and franchises, copyrights, related rights and patents, recipes and formulas, intangible assets under development). The balance sheet and cash flow and income statement generally contain aggregate information, with detailed information disclosed in the notes to the financial statements.
With the main method of accounting for intangible assets the company must reflect in its reporting: 1) useful life; 2)depreciation methods used; 3) the cost of intangible assets before deduction of accumulated depreciation (taking into account accumulated impairment losses) and the amount of accumulated depreciation at the beginning and end of the period; 4) items of the income statement, which include depreciation of intangible assets; 5) reconciliation of the book value at the beginning and end of the period, reflecting the receipt of intangible assets, any changes in the book value, write-offs and disposals of intangible assets; accrued depreciation; differences from the recalculation of the value of assets into the reporting currency, etc.; 6) the reasons why determining the useful life of individual intangible assets is considered impossible; 7) description, book value and remaining depreciation period for all significant intangible assets; 8) availability and book value of intangible assets pledged as collateral for obligations; 9) the amount of research and development costs included in the expenses of the period.
If intangible assets are accounted for at a revalued value, then the following should be disclosed by asset class: 1) the actual date of the revaluation; 2) the carrying amount of revalued intangible assets; 3) the amount of the revaluation amount indicating changes during the period. In addition, when conducting a revaluation, the amount of increase in the carrying value of intangible assets at the beginning and end of the period, as well as the methods and significant assumptions used in estimating the fair value of intangible assets must be disclosed.
Regardless of the method used to account for intangible assets, IAS 38 recommends disclosure of the following: Additional information: 1) description of fully depreciated, but still used intangible assets; 2) a brief description of intangible assets controlled by the entity but not recognized as assets because they do not meet the recognition criteria or because they were acquired or created before IAS 38 became effective.
FEATURES OF CONSTRUCTING A CASH FLOW STATEMENT IN ACCORDANCE WITH IFRS
Basic concepts, purpose and principles of IFRS 7 standard
Regardless of the nature of the activity, any company needs cash to operate, pay off obligations, and provide income to investors. A cash flow report is necessary both for managers to control cash flows, and for third-party investors and shareholders, who, based on this report, can draw conclusions about management of the firm's liquidity, its income and the firm's ability to raise significant amounts of cash.
Historical cash flow information is often used as the basis for making forecasts about the amount and timing of future cash flows. It is also useful in checking the accuracy of cash flow forecasts and in analyzing the relationships between profitability, net cash flows and price changes. The procedure for preparing a cash flow statement is regulated by IFRS 7 “Statements of Cash Flows”. The purpose of this standard is to disclose the requirement to present information about historical changes in cash and cash equivalents of a company through the statement of cash flows. Thus, the main purpose of this statement is to present information about the receipts and payments of cash made by the company during the reporting period, and The importance of the report is due to the fact that often the lack of free cash becomes the reason for the bankruptcy of companies.
IFRS 7 defines terms used when preparing a report.
Cash- cash and deposits that can be received by a company on demand.
Cash equivalent- short-term, highly liquid investments (investments), easily convertible into a certain amount of cash and subject to an insignificant risk of changes in value. For example, cash equivalents include securities and uncertificated financial instruments. IFRS 7 “Statements of Cash Flows” provides a detailed description of cash equivalents.
Cash flows characterize the inflow (receipts) and outflow (payments) of cash and cash equivalents.
Basic principles
All companies that prepare financial statements in accordance with IFRS are required to present a statement of cash flows. This statement must be presented as an integral part of its financial statements for each period in which financial statements are presented.
- The cash flow statement analyzes changes in cash and cash equivalents during a period. Cash and cash equivalents include cash on hand, bank demand deposits, and short-term, highly liquid investments that are readily convertible into specified amounts of cash with little risk of changes in their value.
- Investments are defined as cash equivalents when the payment term is 3 months or less from the date of acquisition.
- Bank overdrafts, payable on demand and forming an integral part of a company's cash management, are also included in cash and cash equivalents.
Users of financial statements are interested in how a company generates and uses cash (and cash equivalents). The statement of cash flows, used in conjunction with other components of financial statements, provides information that allows users to evaluate changes in a company's net assets, its financial condition (for example, , liquidity and solvency), as well as assess the company’s ability to influence the volume and timing of cash flows in order to adapt to changing conditions.
Classification of cash flows by type of company activity
In accordance with this standard, cash flows during the reporting period are classified into the following areas of activity: 1) operating; 2) investment; 3) financial.
Presentation of information in the cash flow statement by type of activity makes it possible to assess their impact on changes in the financial condition of the organization and the relationships between types of activities. The same transaction may be reflected in the report differently. For example, repayment of a loan is in the group of financial activities, and interest on it is in the group of operating activities.
Operating activities in the IFRS system it is considered as the main one generating the greatest income for the company. The amount of cash flows from operating activities is a key element showing the amount of cash resource flows for repaying loans, maintaining and growing operating capabilities, paying dividends, and new investments.
Cash flows from operating activities are generated primarily in the course of core activities that generate the company's revenue. Thus, they usually result from transactions that contribute to net income.
Examples of cash flows and cash equivalents from operating activities include:
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Investment activities
Separate disclosure of information about cash flows from investment activities reflects the extent of expenditure on resources intended to generate future income and cash flows.
Cash flows from investing activities include:
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Separate disclosure of cash flows funds from financial activities necessary to forecast cash demands on the part of those who represent the company's capital.
The types of cash flows from financing activities are:
2.3.Methods for reporting on operating activities
To provide information about cash flows from operating activities, allows companies to choose one of two possible methods described in IFRS 7 Statements of Cash Flows: direct (encouraged) and indirect (allowed).
Direct method, which discloses information about the main classes of gross receipts and gross disbursements. The direct method involves determining the amount of net cash flow by comparing data on cash receipts and disbursements in connection with operating activities. The result obtained is adjusted for interest payments and income tax expenses.
The greatest difficulty in the process of constructing a cash flow statement using the direct method, especially for an external analyst, is its first section, which reflects cash flow from operating activities.
The following are distinguished: dignity this method: 1) the ability to show the main sources of inflow and direction of outflow of funds; 2) the ability to make prompt conclusions regarding the sufficiency of funds for payments on various current obligations; 3) direct link to the cash plan (budget of cash receipts and payments); 4) establishes the relationship between sales and cash proceeds for the reporting period, etc.
Information about the main types of cash receipts and payments can be obtained: from the company's accounts; from the balance sheet and income statement, using adjustments to the relevant items.
