IAS 38 Intangible Assets: Recognition, Measurement, and Disclosures

Under IAS 38, an intangible asset goes on the balance sheet only when it is identifiable, likely to generate future economic benefits for the entity, and measurable at reliable cost; if it clears those tests, it is carried at cost (or, rarely, at a revalued amount) and either amortized over a finite useful life or tested annually for impairment if that life is indefinite.¹ Everything else about the standard follows from that single gate: a strict definition and recognition threshold up front, with everything that fails expensed immediately.

What Counts as an Intangible Asset

The standard defines an intangible asset as an identifiable non-monetary asset without physical substance. Software, patents, trademarks, and licenses are the common examples.¹

Identifiability is the first hurdle. An item is identifiable when either of two things is true: it can be separated from the entity and sold, transferred, or licensed on its own; or it arises from a contract or other legal right, whether or not that right is separately transferable.¹ That is the test that distinguishes a real intangible asset from generalized goodwill.

Once identifiability is met, two recognition criteria apply. It must be probable that future economic benefits from the asset will flow to the entity, and its cost must be measurable with reasonable reliability.¹ Probability does not require certainty; it means reasonable grounds to expect inflows or cost savings. Reliable measurement is easy for a purchased asset with an invoice and harder for anything the entity builds itself.

What IAS 38 Does Not Cover

IAS 38 steps aside whenever another IFRS standard already governs a particular type of intangible. Goodwill from a business combination is dealt with under IFRS 3. Deferred tax assets fall under IAS 12. Intangibles held for sale in the ordinary course of business go to IAS 2. Exploration and evaluation assets for mining and oil and gas activities fall under IFRS 6. Leases of intangibles follow IFRS 16, and insurance contract assets are covered by IFRS 17. Financial assets as defined in IAS 32 are also excluded.¹ If your asset fits any of those categories, work from the specific standard instead.

Items That Cannot Be Recognized

Some internally generated items are barred from the balance sheet no matter how valuable they clearly are. Internally generated goodwill is the biggest one: it is neither separable nor rooted in a contractual right, and its cost cannot be isolated from the cost of running the business, so it fails the definition outright.¹

The standard also prohibits recognition of internally generated brands, mastheads, publishing titles, and customer lists, for the same reason: their development costs cannot be reliably separated from the cost of developing the business as a whole.¹ Advertising, promotional spending, and staff training are always expensed as incurred on the same reasoning.

Measuring an Intangible Asset at Initial Recognition

Once an intangible asset passes the recognition tests, it enters the books at cost. For a separately purchased asset, cost is the purchase price (including import duties and non-refundable taxes) net of trade discounts and rebates, plus any directly attributable costs of preparing the asset for its intended use, such as legal fees to secure a license.¹

Two common scenarios follow different rules. When an intangible asset is acquired in a business combination, its cost is its fair value at the acquisition date under IFRS 3. That fair value can be higher than the carrying amount on the seller’s own books, because intangibles the seller could not recognize internally may be identifiable in the buyer’s hands. When an intangible asset is obtained through a government grant, the entity can recognize both the asset and the grant at fair value; if it does not use fair value, the asset is recognized at a nominal amount plus any directly attributable costs of preparing it for use.¹

Internally Generated Assets: Research vs Development

Building an intangible asset in-house triggers a two-phase framework, and the line between the phases decides whether costs ever reach the balance sheet.

Research Costs Are Always Expensed

All spending in the research phase — exploring alternatives, evaluating materials, testing concepts — is expensed as incurred. At that stage the entity cannot yet show that a viable asset exists or that future economic benefits will flow from it. Once research costs have been expensed, they cannot be reinstated as part of an asset’s cost later, even if the project ultimately succeeds.¹

Development Costs Can Be Capitalized, With Six Conditions

Development costs can be capitalized only when the entity can demonstrate all six of the following:

Technical feasibility of completing the asset so that it will be available for use or sale.
Intention to complete the asset and use or sell it.
Ability to use or sell the asset.
Probable future economic benefits, supported by market analysis, internal projections, or a clear operational use.
Adequate technical, financial, and other resources to finish development.
Ability to measure the development expenditure reliably.

Miss one, and the costs are expensed just as research costs would be.¹ The “probable future economic benefits” condition is where projects most often stumble; optimism is not evidence. Only costs directly attributable to development activity — materials consumed, labor, testing — qualify for capitalization. General overhead does not.

