Intangible Assets: Comparison between MPSAS 31, MFRS 138 and Section 18 of MPERS

In this article, we compare the financial reporting requirements for intangible assets. For this purpose, we compare the requirements under MPSAS 31, MFRS 138 and Section 18 of MPERS. All three standards define an intangible asset is an identifiable non-monetary asset without physical substance.

Similar to other comparison articles, we will not explain which standard an entity should use as the discussion is available in Financial Reporting Frameworks in Malaysia. Additionally, this comparison provides a high-level overview of the differences in the financial reporting requirements. We hope this comparison provides a quick understanding for entities that are planning or thinking to move from one framework to another.

Let us now get into the details.

Asset meeting the definition

Both MPSAS 31 and MFRS 138 explain that an item meets the definition of intangible asset if it poses the three criteria:

1. Identifiability.
2. Control over resources.
3. Existence of future economic benefits (or service potential).

Section 18, however, does not explicitly list out the criteria above except the identifiability. Nevertheless, we believe, the above criteria are similarly applicable in MPERS. The three standards state that an asset is identifiable if it is either:

1. Is separable – which is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged; or
2. Arises from contractual and other legal rights or binding arrangements.

There is a specific guidance in MPSAS 31 relating to intangible heritage assets, for example, recordings of significant historical events.. Intangible heritage assets are common in public sector and less common in private sector. MPSAS 31 does not require an entity to recognise intangible heritage assets that would meet the definition and recognition criteria for intangible assets. However, if an entity recognises them, it must apply the disclosure requirements. The entity may, but is not required to apply the measurement requirements of the standard.

The recognition criteria

Both MPSAS 31 and MFRS 138 require an entity to recognise an intangible asset only if the two criteria are met:

1. It is probable that the expected future economic benefits (or service potential) will flow to the entity; and
2. It can measure the cost or fair value of the asset reliably.

In comparison, Section 18 includes an additional criterion – whereby the asset does not result from expenditure incurred internally on an intangible asset. This is because Section 18 requires an entity to recognise expenditure incurred internally on an intangible item as an expense. In addition, under Section 18, the probability recognition criterion is always considered satisfied for separately acquired intangible assets.

The initial measurement

All three standards require entities to initially measure an intangible asset at cost. Recognition of costs in the carrying amount ceases when the asset is ready for its intended use.

MFRS 138 and Section 18 also provide guidance on the acquisition of an intangible asset in a business combination. In such a situation, the cost is its fair value at the acquisition date. This guidance, however, is not available in MPSAS 31. It excludes discussion on assets acquired in a business combination.

MPSAS 31 additionally includes guidance for acquisition through non-exchange transactions. Non-exchange transactions are common for public sector entities due to the characteristic of the public sector. Where an entity acquires an intangible asset in a non-exchange transaction, it measures the asset at its fair value at the acquisition date. This however does not constitute a revaluation.

Internally generated intangible assets

We note a significant difference with regard to the accounting treatment as follows:

• Research phase – all three standards require an entity to recognise expenditure on research phase as an expense when incurred.
• Development phase – MPSAS 31 and MFRS 138 allow an entity to recognise an intangible asset from development phase if it meets the criteria. In contrast, Section 18 of MPERS requires an entity to recognise expenditure on development phase as an expense when incurred.

Both MPSAS 31 and MFRS 138 allow an entity to capitalise expenditure from the development phase if it can demonstrate all of the following conditions:

1. The technical feasibility of completing the intangible asset so that it will be available for use or sale.
2. Its intention to complete the asset and use or sell it.
3. Its ability to use or sell the intangible asset.
4. How the intangible asset will generate probable future economic benefits or service potential.
5. The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
6. Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

The subsequent measurement

Both MPSAS 31 and MFRS 138 provide an accounting policy choice to subsequently measure an intangible asset either using the cost model or the revaluation model. This accounting policy choice is, however, not available under Section 18. Section 18 requires an entity to measure it using the cost model.

With regard to the useful life, intangible assets are considered to have a finite useful life under Section 18 of MPERS. In fact, Section 18 further states that if an entity cannot estimate the useful life reliably, the life should not exceed 10 years. In contrast, MPSAS 31 and MFRS 138 state that intangible assets may have a finite or indefinite useful life. This requires an entity to assess and determine the useful life. An intangible asset with indefinite useful life is not amortised but must be tested for impairment annually.

Additionally, MPSAS 31 and MFRS 138 require entities to perform a review of the amortisation period, amortisation method and residual value at each reporting period (i.e. annually). Section 18, however, requires entities to review the amortisation period, amortisation method and residual value only whether there is an indication of change.

The above summarises the significant differences between the accounting requirements for intangible assets under MPSAS 31, MFRS 138 and Section 18 of MPERS.

We will continue to bring you a comparison for other standards in future articles. In the meantime, you can read other relevant articles in the Financial Accounting section.