In practice, most businesses carry out a huge number of transactions every day that generate cash flows, so cash flows are quite difficult to analyze and classify. In this regard, the construction method based on accounting data often turns out to be too labor-intensive even for internal accounting services. In addition, it is unacceptable for external users who do not have access to the enterprise's credentials, which constitute its trade secret.
In this situation, a simpler and more universal way is to use the balance sheet and income statement data with appropriate adjustments. The general scheme for constructing a statement of cash flows from operating activities by the direct method is presented in the diagram shown in Table 1.
Table 1.
Scheme for determining cash flow from core activities (direct method)
Index
1 + Net sales revenue
2 +(—) Decrease (increase) in accounts receivable
3 + Advances received
4 = Cash received from clients
5 (—) Cost of products and services sold
6 +(—) Increase (decrease) inventory
7 +(—) Decrease (increase) accounts payable
8 +(—) Increase (decrease) in deferred expenses
9 + General, commercial and administrative expenses
10 +(—) Decrease (increase) in other liabilities
11 = Payments to suppliers and staff
12 (—) Interest expenses
13 +(—) Decrease (increase) accrued interest
14 +(—) Decrease (increase) in reserves for upcoming payments
15 +(—) Non-operating / other income (expenses)
16 = Interest and other current expenses and income
17 (—) Taxes
18 +(—) Decrease (increase) debt/reserves for tax payments
19 +(—) Increase (decrease) in advances on tax payments
20 = Taxes paid
21 Cash flow from operating activities (page 4 - page 11 - page 16 - page 20)
Disadvantage The considered method is that it does not reveal the relationship between the obtained financial result and changes in the absolute amount of funds of the enterprise.
Using indirect method information about cash flows from operating activities is disclosed by adjusting net profit or loss for the amount of depreciation charges, changes in inventories, accounts receivable and payable, proceeds from the sale of own shares, bonds, dividends received and paid, etc. Thus, when using the indirect method, the firm's net income (loss) is adjusted to take into account the results of non-cash transactions, as well as changes that have occurred in operating working capital.
Types of non-monetary transactions can be: 1) acquisition of assets either by accepting corresponding liabilities or through financial leases; 2) acquisition of a company through the issue of shares; 3) conversion of debt into shares.
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According to the construction algorithm, this method is reverse to direct. Thus, this method shows the relationships between different types of activities of the enterprise; establishes the relationship between net profit and changes in the working capital of the enterprise for the reporting period. Despite its apparent cumbersomeness, the indirect method is quite widespread in foreign practice. It is usually used in the preparation of consolidated financial statements, since the use of the direct method turns out to be extremely capital intensive. Regardless of the method chosen by the company to present the cash flow statement, the amount of net cash flow has the same meaning. |
Algorithm for generating cash flow from operating activities by the indirect method includes the implementation of the following stages: 1) Based on reporting data, the net profit of the enterprise is determined; 2) The amounts of cost items that do not actually cause cash flow are added to net profit (for example, depreciation; 3) Any increases (decreases) that occurred in items of current assets are subtracted (added), with the exception of the item “Cash”; 4) Any increases (decreases) that occurred in items of short-term liabilities that do not require interest payments are added (subtracted). The general scheme for constructing a cash flow statement using the indirect method is shown in Table 2.
Table 2.
Determination of cash flow from core activities (indirect method)
Index
1 Net profit
2 + Shock absorption
3 — (+) increase (decrease) in accounts receivable
4 — (+) increase (decrease) inventory
5 — (+) increase (decrease) in other current assets
6 + (—) increase (decrease) in accounts payable
7 +(—) increase (decrease) in interest payable
8 +(—) increase (decrease) in reserves for upcoming payments
9 +(—) increase (decrease) in debt on tax payments
10 = Cash flow from operating activities
The indirect method shows where exactly the company’s profit is materialized, or where “real” money is invested.
In addition to the ease of calculation, the main advantage of using the indirect method in operational management is that it allows establish correspondence between financial results and changes in working capital involved in the main activity. In the long term, this method allows us to identify the most problematic “places of accumulation” of frozen funds and, accordingly, outline ways out of such a situation.
In addition, an important factor when choosing a cash flow statement method is data availability. The use of various forms and methods for constructing a cash flow report allows you to analyze their volumes and structure in several aspects. As a result, the user receives a detailed understanding of the operating, investment and financial transactions carried out by the enterprise during the period under review. This, in turn, allows him to form a judgment about the strengths and weaknesses of a given enterprise, its current and potential problems.
The direct method is preferred. It is believed to provide information to estimate future cash flows, which is difficult when using the indirect method.
When preparing a cash flow statement, the main types of gross cash receipts and gross cash payments are shown separately.
Currency flows are reflected in the flow report cash on the date of occurrence of this movement in the company’s reporting currency. To do this, foreign currency is recalculated at the exchange rate in accordance with IFRS 21 “The Impact of Changes in Exchange Rates”. Estimated gains and losses from changes in foreign currency exchange rates are not treated as cash flows. Therefore, the resulting result is shown separately from cash flows from operating, investing and financing activities.
Cash flows from extraordinary events should be attributed to operating, investing and financing activities and shown separately. This approach allows us to determine the impact of extraordinary circumstances on present and future cash flows. This information is disclosed in accordance with IFRS 8 “Net profit or loss for the period, fundamental errors and changes in accounting policies”.
Cash as flows of interest and dividends received or paid are disclosed separately in the statement of cash flows as operating, investing or financing. The amount of interest paid during the period or capitalized in accordance with the alternative permitted by IAS 23 Borrowing Costs is disclosed.
Cash flows for income taxes must be shown in the report separately from other flows and relate to operating activities if they cannot be directly linked to financing or investing activities. If it is necessary to link cash flows to a specific transaction related to investing or financing activities, this flow should be attributed to a specific type of activity.
Transactions of a financial and investment nature that do not result in cash flows and cash equivalents are not included in the statement of cash flows. However, they must be disclosed in the financial statements because they affect the capital and asset structure of the company.
The statement of cash flows should reconcile amounts to relevant balance sheet items and disclose the amount of significant balances of cash and cash equivalents that are not available for use. The statement of cash flows assesses the organization's ability to generate cash and cash. equivalents, distribute over time and maintain the certainty of their formation. The cash flow statement provides an opportunity to evaluate changes in the organization's net assets and the ability to influence the amount and timing of cash flows. This is necessary to optimize activities under constantly changing internal and external conditions and opportunities. Cash flow statement information allows users to develop models for estimating, analyzing, and forecasting the present value of future cash flows.
TASK
On January 1, 2011, the company entered into an agreement for the provision of services for CU 900,000. (1 cu = 1 dollar) for a period of three years. As of the date of reporting for 2011, actual costs under the contract amounted to CU 300,000. services were performed for 400,000 USD. The company estimates future costs to be $500,000.
