Most companies operating within the gaming industry have intangible assets on their balance sheet. Although intangible assets do not have a physical substance, they can be a significant element for companies to be able to operate successfully. Examples of such assets include platforms, games and other software specific to the business’ operations.
These criteria apply to all intangible assets, whether acquired separately, acquired in a business combination or generated internally.
It may be challenging to assess whether an internally generated intangible asset qualifies for recognition, due to issues in:
In this respect, in addition to complying with the criteria to qualify as an intangible asset and the recognition criteria mentioned above, to assess whether internally generated intangible assets meet the recognition criteria, an entity is required to classify the generation of the assets into 2 phases:
IAS 38 defines Research and Development as follows:
‘Research’ is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Research costs are expensed as they are incurred.
Examples of research activities include:
‘Development’ is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services, before the start of commercial production or use. Development does not include the maintenance or enhancement of ongoing operations.
Examples of development activities are: -
In view of the above, a company needs to be able to make a distinction between the 2 phases of its projects. The costs attributable to activities that fall under the research phase (as defined above), need to be accounted for as an expense. On the other hand, anything that qualifies as development could be capitalised, if they satisfy the recognition criteria that will be discussed in more detail below.
Should the company not be in a position to distinguish between the 2 phases of its internal project to create the intangible asset, all the expenditure incurred on the project needs to be treated as if it was incurred in the research phase and hence expensed when incurred.
It is also important to note that when the standard refers to development, it does not necessarily need to be in relation to an entirely new innovation; but rather it needs to be new to the specific entity.
If an internally generated intangible asset arises from the development phase of a project, then
directly attributable expenditure is capitalised from the date on which the entity can demonstrate: -
On initial recognition, an intangible asset should be measured at cost if it is probable that future economic benefits that are attributable to the asset will flow to the entity and the cost of the asset can be measured reliably.
The cost of an internally generated intangible asset includes the directly attributable expenditure of preparing the asset for its intended use. Expenditure on training activities, identified inefficiencies and initial operating losses is expensed as it is incurred.
The cost to be recognised is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria and prohibits reinstatement of expenditure previously recognised as an expense.
Directly attributable costs comprise all costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Examples of directly attributable costs are:
The below are not components of the cost of an internally generated intangible asset:
The capitalisation cut off is determined by when the testing stage of the software has been completed and the software is ready to go live. Costs incurred after the final acceptance testing and launch have been successfully completed, should be expensed.
There may be a period after the launch of the asset that would still be accounted for as part of the development phase, for example in the case of platform development, activities to improve its functionality to deal with higher volumes of players, could constitute development. However, this does not necessarily mean that the Company would be able to capitalise all the related expenditure. It needs to:
Accounting for intangible assets, particularly those that are generated internally by an entity using its own in-house resources, can be challenging. Certain aspects of the recognition process can be subjective as they inherently depend on management’s intent. Other aspects of measurement can be judgmental and may need to rely on robust data capturing systems and sound controls. It is therefore imperative that all these aspects are adequately addressed in a timely manner before the ‘capitalise vs expense’ decision is taken by management.