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IAS 38

Intangible Assets

1Objective and scope

IAS 38 prescribes the accounting treatment for intangible assets not specifically dealt with in another standard: an identifiable, non-monetary asset without physical substance. It also specifies how to measure the carrying amount of intangible assets, and requires certain disclosures.

2Key definitions

Identifiability
An asset is identifiable if it is separable (capable of being sold, transferred, licensed, rented or exchanged, on its own or with a related contract), or arises from contractual or other legal rights, regardless of whether those rights are transferable or separable.
Research
Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
Development
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.

3Recognition

Research expenditure is always expensed as incurred - future economic benefits cannot yet be demonstrated. Development expenditure is capitalised as an intangible asset only if ALL of the following can be demonstrated:

  • The technical feasibility of completing the intangible asset so that it will be available for use or sale
  • The intention to complete the intangible asset and use or sell it
  • The ability to use or sell the intangible asset
  • How the intangible asset will generate probable future economic benefits (e.g. the existence of a market for its output, or its usefulness if for internal use)
  • The availability of adequate technical, financial and other resources to complete the development and use or sell the asset
  • The ability to measure reliably the expenditure attributable to the intangible asset during its development

Internally generated items that are never recognised

Internally generated goodwill, brands, mastheads, publishing titles, customer lists and items of a similar substance are never recognised as intangible assets - the expenditure to generate them internally cannot be distinguished from the cost of developing the business as a whole.

4Measurement and disclosure

After initial recognition at cost, an entity chooses the cost model or the revaluation model (the latter only permitted where fair value can be determined by reference to an active market - rare for intangible assets in practice, since most are unique). Intangible assets with a finite useful life are amortised over that life, and tested for impairment when there is an indicator; those with an indefinite useful life are NOT amortised, but are tested for impairment at least annually, in the same way as goodwill.

  • Useful lives, amortisation methods and rates used for intangible assets with finite lives
  • The carrying amount of intangible assets with an indefinite useful life, and the reasons supporting that assessment
  • The aggregate amount of research and development expenditure recognised as an expense during the period

5Examinable focus

What KASNEB tests

Applying the six development-cost capitalisation criteria to a scenario, splitting a project's expenditure between research (expensed) and development (capitalised only from the point all six criteria are first met - never retrospectively), and then amortising the capitalised balance, is one of the most consistently examined KASNEB numerical and written topics.