Calculate the amount of income and expenses to be reflected in the company's financial statements for 2011 using various accounting policies.
Solution:
According to IAS 18 “Income” (Revenue). There are types of revenue: 1) from the sale of goods; 2) from the provision of services and 3) from the use of company assets by others.
Depending on the type of revenue and the characteristics of the transaction, different criteria for its recognition are established.
According to the problem, on January 1, 2011, the company entered into a contract for the provision of services, which means that revenue from the provision of services should be recognized depending on the degree of completion of the transaction and if the final result can be reliably measured. When the result of the transaction for the provision of services cannot be measured reliably, revenue should be recognized only to the extent of reimbursable expenses.
The completion of the provision of services is determined by: 1) reports of completed work; 2) the percentage of services performed in the total volume of services as of the reporting date; 3) the percentage of contract costs incurred on the date of drawing up the report to the estimated value of the total costs according to the estimate, determined by calculation.
Revenue is recognized as a general rule in the reporting period in which the services provided for in the contract are provided.
1. Percentage of services performed to the total volume of services(percentage of completion in total volume of services).
As of the date of reporting for 2011, the company performed services for CU 400,000, and the contract was concluded for a total amount of CU 900,000.
Income in the reporting period amounted to =400,000 USD. :900,000 USD x 100% = 44.4%.
Costs as of the date of reporting were CU 300,000 (actual costs) + CU 500,000 (future) = CU 800,000.
800,000 USD × 44.4% = 355,200 USD - expenses.
2. Cost percentage(percentage of costs in the total cost estimate).
Actual costs under the contract = 300,000 c.u. The value of the total costs according to the estimate (300,000 c.u. + 500,000 c.u.) = 800,000 c.u. The percentage of costs was = 300,000 USD. : 800,000 USD x 100% = 37.5%.
900,000 USD × 37.5% = 337,500 USD - income.
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BIBLIOGRAPHY
1. Ageeva O.A. International financial reporting standards: Textbook. - M.: Publishing house "Accounting", 2008. - 464 p.
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Among the assets of a commercial company, a large group of objects called intangibles has special value and specific characteristics. This category includes identifiable assets that do not have a material or physical form and are non-monetary. Today, in the era of the digital economy, the presence of such assets largely determines the competitiveness and success of an enterprise, therefore their prevalence among companies of various profiles and sizes is increasing, and therefore reliable accounting is required. Therefore, to formulate a correct methodology and approach to accounting for such assets in companies that apply IFRS, the application standard IAS 38 was developed. We will talk about the role of this IFRS in the accounting policies of companies and issues of its substantive application in this article.
IAS 38 – General
The definition of an asset of this kind in financial and economic literature is vague. In a general sense, any object that does not have a material condition, but can bring significant benefits to the company, can be recognized as such an asset of the company. The main requirement for such an asset from the point of view of business logic is that the company in question has the rights and opportunities to use this asset. We mean various types of economic profit, which are expressed not only in direct cash receipts.
Any asset of this group has a number of properties that may vary slightly depending on the specifics of the intangible asset itself or the business of the owner company:
- Can be identified separately from other assets;
- Has a useful life of over one year;
- Able to bring economic benefits to the owner company;
- Controlled and used by the company itself;
- The original cost of a given asset can be calculated.
The main purpose of IFRS IAS 38 is to standardize and regulate the accounting for intangible assets of companies, regardless of the industry or business market. The standard requires companies to recognize in their financial accounting any item as an intangible asset that meets the listed properties of a specified subset of the company's assets. Among other things, the standard establishes the procedure for calculating, assessing and recognizing the value of an asset of this kind on the company’s balance sheet, and also regulates the requirements for disclosure of information on such corporate assets.
IAS 38 applies to the accounting of any corporate intangible assets, other than those covered by a separate standard or classified in a specific group. Examples of specific groupings include intangible assets associated with the assessment of mineral reserves (minerals, gas, oil) and similar non-renewable resources. If suddenly there is a separate standard governing the accounting of a specific type of intangible assets, then the company does not apply the IAS 38 standard.
This standard also does not apply to a firm's intangible assets that are held for sale, tax assets, leases, assets that arise from employee benefits, goodwill from synergies and business combinations, insurance contracts, and certain financial assets, each of which governed by one or more specific international standards.
Figure 1. Signs of an intangible asset according to IAS 38.
An asset of this kind may have properties that may include both tangible and intangible components. An example of this could be proprietary know-how on a company server, special technical documentation or a patent. Such a discrepancy, it would seem, introduces discrepancies in the accounting principles of such an asset, without providing the opportunity to unambiguously recognize its position in one of the groupings. However, the IFRS IAS 38 standard in this case allows the company to independently decide how to account for this asset based on its own professionalism and the significance of the tangible/intangible element in the asset.
If an asset contains more signs of materiality, then it must be accounted for using a special standard regarding the company's fixed assets. And if the intangible component is the main core of this object of economic benefit for the company, then its assessment and recognition is carried out in accordance with IAS 38.
In addition to the areas of application of Standard 38 listed above, it should apply to any company costs for corporate training, research costs and various development costs. This grouping is included in the scope of application of this asset due to the prevailing “knowledge” component in each of these processes. Even if the final work on such projects results in the creation of something of material value to the company, the intellectual component of this process is the primary property.
With regard to financial lease: its subject can be either material or non-material. If we are talking about an intangible asset that a company received as a result of a finance lease transaction, then it is recognized and accounted for in accordance with this standard. The processes for accounting for ownership of media materials, documents, manuscripts, patents and other similar intangible assets are governed by this standard without any significant exceptions. Of course, a company has the right to independently determine an exception to IAS 38 in the case where the activity, operation or product as a whole is so specialized that it requires an individual approach to this issue.
IFRS IAS 38 - application features
According to IAS 38 regulations, an asset of this type must first of all have the property of being identifiable. The main principle is that a tangible asset can be distinguished from goodwill. An asset can be identified if it can be separately sold, transferred, pledged, protected by a patent/license, leased, exchanged for another asset separately from the company and its other assets, and is the result of intellectual property, contractual and other legal rights. A company's goodwill, which arises as a result of a business combination, is also an asset that gives the enterprise the benefits of a business combination and a merger of assets. Some assets in such a transaction cannot be individually identified, so their economic benefit to the entity is recognized as a whole in the business combination.
