## **Learning Outcomes**

After reading this article, you will be able to identify which intangible assets may be recognised under IAS 38, explain why internally generated brands are not recognised as assets, distinguish between internally generated and acquired intangibles, and outline the correct treatment for associated costs. This skill is fundamental for single company and group financial statements questions in ACCA FR.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand both recognition and measurement of intangible assets, especially regarding internally generated intangibles and brands. In particular, you should be able to:

- Explain and apply IAS 38 Intangible Assets to internally generated intangibles and brands
- Discuss which non-current assets qualify for recognition as intangible assets
- Distinguish between internally generated and purchased intangible assets
- Apply the recognition criteria for intangible assets, including the prohibition on capitalising internally generated brands, publishing titles, mastheads, and customer lists

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following can never be recognised as an intangible asset under IAS 38?
   a) Purchased patent
   b) Internally generated brand name
   c) Purchased trademark
   d) Purchased license

2. Which one of the following statements is true regarding internally generated brands?
   a) Can be capitalised if reliably measured
   b) Can be revalued if an active market exists
   c) Cannot be recognised as an asset
   d) Can be amortised over a defined period

3. Briefly describe why internally generated customer lists must not be recognised as intangible assets.

4. How should costs incurred in developing an internally generated brand be treated under IAS 38?

## **Introduction**

Companies increasingly invest in intangible items such as brands, customer lists, and internally built software. Correctly recognising and measuring these non-physical assets can affect the reported value of a company. IAS 38 sets strict rules for whether internally generated intangible assets can be recognised and how they should be accounted for, with a particular focus on brands and similar items. For ACCA FR, understanding these rules is essential for both multiple-choice and constructed response questions.

> **Key Term: intangible asset**
> An identifiable non-monetary asset without physical substance, controlled by the entity as a result of past events, from which future economic benefits are expected to flow.

## **Recognition of Intangible Assets: Internally Generated vs Purchased**

IAS 38 allows recognition of an intangible asset only if:

- It is identifiable (either separable or arising from legal/contractual rights)
- The entity controls the asset
- Future economic benefits are probable
- Cost can be measured reliably

Purchased intangibles (e.g. a bought patent or license) can generally be recognised at cost.

Internally generated intangibles, such as brands, publishing titles, mastheads, customer lists, and goodwill, are specifically forbidden from recognition under IAS 38. This prohibition is rooted in the fact that costs attributable to these items cannot be separated reliably from the general costs of developing the business as a whole.

> **Key Term: internally generated intangible asset**
> An intangible asset created within the company, rather than acquired from outside sources.
>
> **Key Term: brand**
> A name, term, design, or other feature that identifies an entity’s goods or services, distinguishing them from competitors.

## **Brands and Internally Generated Intangibles**

IAS 38 takes a restrictive approach towards internally generated brands and similar assets due to measurement and reliability concerns. The costs associated with creating a brand cannot be separately measured from overall business development. Similarly, customer lists and publishing titles are considered so intertwined with general business activities that they cannot be isolated for reliable measurement.

Therefore:

- Expenditure on creating or developing internally generated brands, customer lists, mastheads, or similar items must always be expensed as incurred.
- Such assets may not be recognised or subsequently revalued.

Where a brand name, customer list or similar item is purchased separately (for example, as part of an acquisition), and cost can be measured reliably, then it may be recognised as an intangible asset and subsequently measured at cost or (where permitted) at fair value.

### **Worked Example 1.1**

**UltraGlow Ltd has spent \$500,000 over several years promoting and building its distinctive name and image in the cosmetics industry. The directors believe the brand now adds substantial value, so wish to recognise a brand asset in the accounts. The company has no intention of selling the brand. Should UltraGlow Ltd recognise a brand as an asset?**

> **Answer:**
> No. Expenditure on internally generated brands must always be written off as incurred. Even if management believes the brand adds value, IAS 38 prohibits recognition because the cost of the brand cannot be reliably distinguished from general business outgoings.

### **Worked Example 1.2**

**Starroad Co acquires, for \$2 million, a publishing title as part of a business combination. The value can be reliably measured. How should the publishing title be treated?**

> **Answer:**
> The publishing title should be recognised as an intangible asset at its fair value of \$2 million, as it was acquired and can be measured reliably. Subsequent measurement should follow the cost model unless there is an active market for revaluation.

### **Exam Warning**

> A common mistake is to try to capitalise marketing, advertising, or brand-building costs as intangibles. The examiner may test scenarios where such costs must be expensed under IAS 38.

## **Worked Example 1.3**

**Relevant Ltd developed a customer list through several years of business. Costs can be identified for advertising and client acquisition. Can this list be recognised as an intangible asset?**

> **Answer:**
> No. Even if costs for advertising or customer acquisition are known, the overall cost of “building a customer list” cannot be measured separately from everyday business costs. IAS 38 states that internally generated customer lists must not be recognised as assets.

## **Subsequent Measurement and Revaluation**

IAS 38 permits intangible assets to be carried at either cost (less amortisation and impairment) or at a revalued amount. However, the revaluation model is only allowed if an active market exists for the asset—an unlikely situation for unique brands or internally generated items. Most intangible assets are therefore held at cost, and internally generated brands are both unrecognisable and unrevalued.

> **Key Term: active market**
> A market with sufficient transactions and liquidity to enable ongoing, reliable pricing of homogenous items.
>
> **Key Term: revaluation model**
> An accounting policy where an asset is carried at a revalued amount, being fair value at revaluation date less subsequent amortisation and impairment.

## **Summary**

IAS 38 sets a high threshold for recognising internally generated intangible assets. With limited exceptions (such as some research and development after meeting strict criteria), internally generated brands, customer lists, mastheads, and similar assets must always be expensed—not recognised as intangible assets. Only separate, acquired intangibles may be capitalised. Revaluation of intangibles is almost never available for brands due to the lack of active markets.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the definition and recognition criteria for intangible assets under IAS 38
- Describe the difference in treatment between purchased and internally generated intangibles
- List items explicitly forbidden from recognition (internally generated brands, customer lists, mastheads, publishing titles)
- Identify the correct accounting for expenditure on internally generated brands (expense as incurred)
- State that revaluation of intangibles is only permitted where an active market exists (rare for brands)
- Recognise that only purchased brands meeting reliability criteria may be recognised as intangible assets

## **Key Terms and Concepts**

- intangible asset
- internally generated intangible asset
- brand
- active market
- revaluation model

Intangible assets (IAS 38) - Internally generated intangibles and brands