IAS 38 Intangible Assets: What Finance Professionals Need to Know
IAS 38 sets out when intangible assets can be recognised on the balance sheet and how to measure them. This guide covers the recognition criteria, the research vs development distinction, and amortisation.
What Is IAS 38?
IAS 38 Intangible Assets establishes accounting for non-monetary assets without physical substance — brands, patents, software, customer lists, licences, and development costs. Its most important and frequently tested aspect is the distinction between research and development expenditure and the conditions under which development costs can be capitalised.
Recognition Criteria
An intangible asset is recognised only if: it is identifiable (separable from the entity or arising from contractual or legal rights); the entity controls it; and it is probable that future economic benefits will flow to the entity and the cost can be reliably measured. Internally generated goodwill, brands, mastheads, and customer lists cannot be recognised — they fail the identifiable criterion because they cannot be reliably separated and measured.
Research vs Development
Research costs must always be expensed. Research is original investigation to gain new knowledge without a clear application in view. Development costs can be capitalised (recognised as an intangible asset) if all six criteria are met: technical feasibility of completing the asset; intention to complete and use or sell it; ability to use or sell it; existence of a market or internal usefulness; availability of resources to complete; and ability to measure reliably the expenditure attributable to the asset. If any criterion is not met, the expenditure is expensed.
Measurement After Recognition
Like IAS 16, IAS 38 offers a cost model (cost minus amortisation and impairment) and a revaluation model (only available if an active market exists for the intangible — rare in practice). Intangibles with finite useful lives are amortised. Intangibles with indefinite useful lives (including goodwill under IFRS 3) are not amortised but tested annually for impairment under IAS 36.
Exam Focus
IAS 38 is regularly examined in ACCA FR (Financial Reporting) and CIMA F2, particularly the research vs development distinction and the criteria for capitalising development costs.
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