Intangible assets include a fairly large group of intellectual property objects, knowledge expressed in various ways, technical know-how, objects of exclusive rights and opportunities, including various permits, quotas, exclusive agreements and other similar assets. Not all objects that fall under the external definition of an intangible asset actually are such. Therefore, if an item or item does not meet the criteria for individual identification as an intangible asset, then the costs of acquiring such an item are recognized as expenses when incurred.
An entity can reasonably claim that an asset of a given type is under its control when it has all the rights to receive the economic benefits embodied in the asset's resource. The ability to control benefits and limit third parties' access to those benefits usually arises from the company's legal property rights, which are indisputable in court. Although in modern practice there are enough examples when such an asset exists, but due to its specifics there is no legal right to it. The presence of legal rights is not a prerequisite for the emergence of control, but it facilitates it and at least enables the company to identify such an object as an intangible asset.
For example, the intellectual knowledge of employees cannot be considered an intangible asset of the company not only due to the impossibility of clearly assessing its value and separating it as an object for sale, but rather due to the inability to fully assert its rights to such knowledge even as an employer under a contract. Therefore, an intangible asset and future economic benefits from its possession can only include such profits that the company will receive and experience directly, and the occurrence of which it can reasonably count on. Examples include cash flows from sales or replication, cost optimization, increasing the efficiency of other company processes, etc.
Intangible assets have one exceptional property - they are almost never modernized, replaced or improved. Therefore, all costs incurred in connection with an intangible asset after its initial use are generally borne by the organization's business as a whole. Therefore, it is extremely rare that the carrying amount of an intangible asset changes due to new expenses associated with this property. In general, it can be said that the costs of maintaining and developing an intangible asset are recognized in profit or loss on the assumption that they cannot be separated from the total costs of developing and maintaining the business.
Any asset of this type that can be reliably identified is recognized when the cost of the item can be estimated and the entity reasonably expects future economic benefits from its use. The initial measurement of an intangible asset in accordance with the requirements of IFRS IAS 38 always occurs at cost. The criterion of “future economic benefits” from the use of an asset is a subjective professional judgment of the company, which must be based on objective assessments and data obtained from all possible professional sources whose opinion the company can reasonably trust.
The cost of an asset, as a rule, includes all the total monetary costs of the company for the purchase of this intangible asset, preparation of the transaction, taking into account commission payments, implementation and other expenses associated with this transaction. As stated earlier, as a result of the acquisition and implementation process, the company expects to receive certain economic benefits for which it is interested in this asset. The cost of an intangible asset is always measured at fair value, and the costs of acquiring such an asset are recognized as an expense to the company when incurred.
If an entity accounts for an asset at cost in accordance with IAS 38, it accounts for its cost less any depreciation and impairment losses subsequent to initial recognition. If an entity accounts for its type of asset under a revalued model, then the fair value of the valuation at the date of the revaluation is reduced by accumulated depreciation and impairment losses. Under this approach, fair value is determined based on professional judgment based on public market data.
In accounting for the grouping of assets covered by IFRS IAS 38, there is a separate type of tangible assets that requires individual consideration. We are talking about intangible assets that are created by the company independently. Such assets are difficult to value and recognize because there are specific problems in determining when such an asset comes into existence and reliably determining its cost. The company should be guided by the general provisions of IAS 38 in relation to assets created independently, without any significant exceptions. The company conducts assessments at two production stages of asset creation - research and development.
Research makes it possible to understand the fundamental applicability of an asset in extracting economic benefits, and the development stage is to transform the product into a certain shell that can ensure its separation from the company for exchange, sale and other extraction of income and benefits. If the created asset follows the recognition logic in the same way as other intangible assets, then the company has the right to account for it in accordance with IFRS IAS 38. When the created asset can generate economic benefits for the enterprise only together with other assets, then the company should identify it in accordance with the recognition rules cash generating units.
In any case, the company must use a method of calculating the cost of the asset that will provide a wide range of users with an understanding of the cost structure spent on producing the asset. In addition, the process of creating an intangible asset must be supported by regulatory documentation (business plan, technical specifications), technical materials and personnel necessary for the production of such products.
For each recognized intangible asset, the company, based on factual information, determines the useful life of this asset as finite or indefinite. If an asset has a limited useful life and is expected to be disposed of later, the company forecasts the unit amount of economic benefits that the company expects to receive from the asset. A company should account for an asset as not having a specified useful life if an analysis of its applicability has not revealed foreseeable restrictions on the use of this product/asset.
Depreciation of an asset with a limited useful life occurs systematically throughout its entire useful life, starting from the moment the asset is actually able to be used. The residual value of such an asset is logically zero unless there is an obligation on the part of a third party to purchase the asset at the end of its useful life or an alternative market in which the asset of this kind can be sold and demand is reasonably likely. The depreciation period of an asset should be analyzed at least once a financial year, and if there is a discrepancy with the initial estimates, it should be adjusted to new data.
The Company assesses an asset for signs of impairment in accordance with a specific standard. An asset of this type is derecognised by the entity when it is disposed of or when no further benefits are expected from its use. Gain or loss on disposal is calculated as the difference between the proceeds from disposal and the carrying amount of the asset.
IFRS IAS 38 requires companies to disclose the most complete and detailed list of information about their tangible assets so that users of financial statements can analyze this section of corporate reporting as fully as possible without significant difficulties. Thus, companies must disclose in their reporting differentiated information on acquired and independently produced intangible assets in matters of specificity, expectations of benefits and profits, terms of use in business, cost, depreciation, receipts from an asset or group of profit-generating units, impairment losses and other changes in data carrying amount, disposal forecasts and other material financial information regarding the asset.
In this case, it is not necessary, but it is advisable to provide a brief description of the economic forecast for the use of an intangible asset, as well as provide information about whether companies own other objects of similar economic significance that are not recognized as assets due to non-compliance with recognition criteria.
Conclusions and Conclusion
Intangible assets in modern business have long been equal in importance to tangible ones, and in some industries they surpass them. This is due to the specifics of certain types of business and the global trend of the digital economy, in which knowledge and technology play a leading role in matters of competitiveness and business success. IFRS IAS 38 can be a useful tool for modern accountants and financiers associated with enterprises whose business is heavily dependent on intangible assets. A professional approach to this topic can ensure the formation of correct financial statements, which will be of great practical value for external and internal users of the company.
The definition and recognition criteria for intangible assets are governed by IAS 38. M.L. Pyatov, I.A. Smirnova, St. Petersburg State University consider the provisions of this standard related to the definition and recognition of intangible assets and compare them with Russian practice.
IAS 38 - relevance for Russian accounting practice
Intangible assets are one of the most difficult accounting categories to define. If an understanding of what goods, materials, and fixed assets are can be considered achieved, then with intangible assets everything is much more complicated.
