Intangible Assets under IFRS for SMEs
Introduction
Intangible assets are non-monetary assets without physical substance that are identifiable and controlled by an entity. The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) provides guidance on recognising, measuring, and disclosing intangible assets. Section 18 of IFRS for SMEs specifically deals with intangible assets other than goodwill.
Recognition and Initial Measurement
An intangible asset is recognised only if it meets the following criteria:
It is identifiable.
The entity controls the asset.
It is probable that future economic benefits will flow to the entity.
The cost of the asset can be measured reliably.
Intangible assets are initially measured at cost, which includes:
Purchase price (including import duties and non-refundable purchase taxes).
Directly attributable costs necessary to bring the asset to its intended use.
Example:
A company acquires a software license for R50,000. Additional customisation costs amount to R10,000. The total initial cost of the intangible asset would be R60,000.
Subsequent Measurement
After initial recognition, an entity can choose either of the following models:
Cost Model: The intangible asset is carried at cost less any accumulated amortisation and impairment losses.
Revaluation Model: The IFRS for SMEs does not permit the revaluation model for intangible assets, unlike full IFRS.
Amortisation
Intangible assets with finite useful lives must be amortised over their useful life using a systematic basis. The standard requires entities to:
Assess the useful life of an intangible asset.
Use a straight-line method unless another method better reflects the consumption pattern of benefits.
Review the amortisation method, residual value, and useful life at each reporting date.
Example:
A company purchases a patent for R200,000 with an estimated useful life of 10 years. Using the straight-line method, the annual amortisation expense would be R20,000 (R200,000 ÷ 10 years).
Intangible assets with indefinite useful lives should not be amortised but must be tested annually for impairment.
Impairment
If there are indicators of impairment, an entity must perform an impairment test under Section 27 of IFRS for SMEs. The impairment loss is recognised when the carrying amount exceeds the recoverable amount.
Example:
A company holds a trademark acquired for R100,000. Due to declining market demand, its recoverable amount is reassessed at R70,000. The impairment loss of R30,000 (R100,000 - R70,000) should be recognised in profit or loss.
Impairment of Assets under IFRS for SMEs
Indicators of Impairment
An asset is considered impaired if its carrying amount exceeds its recoverable amount. The following are common indicators of impairment:
Significant decline in market value.
Adverse changes in legal, economic, or market conditions.
Increased competition reducing the economic benefits from the asset.
Obsolescence or physical damage to the asset.
Changes in how the asset is used or expected to be used.
Recoverable Amount
The recoverable amount of an asset is the higher of:
Fair value less costs to sell – the amount that could be received from selling the asset in an orderly transaction.
Value in use – the present value of future cash flows expected from the asset.
Recognition of Impairment Loss
If an impairment loss occurs, the carrying amount of the asset must be reduced to its recoverable amount, and the loss is recognised in profit or loss. The impairment loss cannot be reversed for goodwill but may be reversed for other assets if conditions improve.
Example:
A company owns a patent with a carrying amount of R500,000. Due to technological advancements, its recoverable amount is estimated at R350,000. The impairment loss of R150,000 (R500,000 - R350,000) should be recognised in profit or loss.
Research and Development (R&D) Costs
Research costs must be expensed as incurred.
Development costs can be capitalised only if specific criteria are met, including technical feasibility, intention to complete, and the ability to generate probable future economic benefits.
Example:
A tech startup spends R500,000 on research activities for a new software product, which is expensed as incurred. Later, R800,000 is spent on development, meeting the capitalisation criteria. The R800,000 is recorded as an intangible asset.
Disclosures
Entities must disclose:
The useful lives or amortisation rates of intangible assets.
The amortisation methods used.
The carrying amount of intangible assets.
A reconciliation of carrying amounts at the beginning and end of the period.
Conclusion
IFRS for SMEs provides a simplified approach to accounting for intangible assets compared to full IFRS. By following Section 18, SMEs can ensure compliance while maintaining clear financial reporting for stakeholders. Practical examples demonstrate the application of these principles, helping businesses understand and apply the standard effectively.
