IAS 38 governs how companies reporting under IFRS account for intangible assets, meaning non-monetary items without physical substance such as patents, software, licenses, and acquired customer lists that aren’t dealt with by another standard. The rules decide three things: whether an item qualifies as an intangible asset at all, what value to place on it when it first appears on the balance sheet, and how to carry, amortize, test, and eventually remove it. Miss any of the qualifying conditions and the spending is expensed immediately rather than capitalized.
What Counts as an Intangible Asset
An item qualifies only when three tests are met at the same time: identifiability, control, and expected future economic benefits.1IFRS Foundation. IAS 38 Intangible Assets Fail one, and there is no asset to recognize.
Identifiability means the item is distinguishable from the general value of the business. It passes the test if it can be separated from the entity and sold, transferred, or licensed on its own, or if it arises from a contract or other legal right. A patent qualifies because you can license it independently. A company’s general reputation does not, which is why internally generated goodwill is barred.
Control means the entity has the power to obtain the future benefits from the asset and can restrict others’ access to them. Legal rights, such as copyrights, patents, and confidentiality agreements, are the usual evidence. Skilled employees rarely give rise to an intangible asset because the entity cannot stop them from leaving.
Future economic benefits can take the form of revenue from selling products or services, cost savings, or other measurable gains. A patented process that cuts production costs by 15 percent is a clear example. A staff training program generally isn’t, because the entity cannot control the benefits.
When It Goes on the Balance Sheet
Meeting the definition isn’t enough. Two recognition criteria then have to be cleared:1IFRS Foundation. IAS 38 Intangible Assets
- It must be probable that the expected future economic benefits will flow to the entity, judged on reasonable and supportable assumptions about conditions over the asset’s useful life.
- The cost of the asset must be measurable reliably.
For assets bought on the open market, reliable measurement is straightforward, since the purchase price sits on the invoice. Internally generated assets are harder, which is why the standard imposes the research-versus-development split. If either criterion fails, the spending is expensed in the period incurred.
Some internally generated items are barred from recognition outright. Brands, mastheads, publishing titles, and customer lists developed in-house can never be capitalized, even where they clearly have value. The standard’s reasoning is that the spending on them cannot be reliably distinguished from the cost of developing the business as a whole.
Internally Generated Assets: Research vs. Development
When a company generates an intangible asset internally, it has to split the project into a research phase and a development phase.1IFRS Foundation. IAS 38 Intangible Assets
All research-phase spending is expensed. No exceptions. If a project cannot be separated clearly into research and development phases, the entire cost is treated as research.
Development-phase costs can be capitalized, but only if all six of the following can be demonstrated at the same time:2IFRS Foundation. IAS 38 Intangible Assets
- Technical feasibility of completing the asset so it will be available for use or sale.
- Management’s intention to complete the asset and either use or sell it.
- The ability to use or sell the finished asset.
- Probable future economic benefits, for instance by showing a market exists for the output.
- Adequate technical, financial, and other resources to complete development and exploit the asset.
- Reliable measurement of the development spending attributable to the asset.
Costs that qualify for capitalization include materials and services consumed, employee benefits for staff directly involved, fees to register legal rights, and amortization of patents and licenses used in development. Selling costs, general administrative overhead, identified inefficiencies, initial operating losses, and staff training costs are all excluded.
One rule catches finance teams often: once spending has been recognized as an expense, it can never be reclassified as part of an intangible asset’s cost. If a company expenses research costs in year one and then in year two the project meets the six development criteria, those earlier amounts stay expensed. The door closes when the entry hits the income statement.
Measuring the Asset at First Recognition
An intangible asset that clears recognition goes on the balance sheet at cost. What “cost” means depends on how the asset was obtained.1IFRS Foundation. IAS 38 Intangible Assets
For an asset bought separately, cost includes the purchase price (net of trade discounts and rebates), any import duties and non-refundable taxes, and directly attributable costs of preparing it for its intended use, such as legal fees to secure rights or testing to confirm the asset works as expected.
For an intangible acquired in a business combination, cost equals fair value at the acquisition date. The probability and reliable measurement criteria are automatically considered satisfied here, because the acquisition price itself reflects market expectations about future benefits. The acquirer must recognize identifiable intangibles separately from goodwill, even those the acquired company never recorded. In-process research and development projects of the acquired entity are recognized separately if they meet the definition of an intangible asset.
Where an intangible asset is received in exchange for a non-monetary asset (or a mix of monetary and non-monetary assets), cost is measured at fair value. The exceptions are transactions that lack commercial substance and cases where the fair value of neither asset can be measured reliably; in those situations, cost defaults to the carrying amount of the asset given up. A transaction has commercial substance when the risk, timing, or amount of the entity’s future cash flows changes meaningfully as a result of the swap.
Carrying the Asset Forward: Cost or Revaluation
After initial recognition, the entity picks one of two measurement models. The choice applies to an entire class of intangible assets rather than individual items.
Under the cost model, the asset stays at its original cost less accumulated amortization and any accumulated impairment losses. Most companies use this approach because it relies on historical data and avoids the complexity and volatility of fair value remeasurements. For software licenses, proprietary databases, and similar assets that aren’t actively traded, it is usually the only realistic option.