First of all, the actual criterion of intangibility raises a question. Intangible, that is, intangible, resources are accounts receivable, the organization's bank accounts, deferred expenses, uncertificated securities, trademarks, copyrights, results of scientific research and design developments, computer programs and many, many other objects. Can all these objects be considered intangible assets?
It is also difficult to determine the scope of rights, the presence of which provides grounds for recognition of an intangible asset.
In addition, it is difficult to apply the criterion of asset profitability in the case under consideration, for example, if acquired goodwill of an enterprise is classified as intangible assets.
The multivariance and ambiguity of the interpretation of the category of intangible asset led to the fact that in Russia for several years, regulations prescribed that founding expenses, which, in principle, are not assets, are included in this accounting object even within the framework of the interpretation of domestic law.
To a certain extent, the definition of an intangible asset can be considered satisfactory, according to which intangible assets are non-current non-monetary assets that do not have tangible media, and non-current non-monetary assets, the value (price) of which is many times higher than the value (price) of their tangible media.
However, it does not solve the problems identified above. Therefore, perhaps, for now the only correct definition of this concept can be called the following: intangible assets are objects that, according to regulatory documents or other regulations, should be taken into account in the “Intangible Assets” account.
The composition of such objects in different accounting systems is different. IFRS provide an independent interpretation of intangible assets. Understanding the position of IFRS on this issue is important not only for accountants who maintain accounting according to International Standards. Acquaintance with the new edition of PBU 14 (for more details, see issue 4 of BUKH.1S for 2008, p. 4) shows that it is the area of accounting for intangible assets in Russian regulations that represents the largest volume of borrowing from IFRS.
However, the most significant differences between Russian practice and IFRS regarding intangible assets continue to be the differences in the boundaries covered by this concept.
These boundaries are formed by the rules for recognizing intangible assets in accounting, which we will consider in this article.
Definition of intangible assets
According to the provisions of the standard under consideration, an object can be reflected in the financial statements under the balance sheet item “intangible asset” if it meets the definition of an intangible asset and the criteria for its recognition. Both the definition of an intangible asset and the criteria for its recognition in the standard are based on the general definition of an asset in the IFRS Principles, but they also have very significant features.
First of all, we note that in IFRS the sign of intangibility, that is, the absence of a material embodiment, is only one of the criteria for classifying an accounting object as an intangible asset. This limits the scope of IAS 38 Intangible Assets.
This standard does not regulate the reporting of a number of intangible objects, referring us to other standards. IAS 38 contains an open list of types of business facts to which its provisions do not apply because “another Standard establishes the accounting treatment for a particular type of intangible asset” and, therefore, “an entity shall apply that Standard in lieu of this Standard.”
IAS 38 provides examples of items that are designated as intangible assets but are not recognized as intangible assets in financial statements:
- intangible assets associated with the development and production of non-renewable resources (IFRS 6), insurance organizations (IFRS 4), as well as those intended for sale (IFRS 5, IAS 2, IAS 11). It should be noted that the issues of reflecting intangible assets intended for sale as inventories of an organization are very relevant for today's Russian accounting practice in connection with the entry into force of Part Four of the Civil Code of the Russian Federation*;
- assets arising from leases (IAS 17). The right to use tangible property acquired by the lessee actually represents nothing more than an intangible asset, while at the same time, the lessor, under a financial lease agreement, reflects on the balance sheet not the leased object, but the tenant’s receivables, that is, an intangible object;
- deferred income tax assets (IAS 12). While not representing receivables in the strict sense, they, being a consequence of the expenditure of company resources, will potentially reduce the volume of such expenses in the future;
- financial assets (IAS 32, IAS 27, IAS 28, IAS 31). The “intangibility” of financial assets themselves and their profitability for the company is completely obvious;
- assets associated with ensuring the payment of benefits to employees of the organization (IAS 19);
- goodwill that arises as a result of a business combination (IFRS 3).
In accordance with these scope limitations, IAS 38 provides a very broad definition of intangible assets, according to which an intangible asset is an identifiable non-monetary asset that has no physical form.
Thus, the standard identifies three characteristics that allow an object to be classified as intangible assets, namely intangibility, identifiability and non-monetary nature.
Also, the object must meet the basic characteristics of an asset as such, that is, be controlled and provide economic benefits to the organization.
Let's look at these signs.
Immateriality
Some objects that do not have a physical form are closely associated with or are operated in conjunction with only certain material objects, for example, an operating system and computer hardware, a program and a computer-controlled machine tool.
An organization that has such objects must independently determine the more significant element of the two components - tangible or intangible - and apply the appropriate standard.
Identifiability
In general, identifiability is the ability to separate an object from other company assets. The concept of identifiability has both a legal and an economic nature. From a legal point of view, identifiability in its most general form is the potential ability of an asset to be independently sold (assigned) to persons third party to the organization (if it is legally possible to turn it over). From an economic perspective, identifiability is the ability of an asset to independently be a source of future economic benefits to a company. According to IFRS, in terms of identifiability, its economic component is of primary importance.
This does not follow from the actual definition of the identifiability criterion in IAS 38, which states that “an asset satisfies the identifiability criterion in the context of the definition of an intangible asset when it:
“(a) may be separated from the entity by subsequent sale, licensing, lease or exchange, either as a stand-alone item or together with a related contract, asset or liability;
(b) arises from contractual or other legal rights, whether those rights are transferable or severable from the entity or other rights and obligations."
According to IFRS, the definition of an intangible asset first of all requires the object to be identifiable, which would allow it to be clearly distinguished from goodwill. However, goodwill acquired in a business combination reflects the acquiring entity's expectation of future economic benefits from assets that cannot be individually identified and separately recognized. These future economic benefits arise from the synergies of the identifiable assets acquired, or assets that do not individually qualify for recognition in the financial statements, but for which the acquirer is willing to pay in a business combination.
Non-monetary
Monetary assets include cash on hand and in bank accounts of the organization, accounts receivable and financial investments that are subject to repayment in a clearly established or determinable amount of cash. All other assets are non-monetary.
Thus, monetary intangible objects are considered as financial assets, but do not belong to the group of intangible assets.
Control
Regarding the control that a company must have over an object that can be recognized as an intangible asset, IFRS establishes requirements that also demonstrate the close connection between legal norms and economic processes.
An entity, the standard says, controls an asset if it has a right to future economic benefits flowing from the asset's underlying economic resource and can limit the access of other entities and individuals to those benefits.
The ability for an organization to control the future economic benefits of an intangible asset usually arises from legal rights that can be exercised, including in court. In the absence of legal rights, determining whether control is possible is more difficult.
