IAS 38 Intangible Assets
Most of a modern business's value is not in things you can touch. A pharmaceutical company's worth is in its drug pipeline, a software house's in its code, a consumer goods group's in its brands. IAS 38 Intangible Assets decides which of that value may appear on the statement of financial position — and the answer is: much less of it than you would expect.
This chapter’s one recording predates the 2027 syllabus, and its pointers to earlier chapters on property, plant and equipment and to a next chapter on impairment belong to an earlier course structure. It works the GKS example to this chapter’s answer — $240,000 expensed, $200,000 capitalised; carry three things with you.
Recognition criteria: probable future economic benefits and reliable measurement of cost are IAS 38’s own criteria (“Recognition”), not the Conceptual Framework’s.
Brands: an internally generated brand is never recognised, because its cost cannot be separated from developing the business; a brand that is bought, alone or with a subsidiary, is recognised.
Active market: the three conditions it gives describe an active market; the definition is in “Subsequent measurement”.
1 The definition
Intangible asset
An identifiable, non-monetary asset without physical substance.
Three words, each doing work. Read them as three separate hurdles, because a candidate item can fall at any one of them:
Test | What it means | Where items fail it |
Identifiable | Either (a) separable — capable of being separated from the entity and sold, transferred, licensed, rented or exchanged, on its own or together with a related contract or asset; or (b) it arises from contractual or other legal rights, whether or not those rights are separable. | An internally built reputation, or a trained workforce: real value, but you cannot sell it away from the business and no contract creates it. |
Non-monetary | Not cash, and not a right to receive a fixed or determinable number of units of currency. | A receivable is an asset with no physical substance, but it is monetary — so it is a financial asset under IFRS 9 (Chapter 7), not an intangible. |
No physical substance | You cannot touch it. Where an item has both — computer software on a disc, say — judgement decides which element is more significant. | A machine controlled by embedded software is property, plant and equipment; a licensed software application is an intangible. |
On top of the definition, an intangible asset must satisfy the definition of an asset itself — the entity must control it, meaning it has the power to obtain the future economic benefits and to restrict others' access to them. That is what a patent does: it is the legal right to stop anyone else using the idea. It is also why a trained workforce fails — staff can resign.
2 Recognition
An intangible asset is recognised only if:
it is probable that the expected future economic benefits attributable to the asset will flow to the entity; and
the cost of the asset can be measured reliably.
How the asset arrived decides how easily those two are met, and IAS 38 deals with each route separately.
How the intangible arrived | Can it be recognised? |
Bought on its own — a patent, a licence, a quota | Yes, at cost. Both recognition criteria are treated as met: an entity that paid a price expected the benefits, and the price is the reliable measure. |
Acquired as part of a business combination | Yes, at fair value, separately from goodwill — provided it is identifiable. This is wider than what the acquiree itself could recognise (see below). |
Internally generated: research | Never. Expensed as incurred. |
Internally generated: development | Must be capitalised once, and only once, all six criteria are met. |
Internally generated brands, mastheads, publishing titles, customer lists and similar items | Never. Their cost cannot be distinguished from the cost of developing the business as a whole. |
Internally generated goodwill | Never. |
3 Separate acquisition
Capitalise at cost, built up in the same way as for an item of property, plant and equipment:
Included in cost | Excluded — expensed as incurred |
Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates | The costs of introducing a new product or service, including advertising and promotion |
Directly attributable costs of preparing the asset for its intended use — legal fees on the agreement, professional fees, testing costs | The costs of conducting business in a new location or with a new class of customer, including staff training |
Administration and other general overheads |
Amortisation then runs over the asset's useful life, beginning when the asset is available for use — not when it is first used.
4 Research and development
This is where the chapter is examined. One project passes through phases, and the treatment changes as it does.
4.1 Research
Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. At that stage the entity cannot demonstrate that an asset exists which will generate probable future economic benefits, so all research expenditure is recognised as an expense when it is incurred.
Expenditure once expensed can never be reinstated. If a project turns out well and development begins in August, the costs incurred up to July stay in profit or loss — they are not swept back on to the statement of financial position. Only expenditure incurred after the criteria are met is capitalised.
