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Wiley IFRS: Practical Implementation Guide and Workbook
Required
Which of the above-mentioned costs are eligible for capitalization according to lAS 38, and which of
them should be expensed when they are incurred?
Solution
Costs that are eligible for capitalization include items (b), (e),
(f) ,
(g), and (h); for item
(j ),
after initial
recognition at cost, both the asset and the grant can be recognized at fair value.
These costs are eligible for capitalization under lAS 38 because
• They meet the criteria of "identifiability" (i.e., they are separable or they arise from contractual
rights).
• It
is probable that future economic benefits will flow to the entity.
• These costs can be measured reliably.
Costs that should be expensed because they do not meet the criteria under lAS 38 include items (a), (c),
and (d). Item (i) is a case of an internally generated intangible asset that can be capitalized only provided
it meets the development criterion. The main issue with item (k) is that the entity does not have "control"
over its workforce. Despite the obvious benefit of item
(I )
to the business, such expenditure on adver–
tisement does not meet the criterion of "control."
8. WEB SITE DEVELOPMENT COSTS
8,1
The ad vent of the Internet has created new way s of performing tasks that were unknown in
the past. Most entitie s have their own Web site that serves as an introduction of the entity and its
produ ct s and services to the wo rld at large. A Web site has man y of the character istics of both tan–
gible and intang ible assets. With virtually every entity incurring cos ts on setting up its own Web
site, there wa s a rea l need to ex amine this issue from an accounting perspective. An inte rpr etation
was issued that addressed the Web site cos ts; SIC
32,
Intangible Assets-Web Site Costs.
8.2
SIC
32
lays down guidance on the treatment of Web site cos ts co nsistent with the criteria for
ca pitalization of costs established by lAS
38.
Accord ing to SIC
32,
a Web site that has been devel –
oped for the purposes of promot ing and advertising an entity' s produ cts and services does not meet
the crite ria for capitalization of co sts under lAS
38.
Th us co sts incurred in setting up such a Web
site sho uld be expensed.
9. MEASUREMENT AFTER RECOGNITI ON
9.1
Th e Standard stat es that , after reco gnition, intangible assets may be measured using either a
cost model or a revaluation model. However, if the revaluation model is used, then all assets in the
same class are to be treated alike unl ess there is no active market for those assets.
9.2
"C lass es of intangible assets" refers to groupings of similar item s, such as patent s and trade–
marks, concession rights, or brand s. Assets in eac h class must be treated alike in order to avo id
mixes of cos ts and values.
9.3
If the cos t mod el is selected, then afte r initial recogn ition , an intangible asset shall be ca rried
at cost less accumulated amortizati on and impairment losses.
9.4
If the revalu ation model is se lected, the intangibl e asset shall be ca rried at its fair value less
subsequent acc umulated amo rtization and impairme nt losses. Fai r values are to be dete rmined from
an ac tive ma rket and are to be reassessed with regul ari ty sufficient to ensure that, at the balance
sheet date, the carrying amount does not differ materiall y from its fair value .
Practical I nsigh t
Revaluations are to be determin ed
only
by refere nce to an activ e market. Use of valuation
models and o ther techniques is
not
permitted . In this respect , an active market is one in which
the items trad ed are homogeneous, willing buyers and sellers can be found at any time,
and
prices
are availabl e to the public. Therefore, in most instances, the revaluation model will not
be a rea listically usabl e model. Brand s, trademark s, film titles, and the like are all indivi dually
uniq ue and therefore fail on the homogeneity criterion.