However, the ability to enforce rights to an asset through judicial proceedings is not a necessary condition for control, since an entity may be able to control future economic benefits in other ways. Determining such ability is a matter of the accountant's professional judgment.
The possibility and necessity of using the professional judgment of an accountant in determining the accounting object as an intangible asset actually eliminates the shortcomings of the formal (literal) interpretation of the requirements of the standard, emphasizing the individuality of the situation of recognition of an intangible asset, the unambiguous compliance of which with general criteria may raise doubts.
For example, the standard indicates that an organization may have a team of qualified personnel and may be able to identify additional skills of personnel leading to future economic benefits as a result of their training. The organization may also expect staff to continue to provide their services. However, IFRS states that an entity generally does not have sufficient control over the expected future economic benefits that could be derived from skilled and trained personnel for these items to meet the definition of an intangible asset.
For similar reasons, IAS 38 states that the specific merits of management or technical personnel are unlikely to meet the definition of an intangible asset. At the same time, the standard does not exclude such a possibility in the case where the condition for protecting such rights on a legal basis is met, making it possible to use them and obtain the future economic benefits expected from them, subject to other clauses of the definition.
Further, as an example of the implementation of the control criterion, IAS 38 notes that in some cases an organization, having a portfolio of customers or market share, can expect that, due to its efforts in building customer relationships and their loyalty to the company, customers will continue to do business with it .
However, in the absence of legal rights of protection or other means of controlling customer relationships, an organization typically does not have sufficient control over the expected economic benefits of customer relationships to count such items (customer portfolio, market share, customer relationships, loyalty the company's customers) that meet the definition of intangible assets.
However, in the absence of legal rights to protect customer relationships, exchange transactions for the same or similar non-contractual customer relationships (outside a business combination) provide evidence that the entity is nonetheless able to control future economic benefits. expected from these customer relationships.
Because such exchanges also demonstrate that the customer relationships are separable (such as an acquired portfolio of customers), they meet the definition of an intangible asset.
Possibility of delivering economic benefits in the future
In terms of fulfilling the criterion of the ability to bring economic benefits to the company, first of all, it should be noted that the concept of economic benefits in IFRS is broader than the concept of generating income. IAS 38 notes that the future economic benefits of intangible assets may include both revenue from the sale of goods or services and cost savings resulting from the entity's use of the asset. For example, using intellectual property in a production process may reduce future production costs rather than increase future revenues.
Recognition of an intangible asset
Separately, IAS 38 defines the criteria for recognizing an intangible asset, that is, the criteria for accepting an object for accounting and reflecting it in the statements under the heading “intangible assets”. According to the standard, an intangible asset should be recognized if and only if:
- it is probable that future economic benefits attributable to the asset will flow to the entity;
- the value of the asset can be reliably determined.
IFRS requires an entity to estimate the likelihood of future economic benefits using reasonable and supportable assumptions that reflect management's best estimate of the set of economic conditions that will exist over the useful life of the asset. The standard requires an entity to use judgment to assess the degree of certainty associated with the flow of future economic benefits from the use of an asset, based on evidence available at the date of initial recognition, giving priority to evidence from external sources.
And here it should be noted that regarding the criterion of potential profitability of an intangible asset, the remark applies to all assets recognized within the framework of the IFRS concept in general. It consists in the fact that the decision regarding the possibility of obtaining economic benefits from the operation of an asset belongs to the area of professional judgment not of the accountant, but of management making decisions that determine the nature of the company's activities.
Reliable measurement means the ability to calculate the amount of money it cost the company to acquire an asset and/or its fair value.
Intangible assets can be obtained by an organization in various ways. IAS 38 regulates the recognition of intangible assets created by the organization itself more strictly than the recognition of acquired objects.
Creation of an intangible asset - research and development
According to IAS 38, in the process of creating intangible assets it is necessary to distinguish two stages - research and development.
Research- these are original and planned scientific research undertaken with the aim of obtaining new scientific or technical knowledge.
Development is the application of scientific discoveries or other knowledge to the design or construction of new or substantially improved materials, devices, products, processes, systems or services before their commercial production or use.
Thus, within the framework of the considered provisions of IFRS, the result of research in the process of its implementation can never be recognized as an intangible asset. First of all, this is due to the doubtfulness of the possibility of obtaining benefits in the future due to its presence in the company. The result of the development may be the creation by the company of an intangible asset, which can be recognized in the reporting.
The general rule established by IAS 38 is that “no intangible asset arising during the course of research (or the research phase of an internal project) shall be recognized. Expenditure on research (or the research phase of an internal project) must be recognized as an expense when they are incurred,” that is, decapitalized in the reporting period in which they were incurred.
Examples of research activities that fall under IAS 38 are:
- activities aimed at obtaining new knowledge;
- search, evaluation and final selection of areas of application of research results or other knowledge;
- searching for alternatives to materials, devices, products, processes, systems or services;
- formulating, designing, evaluating and ultimately selecting possible alternatives to new or improved materials, devices, products, processes, systems or services.
In relation to development, IAS 38 requires that an intangible asset arising from development (or from the development stage of an internal project) be recognized if and only if the entity can demonstrate all of the following:
- the technical feasibility of creating the intangible asset so that it is available for use or sale;
- your intention to create an intangible asset and use or sell it;
- its ability to use or sell the intangible asset;
- how the intangible asset will create probable economic benefits. Among other things, the entity must demonstrate that there is a market for the results of the intangible asset or the intangible asset itself, or, if its internal use is intended, the utility of the intangible asset;
- the availability of sufficient technical, financial and other resources to complete development and to use or sell the intangible asset;
- the ability to reliably measure the costs associated with an intangible asset during its development.
The Standard provides examples of development activities:
- design, construction and testing of pre-production samples and models;
- design of tools, templates, molds and dies incorporating new technology;
- design, construction and operation of a pilot plant that is not economically suitable for commercial production.
Boundaries of the category intangible assets
While giving such a strict definition of the criteria for recognizing intangible assets as an object of accounting, IFRS still leaves the boundaries of the category under consideration very vague. In this regard, IAS 38 specifically stipulates that trademarks, marks, titles, publishing rights, customer lists and similar items created by the organization itself are not subject to recognition as intangible assets, since the costs of their creation cannot be clearly separated from the costs of doing business the organization as a whole, and are also essentially elements of the goodwill of the organization itself.
IFRS IAS 38: summary
We have reviewed the provisions of IAS 38 related to the definition and recognition of intangible assets.
The most significant difference between the provisions of IFRS and the requirements of PBU 14 here is that the presence of exclusive rights to an intangible asset is not considered by the Standard as a necessary condition for its recognition.