4.2 Development
Development is the application of research findings 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. Development expenditure must be capitalised — it is not a choice — when the entity can demonstrate all six of the following:
The entity can demonstrate | PIRATE | |
1 | How the intangible asset will generate probable future economic benefits, including the existence of a market for the output of the asset or for the asset itself, or its usefulness if it is to be used internally | Probable benefits |
2 | Its intention to complete the asset and use or sell it | Intention |
3 | The availability of adequate technical, financial and other resources to complete the development and to use or sell the asset | Resources |
4 | Its ability to use or sell the asset | Ability |
5 | The technical feasibility of completing the asset so that it will be available for use or sale | Technical feasibility |
6 | Its ability to measure reliably the expenditure attributable to the asset during its development | Expenditure measurable |
The OT lectures use a different mnemonic for the same six — SECTOR: Sell or use, Expenditure measurable, Commercially viable, Technically feasible, Overall economic benefit, Resources. Either works. What is marked is the six conditions, not the acronym, so learn them by what they say: can we finish it, do we mean to, can we sell it, will it pay, and can we count what it cost?
An intangible asset in the development phase is not amortised, because it is not yet available for use. Instead it is tested for impairment annually, and whenever there is an indication of impairment (F1 Chapter 7 covers IAS 36).
4.3 Internally generated intangibles that can never be recognised
Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance are never recognised as intangible assets. The reason is measurement, not value: expenditure on developing a brand cannot be distinguished from the cost of developing the business as a whole. Money spent on advertising a brand improves the business generally, so there is nothing separable to capitalise.
A masthead is the newspaper's own name as printed at the top of the front page. It is a genuine intangible — it earns real money — and an entity that buys a newspaper recognises the masthead it has acquired. It is only the entity that built the masthead that cannot.
4.4 Intangibles acquired in a business combination
An intangible acquired as part of the acquisition of a subsidiary is recognised separately from goodwill, at its fair value at the acquisition date, provided it is identifiable. This is deliberately wider than what the acquiree could recognise for itself: a brand the subsidiary built internally, and therefore never recognised, is recognised in the consolidated financial statements, because the group has now paid for it as part of the purchase price and the acquisition gives a reliable measure.
If a fair value cannot be established — the item is not separable and arises from no contractual or legal right — it is not recognised separately and is subsumed within the goodwill arising on the acquisition. Chapter 12 works the consolidation mechanics.
5 Subsequent measurement
After recognition an entity chooses, for each class of intangible asset, between the cost model and the revaluation model.
Cost model | Revaluation model | |
Carried at | Cost less accumulated amortisation and accumulated impairment losses. | Fair value at the date of revaluation, less subsequent amortisation and impairment losses. |
Condition | None — always available. | Fair value must be determined by reference to an active market. Revaluations must be made regularly enough that the carrying amount does not differ materially from fair value. |
Gains and losses | — | As for property, plant and equipment: a revaluation gain goes to other comprehensive income and accumulates in a revaluation surplus; a loss goes to profit or loss unless it reverses a surplus previously recognised on the same asset. |
Active market
A market in which transactions for the asset take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Older material — including the OT lectures — describes the same idea through three conditions: the items traded are homogeneous, willing buyers and sellers can normally be found at any time, and prices are available to the public. That three-condition wording was IAS 38's own definition before IFRS 13 took the term over; it is a good practical description of what the definition above means.
In practice the revaluation model is almost never available for intangibles, and the reason is the first idea in either wording: identical items. A patent is a specific patent over one specific idea; that is the whole point of taking it out. A licence is a licence over one particular product. Neither is homogeneous with anything. The exceptions are the standardised, tradable rights — fishing quotas, milk quotas, freely transferable taxi licences — which are interchangeable and do have real markets.
A discounted cash flow model is not an active market. A finance director who is confident about a product's future and wants to write its intangible up to a value-in-use-style figure is asking for exactly what the revaluation model forbids. Fair value under this model comes from market prices for the asset, not from the entity's own forecast of what the asset will earn.
6 Amortisation
The first question is whether the useful life is finite or indefinite.