Under the revaluation model, the asset is carried at fair value at the revaluation date less subsequent amortization and impairment losses. There’s a significant limitation: this model is permitted only where the asset’s fair value can be determined by reference to an active market. Active markets for intangibles are rare because patents and trademarks tend to be unique. Standardized items such as taxi licenses, fishing quotas, and production permits sometimes trade actively enough to make revaluation possible. When the model is used, revaluations must happen often enough that the carrying amount never strays materially from fair value.
Amortization and Useful Life
The next step depends on whether the useful life is classified as finite or indefinite.1IFRS Foundation. IAS 38 Intangible Assets
Finite Useful Life
The depreciable amount (cost less residual value) is spread systematically over the asset’s expected useful life. Amortization begins when the asset is available for use and stops when it is derecognized or fully amortized. Acceptable methods include straight-line, diminishing balance, and units of production. The method should reflect the pattern in which the entity expects to consume the economic benefits, and if that pattern can’t be determined reliably, straight-line is the default.
The residual value is assumed to be zero unless a third party has committed to buy the asset at the end of its useful life, or an active market exists for the asset and is likely to still exist at the end of that life. In practice, most finite-life intangibles are amortized down to zero.
Indefinite Useful Life
Indefinite doesn’t mean infinite. It means there is no foreseeable limit on the period over which the asset is expected to generate economic benefits. Indefinite-life intangibles are not amortized. Instead, the entity tests them for impairment at least once a year, and whenever there is any indication the asset’s value may have dropped.3IFRS Foundation. IAS 36 Impairment of Assets The same annual test applies to intangible assets not yet available for use.
The impairment test compares the carrying amount to the recoverable amount, which is the higher of fair value less costs of disposal and value in use (the present value of expected future cash flows). Any excess of carrying amount over recoverable amount is recognized as an impairment loss.
The indefinite-life classification is reviewed each reporting period. If circumstances change, say a regulatory license once treated as perpetual now carries a fixed expiry, the useful life is reclassified from indefinite to finite and amortization begins prospectively.
Website Costs Under SIC-32
SIC-32 applies the IAS 38 research-and-development framework to internal website projects. Treatment tracks the development stage:4IFRS Foundation. SIC-32 Intangible Assets – Web Site Costs
- Planning stage costs are treated like research and expensed immediately.
- Application and infrastructure development, graphical design, and non-advertising content development costs can be capitalized if the IAS 38 development criteria are met.
- Costs of content that promotes the entity’s own products and services, including product photos and marketing copy, are always expensed when incurred, even during the development phase.
- Operating-stage costs, once development is complete, are expensed unless they meet the criteria for recognizing a new or enhanced asset.
A website built solely or primarily to advertise the entity’s own products can’t be recognized as an intangible asset at all, because the entity cannot demonstrate how it will generate probable future economic benefits. A site that lets customers place orders has a clearer path to capitalizable future revenue.
Removing the Asset from the Books
An intangible asset is derecognized when it is disposed of, or when no future economic benefits are expected from its use or disposal. The gain or loss is the difference between any net disposal proceeds and the carrying amount, and it goes to profit or loss when derecognition occurs.
Gains on disposal cannot be classified as revenue. They are reported as other income. That stops a company from selling patents or licenses and presenting the proceeds as though they came from ordinary operations.
What You Have to Disclose
IAS 38 requires disclosures for each class of intangible assets, distinguishing internally generated items from those acquired externally. The core items are:
- Whether the useful life is finite or indefinite, along with amortization rates or periods and the method used for finite-life assets.
- Gross carrying amount and accumulated amortization (together with accumulated impairment losses) at the beginning and end of the period.
- A reconciliation of movements: additions from internal development, separate purchases, and business combinations; disposals; impairment losses and reversals; amortization charges; and exchange differences.
- For indefinite-life assets, the carrying amount and the specific reasons supporting that classification.
- A description, carrying amount, and remaining amortization period for any intangible asset that is individually material.
- Carrying amounts of intangible assets whose title is restricted, and of any pledged as security.
- Contractual commitments to acquire intangible assets.
Entities using the revaluation model add the effective revaluation date, the carrying amount that would have been reported under the cost model, and the balance and distribution restrictions on the revaluation surplus.
Watch-Outs: US GAAP and Tax Differences
Two IFRS features do not carry across to US GAAP. First, the revaluation model isn’t available under US GAAP; intangible assets are always carried at historical cost under ASC 350. Second, US GAAP generally expenses development costs as incurred rather than capitalizing them once criteria are met. The main US exceptions are software: costs for software developed for external sale can be capitalized once technological feasibility is established under ASC 985-20, and internal-use software costs in the application development stage can be capitalized under ASC 350-40. Outside of software, US GAAP rarely permits capitalization of internally generated intangibles. The same underlying business can therefore show a materially different balance sheet under each framework.
Book-tax differences are also common. In the United States, Section 197 of the Internal Revenue Code requires most acquired intangibles, including goodwill, patents, trademarks, customer-based intangibles, licenses, and covenants not to compete, to be amortized over a fixed 15-year period using the straight-line method.5Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles IAS 38 amortization instead reflects the asset’s actual expected useful life, which could be five years for a software license or 25 years for a broadcasting right. The mismatch generates deferred tax assets or liabilities that need to be tracked and disclosed. The IRS also applies anti-churning rules that can deny Section 197 amortization where an acquisition does not produce a genuine change of ownership.6Internal Revenue Service. Intangibles Similar divergences exist in other jurisdictions, so companies operating internationally should map their IAS 38 schedules against local tax depreciation rules early.