AASB138: how to recognise intangible assets

If you are a business owner or are involved in preparing accounts for an entity, you should know how to recognise an asset as intangible, according to AASB138. There are legal, tax, and valuation implications to classifying items and you must abide by strict Australian accounting standards. Recognising if assets are tangible, or intangible, can be complex and have unique characteristics which affect your business tax liability. This Business Kitz post will cover how you can recognise intangible assets.

What are intangible assets?

The main trait which describes whether an asset is intangible is whether it is physical, hence the term ‘intangible’. Examples of intangible assets include:

  • Goodwill
  • Intellectual Property
  • Patents
  • Trademarks
  • Software
  • Copyright
  • Franchise

These are assets that have no physical presence but hold long-term value to a business.

What is the Australian Accounting Standards Board?

The Australian Accounting Standards Board (AASB) is Australia’s regulator of accounting standards under the Australian Securities and Exchange Commission Act 2001 (Cth). The AASB develops requirements and guidelines for Australian accounting standards to build stakeholder confidence in the Australian economy, including capital markets and external reporting. To read more about the AASB and its role as a regulator, click here.

What are AASB 138 – intangible assets?

The AASB138 is a document outlining the accounting treatment of intangible assets, including any definitions, recognition, measures, and disclosure requirements. The document integrates the IAS 38; a global accounting standard incorporated by the International Accounting Standards Board (IASB) – which describes the treatment of intangible assets internationally. Specifically, the objective of the document is to prescribe the accounting treatment of intangible assets, which may not be dealt with in other standards. 

The AASB considers an intangible asset as a resource:

  • Controlled by the entity as a result of past events;
  • Which provides future economic benefit to the entity;
  • That is identifiable and can be distinguished from goodwill;
  • That lacks physical substance; and
  • That is non-monetary or cannot be easily valued.

However, not all intangible assets are treated equally under AASB 138 and you should consider all elements of the document when classifying assets.  

What is amortization?

When an asset is capitalised onto the balance sheet, the book value of the asset will decrease annually through a process called deprecation or amortization, depending on whether the asset is tangible or intangible.

If an asset is intangible, it will be amortized yearly across the useful life of the asset, typically in a straight-line. This is an expense on the income statement, decreasing the taxable earnings of a business resulting in lower tax liability in future years.

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What do intangible assets on taxable earnings mean for business valuation?

Intangible assets are recorded on the balance sheet at cost and expensed through a process called ‘amortization’ across the life of the asset. However, if the intangible asset is internally-generated, or the asset has an infinite life, it will not be amortized. You can only amortize acquired intangible assets if they can be distinguished from goodwill among other tests.

If you incorrectly recognize intangible assets, they may not be capitalised and will not be recognised on the balance sheet. Rather, it may fall under ‘goodwill’ and will not be amortised in the future, thus impacting your taxable income as a result. It may also affect your business valuation as the intangible assets will change the perception of book value for your business. This is why it’s important to accurately recognise accounting items, as it can impact the future of your business.

Legal advice

It is important to ensure you are accurately recognising your assets correctly, as it may impact the future of your business. If you need assistance because you’re unsure how to categorise your assets, our sister company, Legal Kitz can help you get it right. They offer a free 30-minute consultation for any of your legal needs. Book here now!

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