Finite useful life | Indefinite useful life | |
Definition | A limited period over which the asset is expected to generate net cash inflows — normally set by a contract or a legal right, such as a ten-year licence. | There is no foreseeable limit to the period over which the asset is expected to generate net cash inflows. |
Amortisation | Amortised on a systematic basis over the useful life, starting when the asset is available for use. | Not amortised. |
Impairment | Tested when there is an indication of impairment. | Tested for impairment annually, and whenever there is an indication. |
Review | The useful life, the amortisation method and the residual value are reviewed at least at each financial year end. | The indefinite assessment itself is reviewed each period; if it no longer holds, the change to a finite life is a change in accounting estimate, applied prospectively. |
Indefinite does not mean infinite. It means no foreseeable limit on today's evidence — not that the asset will last forever, and not that the entity has decided not to bother amortising. An indefinite life is a conclusion supported by analysis, and it buys an annual impairment test in exchange for the amortisation charge, not an exemption from both.
Residual value is assumed to be zero unless either a third party has committed to buy the asset at the end of its useful life, or there is an active market for it from which a residual value can be determined and which is likely still to exist at the end of that life. For most intangibles neither applies, so the whole cost is amortised.
7 Derecognition and disclosure
An intangible asset is derecognised on disposal, or when no future economic benefits are expected from its use or disposal. The gain or loss is the net disposal proceeds less the carrying amount, taken to profit or loss — and it is not presented as revenue.
For each class of intangible asset, distinguishing internally generated assets from the rest, an entity discloses the useful lives or amortisation rates used, the amortisation methods, the gross carrying amount and accumulated amortisation at the beginning and end of the period, the line item of the statement of profit or loss in which amortisation is included, and a reconciliation of the carrying amount from the beginning to the end of the period. Separately, it discloses the aggregate research and development expenditure recognised as an expense in the period — which is often the single most useful number in the note.
Research and development
GKS is a large pharmaceutical business involved in the research and development of viable new drugs. It commenced initial investigation into the viability of a new drug on 1 February 20X5 at a cost of $40,000 per month. On 1 August 20X5 GKS was able to demonstrate the commercial viability of the new drug and intends to sell it on the open market once it is fully complete.
Costs subsequent to 1 August 20X5 remained at $40,000 per month. At 31 December 20X5, GKS's reporting date, the drug was not yet complete, but it is believed that by mid-20X6 the drug will be available for sale.
The finance director is so confident of the success of the drug's sales that he wishes to revalue the intangible at the reporting date, using a discounted future cash flow model to establish the fair value.
Explain the treatment of the above costs in GKS's financial statements for the year ended 31 December 20X5.
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Separate acquisition and amortisation
Kestrel acquired a licence to distribute a range of products on 1 April 20X5. The licence cost $600,000, on which Kestrel paid non-refundable duty of $30,000, and legal fees of $45,000 were incurred on the agreement itself.
Kestrel also spent $80,000 advertising the launch of the products and $25,000 training its sales staff to sell them.
The licence runs for eight years and cannot be renewed. Kestrel's reporting date is 31 December.
Calculate the carrying amount of the licence in Kestrel's statement of financial position at 31 December 20X5, and state the treatment of the remaining expenditure.
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8 Where this appears under IFRS 18
IFRS 18 Presentation and Disclosure in Financial Statements replaces IAS 1 for accounting periods beginning on or after 1 January 2027. Recognition and measurement are unchanged — intangibles are still IAS 38, and not one figure in this chapter moves.
What changes is presentation. Research expenditure, amortisation of intangibles used in the business and impairment losses on them all fall in the operating category of the statement of profit or loss, so they sit above the required subtotal operating profit. There is also a disclosure consequence worth knowing: an entity that presents any operating expenses by function must disclose, in a single note, certain expenses by nature within each function line — and amortisation is one of the five nature captions that must be given. A group that reports cost of sales and administrative expenses can no longer leave its amortisation charge unstated.
An intangible asset is an identifiable, non-monetary asset without physical substance that the entity controls, recognised only where future benefits are probable and cost can be measured reliably. Bought on its own it goes in at cost — purchase price plus directly attributable costs, but never advertising, training or overheads. Built in-house, research is always expensed and development must be capitalised once all six criteria are met, from that date forward only; internally generated brands, mastheads and goodwill are never recognised, though the same brand is recognised at fair value when it is acquired with a subsidiary. Amortise a finite-life intangible over its useful life from the date it is available for use, with a residual value of nil unless a buyer is committed or an active market exists; an indefinite-life intangible and one still in development are not amortised but are impairment-tested annually. Revaluation is possible only by reference to an active market, which for most intangibles does not exist — and a discounted cash flow model is never one. IFRS 18 changes none of this, only where the amounts are presented.
9 Test your knowledge
IAS 38 Intangible Assets
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