The ability to comply with the criterion of control over an asset and potential profitability in IFRS is also associated with the presence of a certain amount of legal (legally defined) rights to it by the company.
However, while providing the company with the opportunity to derive economic benefits from the presence of an intangible asset, they do not necessarily have to be of an exclusive nature. This difference significantly expands the range of objects, the costs of which can be capitalized in accounting as a result of their recognition as intangible assets.
Another important point is the distinction made by IFRS between the concepts of defining an object as an intangible asset and recognizing it in accounting as reflected in the corresponding asset item of the balance sheet.
This provision speaks about the possibility of recognizing intangible assets as other accounting objects (reporting elements), for example, goods.
How do companies apply international standards in practice?
Good accounting standards do not necessarily mean that a company's financial statements will follow them in every aspect of reporting and disclosure. Unfortunately, the degree of compliance with mandatory disclosure requirements is not always the same. Whether and to what extent these requirements are met is an interesting question to study. And such studies were carried out.
This article is based on an ACCA report on this topic. The report was published in English, a public link to the report is available at: https://www.stir.ac.uk/research/hub/publication/14929. Report title: Worldwide application of IFRS 3, IAS 38 and IAS 36, related disclosures, and determinants of non-compliance.
This report examines the application of three standards IFRS 3, IFRS 38 and IFRS 36 in the accounting practices of European countries and some other countries that have adopted international accounting standards or declare significant convergence of national standards and IFRS. This ACCA study aimed to analyze whether IFRS is applied consistently across countries and whether effective reporting comparability is achieved. The report itself is quite lengthy, so for now I will focus on the conclusions regarding the application of IFRS 38 “Intangible Assets”. Of course, the report itself contains much more statistical information than this article.
Which companies from which countries were selected for the study?
The study needed to select companies from countries with different institutional and regulatory regimes, both developed and emerging stock markets.
The process of selecting companies for the study took place in three stages. First, the largest listed companies in 23 countries were identified. For European countries, the European S&P 350 index was used, which includes the largest EU companies that are most closely tracked and analyzed. In addition to companies present in the S&P 350 Index, selected European companies included in national large-cap indexes were added to the sample.
The largest non-European companies were identified based on their market value and presence in national stock indices. The sample included the largest companies from the ASFA Index (Australia), IBRX 50 Index (Brazil), Shanghai SSE 50 Index (China), Hang Seng Index (Hong Kong), FTSE Bursa Malaysia KLCI Index (Malaysia), NZX 15 Index (New Zealand) and FTSE/JSE RAFI 40 (South Africa).
Thus, it can be said that all the selected companies are blue chips in their respective geographical areas. Approximately 17% of the sample consists of British companies (91), 8% French (45) and 7% Australian companies (38). The weight of other countries is much less.
As a result, companies were selected from the following 23 countries (number of companies in brackets): Australia (38), Austria (15), Belgium (11), Brazil (25), China (9), Denmark (13), Finland (21) , France (45), Germany (29), Greece (9), Hong Kong (24), Ireland (18), Italy (20), Malaysia (19), Netherlands (17), New Zealand (11), Norway (17 ), Portugal (17), South Africa (21), Spain (25), Sweden (21), Switzerland (28) and the UK (91). There are 544 companies in total, more than half of which are European companies (397 or 73%).
The reporting for 2010 was analyzed. All companies represented different sectors of the economy, but none of them belonged to the financial sector (the reporting of banks, insurance companies, investment funds, etc. was not considered)
Application of IFRS 38 in accounting practice
Of the total number of companies (544) included in the study 517 companies have at least one type of intangible asset in the statement of financial position (not including goodwill). Notably, 491 of the 517 companies that have at least one intangible asset recognized goodwill arising from acquisitions in the year of the study and/or from acquisitions in earlier periods. As expected, it turned out that significant amounts of intangible assets (excluding goodwill) are recognized as a result of company combinations (mergers, acquisitions). In general, a significant proportion of companies' non-current assets consists of intangible assets. In Fig. Figure 1 shows the percentage share of intangible assets and goodwill for different sectors of the economy.
Rice. 1. Share of intangible assets and goodwill in total assets
The study uses a classification of companies by industry based on the Industry Classification Benchmark (ICB) (see Wikipedia for details). For example, under the name “production of materials” (the English term “basic materials”) the chemical industry, mining (for example, coal, diamonds, gold), metal production (for example, steel, aluminum), and the woodworking industry are combined.
The study found that in most industries, goodwill as a percentage of total assets is greater than the percentage of other intangible assets. The percentage of goodwill in company assets ranges from 6% (oil and gas) to 26.8% (technology companies), while other intangible assets range from 4% (materials manufacturing) to 14.1% (technology companies) of value assets.
Rice. 2. Ratio of goodwill and other intangible assets in total assets by country(the diagram can be enlarged by clicking on it)
If you look at Fig. 2, the predominance of goodwill over intangible assets is clearly visible for almost all countries, with the exception of Italy, Portugal, Spain, Malaysia, Greece and China. Goodwill as a percentage of total assets ranges from 0.63% (in China) to almost 26% (in the UK), and remaining intangible assets (excluding goodwill) range from 1.63% to 13.51% of total assets ( again in China and the UK respectively).
Thus, intangible assets are among the most significant types of assets in a large number of companies in the major stock markets of the world. Statistics show that in the UK, Belgium, Hong Kong, France, Denmark, the Netherlands and Australia, up to 39% of companies' total assets take the form of intangible assets (including goodwill). Companies in Malaysia, Greece and China invest the least in intangible assets (i.e. less than 11% of total assets, including goodwill). Or other companies buy the least, because most of the intangible assets are recognized precisely when acquiring other companies.
It is interesting to see which classes of intangible assets predominate in the financial statements of companies prepared in accordance with IFRS (Fig. 3). The left chart shows the number of companies having different classes of intangible assets in the statement of financial position. The study found that “other intangible assets” represented a separate class of intangible assets in the statement of financial position in 453 of 517 companies (i.e. 87.6%). Among other intangible assets, companies most often reflect software and trademarks (which is expected), and least often - customer lists. The right diagram shows the percentage share of different classes of intangible assets in total assets. The class “other intangible assets” represents on average 5.28% of the total value of company assets, which is more than other classes of intangible assets. Even brands and trademarks, rights and licenses are somewhat inferior in value to “other intangible assets.”
