IAS 38 Intangible Assets — Recognition criteria

An intangible asset is recognised on the balance sheet only if all three criteria are met:

1. Identifiability — it is separable (can be sold, transferred, or licensed independently) or arises from contractual/legal rights
2. Control — the entity has the power to obtain future economic benefits and restrict others' access
3. Future economic benefits — probable inflow of benefits that can be measured reliably

All other internally generated intangible outlays are expensed immediately (IAS 38.21).

How IAS 38 Recognition Criteria Works

• Identifiability test (IAS 38.12–18): An intangible asset must be separable (capable of being sold, transferred, or licensed independently) or arise from contractual/legal rights. Internally generated goodwill—including brand equity, customer relationships, and market position—fails this test and is never capitalised. Purchased goodwill from a business combination, however, is recognised as an asset under IFRS 3.

• Control (IAS 38.13): The entity must have the power to obtain future economic benefits and restrict others' access. This is typically proven through legal rights (patents, copyrights, trademarks) or contractual arrangements (franchise agreements, customer contracts). Control via technical/operational superiority alone is insufficient.

• Probability of future economic benefits (IAS 38.21): Recognition requires probable inflow of economic benefits, supported by business plans, market analysis, or regulatory approval. A lower threshold than "virtually certain" applies here; management judgment is critical. For development costs, probability is assessed at the point of transfer from research to development phase.

• Measurement on initial recognition (IAS 38.24–32): Purchased intangibles are measured at cost (purchase price plus directly attributable costs). Internally generated intangibles are split: research costs are always expensed (IAS 38.54); development costs are capitalised only if six specified conditions are met, including technical feasibility and intention to complete (IAS 38.57). Cost comprises materials, labour, overhead, and interest attributable to preparation (IAS 38.67).

• Subsequent measurement (IAS 38.72–87): Under the cost model (mandatory unless a reliable market exists), intangibles are carried at cost less accumulated amortisation and impairment. Amortisation is typically straight-line over useful life (usually 3–20 years for software, patents, licences; indefinite for trademarks with continuous renewal). The revaluation model is permitted only if an active market exists (rare for intangibles; IAS 38.75).

• Amortisation and impairment (IAS 38.88–104): Useful life must be reviewed annually. If useful life is indefinite (e.g., a perpetual trademark with legal protection and renewal intent), no amortisation applies, but annual impairment testing is mandatory under IAS 36. Intangibles with finite lives are tested for impairment if events suggest carrying amount exceeds recoverable amount.

IAS 38 Recognition Criteria — Practical Example

TechCorp Ltd. acquires three intangible assets from a competitor for €2 million in total:

1. Purchased customer list (€600k): Identifiable, contractual rights to service contracts. Useful life: 5 years.
2. Developed software platform (€800k): Purchased, control established via licence agreement. Useful life: 4 years.
3. Brand reputation and market position (€600k): Internally generated goodwill. Not recognised.

On acquisition (Day 1):

Note: €600k for goodwill is excluded. If this were a business combination, goodwill would be recognised under IFRS 3.

Year 1 amortisation (12 months):

(€600k ÷ 5 years = €120k; €800k ÷ 4 years = €200k)

Balance sheet at year-end: Customer List €480k net; Software €600k net.

IAS 38 Recognition Criteria — Common Pitfalls

• Capitalising internally developed brand costs: Entities often attempt to capitalise marketing, advertising, and brand-building expenses. These fail the identifiability and control tests and must be expensed under IAS 38.63–65. Acquired brands (with legal/contractual protection) can be capitalised.

• Incorrectly allocating R&D split: Many companies expense all R&D as one block. IAS 38.54–62 requires granular separation: pure research is always expensed; only development (from technical feasibility onward) can be capitalised if all six conditions are met. This is an audit-frequent area.

• Indefinite life assignment without renewal intent: Entities may claim indefinite useful lives for trademarks but lack evidence of continuous renewal capability or management intent. IAS 38.89–90 requires this to be demonstrable; failure triggers reclassification to finite life and retroactive amortisation, a material error.

Paragraph reference

IAS 38.12 — Identifiability

An intangible asset is identifiable if it:

• (a) is separable — capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability, regardless of whether the entity intends to do so; or
• (b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or other rights and obligations.

Practical implication: A customer list acquired in a business combination is identifiable (separable). Internally generated brand loyalty or workforce competence fails this test—it cannot be sold independently and arises from no contractual right.

IAS 38.13 — Control

An entity controls an intangible asset if it has the power to obtain the future economic benefits flowing from the underlying resource and to restrict others' access to those benefits. Control typically stems from legally enforceable rights (patents, trademarks, copyrights, franchise agreements). Legal enforceability is not a necessary condition—trade secrets and confidentiality obligations may also establish control. Per IAS 38.15, skilled employees are not controlled (they can resign freely). Per IAS 38.16, customer loyalty is not controlled (customers can leave). Both fail the control test.

IAS 38.21 — Recognition criteria

An intangible asset shall be recognised if, and only if:

• (a) it is probable that the expected future economic benefits attributable to the asset will flow to the entity; and
• (b) the cost of the asset can be measured reliably.

Both conditions must be met simultaneously at the recognition date. For intangibles acquired in a separate acquisition, the probability criterion in (a) is always considered satisfied (IAS 38.25), because the purchase price itself reflects the market's assessment of probable future benefits.

IAS 38.57 — Development cost capitalisation (six criteria)

Development costs are capitalised only when all six of the following can be demonstrated:

1. technical feasibility of completing the asset so it will be available for use or sale
2. intention to complete and use or sell it
3. ability to use or sell the asset
4. probable generation of future economic benefits — existence of a market or demonstrable internal use value
5. availability of adequate technical, financial and other resources to complete development
6. ability to reliably measure expenditure attributable to the intangible asset during development

Failure on any single criterion requires full expensing. This is one of the most tested areas in both IFRS audits and professional examinations (ACCA P2, CFA Level 1 FSA).

IAS 38 Recognition Criteria — Key Paragraphs

• IAS 38.21: Definition and recognition criteria.
• IAS 38.54–62: Research and development split.
• IAS 38.72–87: Measurement and amortisation rules.
• IAS 38.88–104: Useful life and impairment.
• IAS 38.107–133: Disclosure requirements (useful life, amortisation methods, impairment losses).
• IFRS 3.32–37: Goodwill and intangible asset measurement in business combinations.