Website Costs

SIC-32 applies the same two-phase logic to company-built websites. Planning-stage spending mirrors research and is expensed. Building infrastructure, coding applications, and developing non-advertising content mirrors development and can be capitalized when the six conditions are met.²

One trap: a website built solely or primarily to advertise and promote the entity’s own products cannot be capitalized at all, because it is not expected to generate measurable future economic benefits distinct from general advertising. A site that generates revenue directly, such as one that lets customers place orders, has a much clearer path to capitalization. Once a site is operational, ongoing spending is expensed as incurred.²

Spending on an Asset After It Is Recognized

Once an intangible asset is on the balance sheet, later spending on it almost always goes to expense. The standard says such expenditure rarely meets the recognition criteria, because it usually maintains existing benefits rather than adding new ones, and it usually cannot be attributed to a specific asset rather than to the business as a whole. Subsequent expenditure on brands, mastheads, publishing titles, and customer lists is always expensed, whether the asset was originally purchased or internally generated.¹

Measurement After Recognition

For each class of intangible assets, the entity picks one of two models and applies it consistently.

Cost Model or Revaluation Model

Under the cost model, the asset is carried at cost less accumulated amortization and any impairment losses. Under the revaluation model, the asset is carried at fair value less later amortization and impairment, but fair value must be determined by reference to an active market. Active markets for intangibles are uncommon. They may exist for freely transferable licenses such as taxi permits, fishing quotas, or production allocations, but they generally do not exist for patents, trademarks, or brands, because each of those is unique and transactions are negotiated one at a time.¹ Most entities use the cost model for this reason.

When the revaluation model is used, increases in carrying amount are recognized in other comprehensive income and accumulated in equity as a revaluation surplus.¹

Amortization for Finite-Life Assets

An asset with a finite useful life is amortized over that life. The amortization method should reflect the pattern in which the entity expects to consume the asset’s economic benefits; if that pattern cannot be determined reliably, the straight-line method is used. Both the useful life and the amortization method are reviewed at least at each financial year-end, and any change is applied prospectively as a change in accounting estimate.¹

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 expected to still exist then.¹ For most intangibles, that means the full cost is amortized over the useful life.

Factors relevant to estimating useful life include expected usage, typical product life cycles, technical or technological obsolescence, the stability of the industry, competitor actions, required maintenance spending, and any legal or contractual limits such as license expiration dates.¹

Indefinite Useful Life and Annual Impairment

An intangible asset with an indefinite useful life is not amortized. Indefinite does not mean infinite; it means there is no foreseeable limit on the period over which the asset is expected to generate cash flows. Instead of amortization, the entity tests the asset for impairment annually under IAS 36, and also whenever there is an indication that it may be impaired.¹ The impairment test compares carrying amount with recoverable amount, which is the higher of fair value less costs of disposal and value in use.³

The indefinite-life classification itself is reassessed each reporting period. If circumstances change — for example, a license becomes subject to an expiry date, or a technology is nearing obsolescence — the useful life becomes finite and amortization starts, applied prospectively under IAS 8.¹

Derecognition

An intangible asset is removed from the balance sheet either on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss on derecognition is the difference between net disposal proceeds and carrying amount, and it goes through profit or loss. Gains cannot be classified as revenue; they are reported on a separate line such as other income.¹

Deferred Tax on Intangibles

Accounting for an intangible under IAS 38 frequently diverges from how the tax authority treats the same asset, and those differences produce deferred tax under IAS 12. An upward revaluation for accounting purposes with no change in tax base creates a deferred tax liability, and the deferred tax on that revaluation is recognized in other comprehensive income, matching the revaluation surplus.⁴ Amortization is the other common source: a tax code that prescribes a fixed write-off period for acquired intangibles will not match the useful life chosen for accounting, and the resulting timing differences produce deferred tax assets or liabilities that have to be tracked over the asset’s life.

Disclosures

For each class of intangible assets, the entity discloses which measurement model it uses, the useful lives or amortization rates for finite-life assets, and the line of the income statement in which amortization is included.¹

A reconciliation of carrying amount from the start to the end of the period is also required, showing additions, disposals, amortization, impairment losses recognized and reversed, and other movements. For revalued assets, the entity discloses the effective date of the revaluation, the carrying amount that would have applied under the cost model, and the revaluation surplus balance.¹ Together, these disclosures let a reader see how much of the balance sheet rests on intangible value, how fast that value is being consumed, and whether management’s useful-life and impairment judgments look reasonable.

1
IFRS Foundation. IAS 38 Intangible Assets
2
IFRS Foundation. SIC-32 Intangible Assets – Web Site Costs
3
IFRS Foundation. IAS 36 Impairment of Assets
4
IFRS Foundation. IAS 12 Income Taxes