Rice. 3. Different classes of intangible assets: frequency of occurrence and value as a percentage of total assets
Compliance with disclosure requirements in IFRS reporting
IAS 38 requires companies to provide information about intangible assets in the explanatory note (disclosure). In accordance with paragraph 118 of IAS 38, entities are required to disclose the following information for each class of intangible assets, distinguishing between internally generated intangible assets and other (acquired) intangible assets:
- (a) whether the useful lives are indefinite or finite and, if they are finite, what are the useful lives of the intangible assets,
- (b) the amortization methods used for intangible assets with finite useful lives;
- (c) the gross carrying amount and accumulated depreciation (together with any accumulated impairment losses) at the beginning and end of the period;
- (d) the line item(s) in the income statement that includes amortization of intangible assets, and
- (e) a reconciliation of the carrying amounts at the beginning and end of the reporting period.
The study showed that 269 out of 517 companies have internally created intangible assets, 503 companies reported acquired intangible assets. Not all of them made the disclosures required by the standard.
The percentage of companies that disclose all required information on acquired intangible assets is:
- useful life of intangible assets - 78.5% (83.6%*)
- intangible asset depreciation method - 83.1% (85.5%)
- book value and accumulated depreciation - 94.0% (96.3%)
- where is depreciation of intangible assets included in the income statement - 78.9% (73.6%)
- reconciliation of the book value of intangible assets at the beginning and end of the period - 93.8% (94.4%)
* — the percentage of companies disclosing this information on intangible assets created within companies is indicated in brackets.
As can be seen from the above figures, for acquired intangible assets, a significant (about 21% of 503) part of the companies for which this information is relevant do not disclose the line item in the income statement, which includes amortization of intangible assets. The analysis showed that only in New Zealand, Norway and Ireland all companies provide this information, while in Australia, Greece, France and South Africa the percentage of companies providing such information is 63%, 67%, 68% and 44% respectively. . When analyzed by industry sector, the majority of companies in the telecommunications industry (90%) provide this information. And companies engaged in the production of consumer goods quite often do not disclose this information (only 50 out of 73 companies provide).
Also, about 21% of companies do not disclose whether the useful lives of acquired intangible assets are indefinite or finite. Many companies in Belgium, Brazil, China, Greece, Italy, Malaysia and Spain do not provide useful life information for acquired intangible assets (in all of these countries, less than 70% of firms provide such information). On the other hand, more than 90% of companies in the Netherlands, UK, Norway and Austria disclose this information.
It is interesting to note that not a single company included in the study applies the revaluation model to intangible assets; all companies use the cost method to evaluate intangible assets (cost model). This fact improves the comparability of financial statements under IFRS with the statements of companies from China and the USA, where the model of revaluation of intangible assets is not allowed. The IASB may wish to consider whether it is appropriate to apply the revaluation model for intangible assets.
Regarding indefinite-lived intangible assets, 151 companies indicated that they have at least one such intangible asset. Only 58% (i.e. 88) of these companies disclose the reasons supporting their estimate of indefinite useful life and/or the factor(s) that played a significant role in determining that estimate. And such disclosures are required according to paragraph 122 of IFRS 38.
Research findings
- Intangible assets are among the most significant types of assets in a large number of companies in the world's major stock markets. In countries such as the UK, Belgium, Hong Kong, France, Denmark, the Netherlands and Australia, up to 39% of a company's total assets takes the form of intangible assets (including goodwill).
- Other intangible assets, along with trademarks and licenses, are a common class of intangible assets and represent a significant portion of the value of a company's assets. But what is hidden under this name “others”? Shouldn't companies provide readers with more detailed information?
- Most intangible assets are acquired in business combinations.
- Not all companies make the standard-required disclosures about intangible assets.
- Neither company uses the revalued cost model to account for intangible assets.
In general, although intangible assets make up a significant proportion of companies' assets, the relevant mandatory disclosures are not always made in full.
Intangible assets in IFRS reporting of Russian companies
The data in the table below has been taken from the 2015 IFRS consolidated financial statements. If desired, anyone can continue this table, and those reporting under IFRS are given at the link. The figures are given in millions of rubles.
| Company | Goodwill | Other intangible assets | Total intangible assets | Total assets | % of assets |
| Rostelecom | 24,303 | 36,452 | 60,755 | 551,320 | 11% |
| MTS | 34,468 | 74,474 | 108,942 | 653,378 | 16,7% |
| VimpelCom | 113,369 | 35,976 | 149,345 | 672,467 | 22,2% |
| AFK System | 43,861 | 118,188 | 162,049 | 826,742 | 19,6% |
| Megaphone | 33,909 | 61,800 | 95,709 | 469,391 | 20,4% |
| Rosneft | 227,000 | 48,000 | 275,000 | 9,638,000 | 2,85% |
| Severstal | 33,571 | 191,361 | 224,932 | 5,866,785 | 3,83% |
| Gazprom | 107,467 | 0 | 107,467 | 17,052,040 | 0,63% |
| MMK* | No? | 1,311 | 1,311 | 448,776 | 0,29% |
*MMK - Magnitogorsk Iron and Steel Works
As can be seen from the table, intangible assets make up from 11 to 22% of all assets of Russian telecommunications companies. Companies from other industries (in this case, oil and gas and steel) generally have insignificant amounts of intangible assets as a percentage of total assets.
According to explanatory notes, most of the intangible assets of telecommunications companies are licenses. For example, Megafon has a book value of 4G licenses of 38,068, which is 61.5% of all intangible assets excluding goodwill. The rest is frequencies, billing and telecommunications software, subscriber base and other intangible assets.
In addition to telecommunications companies, the table presents data for two oil and gas companies (Rosneft and Gazprom) and two metallurgical companies (MMK and Severstal). The percentage of intangible assets in the assets of these companies is small, which is probably why the information in the notes to the statements is much less than in the statements of telecommunications companies. For example, in MMK's reporting there is no separate section in the explanatory note regarding intangible assets. The share of intangible assets in Sevestal’s reporting is about 4%; in the IFRS reporting there is a breakdown of the movement of intangible assets by class: production licenses, software, assets. related to exploration and other intangible assets. But I did not find the necessary disclosures of information on the timing and methods of depreciation of intangible assets.
In the reporting of the Rosneft company, of the 48 billion rubles of intangible assets other than goodwill, half (24 billion) are land lease rights and the remaining 24 billion rubles are other intangible assets without explanation of what they are. Although, of course, for Rosneft these are small amounts, less than half a billion dollars (24,000,000,000/56 ~430 million dollars)
As for the reporting of the Gazprom company according to international standards, there is no “intangible assets” line in it at all, there is only a “goodwill” line. At the same time, intangible assets are present in the reporting under RAS for this period. Most likely, the absence of an intangible asset line in the consolidated statements of Gazprom is due to the fact that on the scale of the Group the value of intangible assets is extremely insignificant (?).
