Difference Between IAS 38 Under Going Concern and IAS 38 Under Liquidation

Introduction

IAS 38, “Intangible Assets,” provides guidelines for the recognition, measurement, and disclosure of intangible assets. This report explores the key differences in applying IAS 38 under a going concern assumption and during liquidation.

IAS 38 Under Going Concern

Core Principle

Under IAS 38, the core principle is that intangible assets should be recognized if it is probable that the future economic benefits attributable to the asset will flow to the entity and the cost of the asset can be measured reliably. Intangible assets are typically amortized over their useful lives unless they are deemed to have indefinite useful lives.

Recognition and Measurement

Recognition Criteria:

• The asset is identifiable (either separable or arising from contractual or other legal rights).

• It is probable that future economic benefits will flow to the entity.

• The cost of the asset can be measured reliably.

Example: A company develops a patentable technology costing R1,000,000. If it is probable that the technology will generate future economic benefits and the costs can be reliably measured, it is recognized as an intangible asset.

Subsequent Measurement

Cost Model: Intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses.

Revaluation Model: Intangible assets are carried at a revalued amount, being fair value at the date of revaluation less any subsequent accumulated amortization and impairment losses, provided that fair value can be determined by reference to an active market.

Example: A brand with an indefinite useful life is initially recognized at cost but revalued periodically based on market conditions.

Amortization

Intangible assets with finite useful lives are amortized over their expected useful lives using a systematic method that reflects the pattern in which the asset’s future economic benefits are expected to be consumed.

Example: A software license with a useful life of 5 years is amortized on a straight-line basis over 5 years.

Impairment

Intangible assets are tested for impairment whenever there is an indication that the asset may be impaired. Intangible assets with indefinite useful lives or not yet available for use are tested for impairment annually.

Example: If a company identifies that the market demand for its patented technology has significantly decreased, it must test the asset for impairment and recognize any necessary impairment loss.

Disclosures

Entities must disclose information about:

• The nature of intangible assets.

• The useful lives or amortization rates.

• The amortization methods used.

• Gross carrying amounts and accumulated amortization.

• Reconciliation of the carrying amount at the beginning and end of the period.

Example: A company discloses details about its various intangible assets, including patents, trademarks, and software, along with their respective carrying amounts and amortization.

IAS 38 Under Liquidation

Core Principle

During liquidation, the focus shifts from the ongoing use and amortization of intangible assets to their immediate realization and the settlement of liabilities. The recognition and measurement of these assets are impacted by the urgency to sell or settle obligations quickly.

Recognition and Measurement

The recognition criteria remain the same, but the emphasis shifts to the fair value less costs to sell, as opposed to the future economic benefits the asset can provide.

Example: A company in liquidation reassesses the carrying amount of its patentable technology based on the expected proceeds from its sale.

Subsequent Measurement

Fair Value Less Costs to Sell: During liquidation, intangible assets are measured at the lower of their carrying amount and fair value less costs to sell. This conservative approach ensures assets are not overstated and reflects the urgency of liquidation sales.

Example: A company in liquidation adjusts the carrying amount of its brand to reflect the lower of its carrying amount and the fair value less costs to sell, which may be significantly lower due to forced sale conditions.

Amortization

Amortization of intangible assets may be accelerated or ceased, depending on the liquidation timeline. The useful life of assets is reassessed to reflect the shorter duration of use before disposal.

Example: If a software license originally had a remaining useful life of 3 years but is expected to be sold within one year, amortization is accelerated or reassessed based on the expected sale date.

Impairment

Frequent reassessment of intangible asset values is necessary to reflect the lower expected disposal values. Impairment losses are more likely to be recognized as assets are written down to their recoverable amounts under liquidation conditions.

Example: A company in liquidation tests its trademark for impairment and recognizes an impairment loss if the fair value less costs to sell is lower than the carrying amount.

Disclosures

Disclosures during liquidation should reflect the changes in the measurement of intangible assets, any impairment losses recognized, and the impact of liquidation on these assets. The goal is to provide transparency about the basis for asset valuations during liquidation.

Example: A company in liquidation discloses the impairment losses recognized on its intangible assets and the adjustments made to reflect the lower liquidation values.

Immediate Realization and Settlement

The focus during liquidation is on the immediate realization of intangible assets. Entities must adjust their financial statements to reflect the expected proceeds from the sale or liquidation of intangible assets.

Example: A company in liquidation sells its software license for R200,000 and recognizes the proceeds in its financial statements, adjusting the carrying amount to reflect the sale.

Loss of Future Economic Benefits

As the liquidation process progresses, entities no longer consider the future economic benefits of intangible assets, focusing instead on their immediate liquidation value.

Example: A company in liquidation no longer considers the potential future revenue from its patented technology, focusing solely on the expected sale proceeds.

Conclusion

The application of IAS 38 under a going concern assumption and during liquidation involves the same fundamental principles but different practical considerations. Under going concern, the focus is on recognizing and measuring intangible assets based on their future economic benefits, amortizing them over their useful lives, and testing for impairment. In contrast, during liquidation, the emphasis shifts to the immediate realization of assets at fair value less costs to sell, with adjustments to reflect the urgency and conditions of liquidation sales. Entities must carefully reassess their intangible assets and make necessary adjustments to ensure accurate and transparent financial reporting during liquidation. This adjustment ensures that stakeholders receive a true and fair view of the entity’s financial position and performance during the liquidation process.

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