What are the six conditions for capitalising development costs under IAS 38.57, and how should management document them?

The standard does apply to expenditure on advertising, training, start-up activities and research and development (IAS 38.5). Rights held by a lessee under licensing agreements for items such as patents and copyrights are within IAS 38's scope and are excluded from IFRS 16 (IAS 38.6). An intangible asset must satisfy all three of the following (IAS 38.8–17): - Identifiability — the asset is separable (capable of being sold, transferred, licensed or exchanged independently) or arises from contractual or other legal rights (IAS 38.12) - Control — the entity has the power to obtain future economic benefits from the asset and to restrict the access of others to those benefits (IAS 38.13) - Future economic benefits — expected inflows such as revenue from sales, cost savings or other benefits from use of the asset (IAS 38.17)

What is the difference between the research phase and development phase under IAS 38, and how should the split be applied in practice?

IAS 38 draws a strict line between research and development expenditure. Research-phase costs are always expensed; development-phase costs are capitalised only when all six criteria are met, including technical feasibility, intention to complete, ability to use or sell, probable future benefits, availability of resources and reliable measurement of expenditure. - Capitalising research costs — no entity may recognise an asset during the research phase; the expenditure must be expensed when incurred - Internally generated intangibles — brands, mastheads, publishing titles, customer lists and similar items developed internally cannot be recognised as assets; the same applies to internally generated goodwill and start-up costs - Indefinite useful life not reviewed — the useful life of an intangible asset assessed as indefinite must be reviewed every period; if circumstances no longer support an indefinite assessment, the change is treated as a change in accounting estimate under IAS 8 (IAS 38.109) - Impairment triggers overlooked — reclassifying a useful life from indefinite to finite is itself an indicator of impairment, requiring a recoverable amount test under IAS 36 (IAS 38.110) - Inadequate disclosure — entities must disclose carrying amounts and reasons when asserting an indefinite useful life, including the specific factors supporting that conclusion (IAS 38.122) - IAS 38.12 — Defines identifiability: separability or origin from contractual or legal rights - IAS 38.21 — Recognition criteria: probable future economic benefits and reliable cost measurement - IAS 38.24 — Initial measurement at cost - IAS 38.34 — Business combinations: intangibles recognised separately from goodwill at fair value at acquisition date - IAS 38.109 — Indefinite useful life must be reviewed each period; change to finite treated as change in accounting estimate - IAS 38.122 — Disclosure requirements for assets assessed as having an indefinite useful life

IAS 38 Intangible Assets — Scope, Recognition and Measurement

IAS 38 Intangible Assets — Core Rule

IAS 38 prescribes the accounting treatment for intangible assets — non-monetary assets without physical substance such as software, patents, trademarks, licences, customer lists and development costs. An item qualifies as an intangible asset only when it meets the definition in the standard and satisfies the recognition criteria (IAS 38.18). Everything else is expensed as incurred.

Scope and Exclusions

IAS 38 applies broadly to intangible assets not covered by another standard. Where a specific standard exists, that standard takes precedence (IAS 38.3). Items outside IAS 38's scope include:

Financial assets (covered by IFRS 9)
Exploration and evaluation assets (covered by IFRS 6)
Goodwill arising from a business combination (covered by IFRS 3)
Deferred tax assets (covered by IAS 12)
Leases of intangible assets accounted for under IFRS 16

The standard does apply to expenditure on advertising, training, start-up activities and research and development (IAS 38.5). Rights held by a lessee under licensing agreements for items such as patents and copyrights are within IAS 38's scope and are excluded from IFRS 16 (IAS 38.6).

How IAS 38 Intangible Assets Works

Definition — three required characteristics

An intangible asset must satisfy all three of the following (IAS 38.8–17):

Identifiability — the asset is separable (capable of being sold, transferred, licensed or exchanged independently) or arises from contractual or other legal rights (IAS 38.12)

Control — the entity has the power to obtain future economic benefits from the asset and to restrict the access of others to those benefits (IAS 38.13)
Future economic benefits — expected inflows such as revenue from sales, cost savings or other benefits from use of the asset (IAS 38.17)

Not every item that embodies these characteristics qualifies. For example, an entity generally cannot recognise a skilled workforce or customer relationships as intangible assets because it lacks sufficient control over the expected future economic benefits (IAS 38.15, IAS 38.16).

Recognition criteria

An intangible asset shall be recognised if, and only if, it is probable that expected future economic benefits will flow to the entity and the cost can be measured reliably (IAS 38.21). Management must use reasonable and supportable assumptions to assess that probability, giving greater weight to external evidence (IAS 38.22, IAS 38.23).

Initial measurement

An intangible asset is initially measured at cost (IAS 38.24). For separately acquired assets, cost includes the purchase price plus any directly attributable costs of preparing the asset for its intended use (IAS 38.27). When acquired in a business combination, cost equals fair value at the acquisition date — recognised separately from goodwill regardless of whether the acquiree had recognised it previously (IAS 38.34).

Research vs development

IAS 38 draws a strict line between research and development expenditure. Research-phase costs are always expensed; development-phase costs are capitalised only when all six criteria are met, including technical feasibility, intention to complete, ability to use or sell, probable future benefits, availability of resources and reliable measurement of expenditure.

IAS 38 Intangible Assets — Common Pitfalls

Capitalising research costs — no entity may recognise an asset during the research phase; the expenditure must be expensed when incurred

Internally generated intangibles — brands, mastheads, publishing titles, customer lists and similar items developed internally cannot be recognised as assets; the same applies to internally generated goodwill and start-up costs
Indefinite useful life not reviewed — the useful life of an intangible asset assessed as indefinite must be reviewed every period; if circumstances no longer support an indefinite assessment, the change is treated as a change in accounting estimate under IAS 8 (IAS 38.109)
Impairment triggers overlooked — reclassifying a useful life from indefinite to finite is itself an indicator of impairment, requiring a recoverable amount test under IAS 36 (IAS 38.110)
Inadequate disclosure — entities must disclose carrying amounts and reasons when asserting an indefinite useful life, including the specific factors supporting that conclusion (IAS 38.122)

IAS 38 Intangible Assets — Key Paragraphs

IAS 38.12 — Defines identifiability: separability or origin from contractual or legal rights
IAS 38.21 — Recognition criteria: probable future economic benefits and reliable cost measurement
IAS 38.24 — Initial measurement at cost
IAS 38.34 — Business combinations: intangibles recognised separately from goodwill at fair value at acquisition date
IAS 38.109 — Indefinite useful life must be reviewed each period; change to finite treated as change in accounting estimate
IAS 38.122 — Disclosure requirements for assets assessed as having an indefinite useful life

IAS 38 Intangible Assets

What is IAS 38 and how does it apply to intangible assets?