IAS 38 Intangible Assets: Summary, Practice Questions & Decision Tree

Three definitional hurdles come before any numbers (IAS 38.8–17). Identifiability: the item is separable — capable of being sold, licensed or rented on its own — or arises from contractual or other legal rights. Control: the entity has the power to obtain the benefits and restrict others' access, usually through legal rights; a skilled workforce fails here, because employees can resign. Future economic benefits: revenue, cost savings or other benefits must be expected. Then the recognition criteria: probable benefits and reliably measurable cost (IAS 38.21). Miss any element and the spending is an expense.

For a separately acquired intangible — a purchased patent, licence or software package — the probability test is considered automatically satisfied: the price paid reflects the expected benefits (IAS 38.25–26). Cost mirrors the IAS 16 logic: purchase price plus directly attributable costs of preparing the asset for use. In a business combination the bar drops further: identifiable intangibles of the acquiree — brands, customer relationships, in-process R&D — are recognised at fair value under IFRS 3, separately from goodwill, even though the acquiree itself could never have recognised them (IAS 38.33–34). This is why acquired brands appear on balance sheets while home-grown ones never do.

Internally generated intangibles are split into two phases. Research — original investigation aimed at new knowledge, with no demonstrable asset yet — is always expensed as incurred (IAS 38.54–56): searching for alternatives, evaluating options, lab exploration. Development — applying findings to a plan or design for new or substantially improved products or processes — is capitalised, but only from the date the entity can demonstrate all six criteria (IAS 38.57):

• Technical feasibility of completing the asset
• Intention to complete it
• Ability to use or sell it
• How it will generate probable future economic benefits (a market exists, or it is useful internally)
• Adequate technical, financial and other resources to complete
• Ability to measure the development expenditure reliably

The capitalisation switch flips on the day all six are demonstrated — costs before that date stay expensed forever, with no retrospective reinstatement (IAS 38.65, 71). If in doubt whether spending is research or development, it is treated as research (IAS 38.59).

IAS 38 names items that are never recognised as internally generated intangibles: goodwill (IAS 38.48), and brands, mastheads, publishing titles, customer lists and items similar in substance (IAS 38.63) — their cost cannot be distinguished from the cost of developing the business as a whole. The same fate meets start-up costs, training, advertising and relocation spending (IAS 38.69). A company can spend millions building a beloved brand and show none of it as an asset; a competitor buying that brand books it at the purchase price. Asymmetric, but deliberate — self-assessed brand values would be unverifiable.

After recognition, each intangible is assessed: finite or indefinite useful life (IAS 38.88). Finite-life intangibles are amortised over that life — normally straight-line to a nil residual value — with the charge in profit or loss and the method and life reviewed annually (IAS 38.97, 104). Indefinite-life intangibles — where no foreseeable limit exists on the period of expected cash flows — are not amortised at all; instead they are tested for impairment annually under IAS 36 and their indefinite assessment is re-examined each year (IAS 38.107–110). Indefinite does not mean infinite: it means no foreseeable limit today. Measurement after recognition follows the cost model or, rarely, the revaluation model — allowed only where an active market exists, which for most intangibles (brands, patents — each unique) it does not (IAS 38.75, 78).