## **Learning Outcomes**

This article covers how intangible assets and research and development (R&D) expenditures are treated under IAS 38. You will learn how to determine when to recognise an intangible asset, how to decide and review its useful life, the mechanics of amortisation, and what disclosures are required in the financial statements. By the end, you should be able to apply IAS 38 rules to practical exam scenarios.

## **ACCA Strategic Business Reporting (SBR) Syllabus**

For ACCA Strategic Business Reporting (SBR), you are required to understand how intangible assets and R&D are accounted for in accordance with IAS 38. In particular, your revision should focus on:

- The criteria for recognising and measuring intangible assets, including acquired and internally generated items
- The distinction between indefinite and finite useful lives for amortisation purposes
- The process for determining and reviewing an intangible asset’s useful life
- Accounting for research and development expenditure
- The requirements for amortising intangible assets with finite useful lives
- When an intangible asset should be tested for impairment
- The specific disclosure requirements relating to intangible assets and R&D

## **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. According to IAS 38, which of the following is **not** a criterion for recognising an intangible asset?
   a) The asset is identifiable.  
   b) The asset has physical substance.  
   c) The asset is controlled by the entity as a result of a past event.  
   d) The asset will generate probable future economic benefits.

2. An internally generated brand fails the IAS 38 recognition criteria primarily because:  
   a) Brands are not valuable assets.  
   b) The costs cannot be distinguished from other business expenses.  
   c) Brands always have indefinite lives.  
   d) Brands cannot generate future economic benefits.

3. True or false? All recognised intangible assets must be amortised on a straight-line basis over their expected useful life.

4. List two examples of information an entity must disclose about its intangible assets under IAS 38.

## **Introduction**

Intangible assets play a central role in today’s business environment, particularly for companies developing technology, software, or brands. IAS 38 _Intangible Assets_ sets out how these items must be recognised, measured, depreciated or amortised, and disclosed. This article outlines the conditions for recognition, distinguishes between finite and indefinite useful lives, explains how amortisation is applied, and clarifies the required disclosures for intangible assets and associated research and development costs.

> **Key Term: intangible asset**  
> An identifiable non-monetary asset without physical substance, held for use in the supply of goods or services, for rental, or for administrative purposes.
>
> **Key Term: research**  
> Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
>
> **Key Term: development**  
> The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before commercial production or use.

## **Recognition of Intangible Assets**

IAS 38 requires an intangible asset to be recognised if, and only if, all of the following apply:

- The asset is **identifiable**
- The entity controls the asset as a result of past events
- Future economic benefits are probable
- The cost of the asset can be measured reliably

Most purchased intangible assets (such as software licences or patents acquired separately) meet these criteria. Intangible assets acquired as part of a business combination are recognised at fair value if separable or arising from contractual/legal rights.

Internally generated goodwill, brands, mastheads, publishing titles, customer lists and similar items fail recognition mainly because costs cannot be reliably separated from the ongoing business expenditure.

> **Key Term: control (of an asset)**  
> The power to obtain future economic benefits from the asset and restrict others' access to those benefits.

## **Research and Development Expenditure**

IAS 38 requires a distinction between **research** and **development** phases.

- Expenditure on **research** is always expensed as incurred.
- **Development** costs may be capitalised as an intangible asset **only if** specific criteria are met:
  - Technical feasibility of completion is demonstrable
  - The intention and ability to complete and use or sell the asset exists
  - The asset will generate probable future economic benefits
  - Adequate resources are available to complete the project
  - Expenditure can be measured reliably

If these conditions are not satisfied, the outlay must be expensed.

### **Worked Example 1.1**

**Scenario:** Stellar Tech spent \$0.8m researching a new AI algorithm and \$1.2m on development. Reliable projections for the market launch became available midway through development (after half the development cost had been incurred).

**Question:** How much of this expenditure can be capitalised as an intangible asset?

> **Answer:**  
>
> Only development expenditure after all criteria are demonstrably met is capitalised. Assume \$0.6m of development spend occurred before market launch projections (hence before the criteria were all satisfied); this must be expensed. The remaining \$0.6m development expenditure can be capitalised. The \$0.8m in research costs is expensed.

## **Measurement After Recognition**

Once recognised, intangible assets are measured at **cost less accumulated amortisation and impairment losses**, unless an active market exists enabling use of the revaluation model (rare in practice for intangibles).

## **Amortisation and Useful Life Assessment**

An intangible asset must be assigned either a **finite** or **indefinite** useful life:

- **Finite useful life:** Amortise systematically over that period, starting when the asset is ready for use, reflecting the pattern of economic benefits consumed. If the pattern cannot be reliably determined, use the straight-line method.
  - Residual value is assumed to be zero unless a third party will buy the asset or there is an active market.

- **Indefinite useful life:** No foreseeable limit to the period benefits are expected; no amortisation is charged, but annual impairment tests are mandatory.

> **Key Term: useful life**  
> The period over which an asset is expected to be available for use, or the number of units expected to be obtained from the asset.
>
> **Key Term: amortisation**  
> The systematic allocation of the depreciable amount of an intangible asset over its useful life.

### **Worked Example 1.2**

**Scenario:** An entity acquires a software licence for \$60,000. It expects to use the software for 3 years, with no residual value.

**Question:** Calculate the annual amortisation expense and carrying amount after 2 years.

> **Answer:**  
>
> Amortisation per year is \$20,000 (\$60,000/3 years). After 2 years, accumulated amortisation is \$40,000, so the carrying amount is \$20,000.

### **Exam Warning**

> If an intangible asset previously classified as having a finite useful life is reclassified as indefinite, ensure all factors justifying the change are documented and impairment testing procedures are updated accordingly. Do not cease amortisation without clear evidence.

## **Reviewing Useful Life and Amortisation Method**

IAS 38 requires annual reassessment of:

- Whether the useful life of an intangible asset remains appropriate
- The appropriateness of the amortisation method

Any changes are treated as changes in accounting estimates, affecting current and future periods only.

> **Key Term: impairment**  
> A loss condition in which the carrying amount of an asset exceeds its recoverable amount.

## **Disclosure Requirements**

IAS 38 requires extensive disclosures for each class of intangible asset:

- Whether useful lives are finite or indefinite
- The amortisation methods used
- The useful lives or amortisation rates
- Gross carrying amounts and accumulated amortisation (aggregated at the start and end of the period)
- A reconciliation of the carrying amount at the beginning and end of the period (showing additions, disposals, amortisation, impairment losses and reversals, revaluations, and other changes)
- For assets with indefinite lives, the reasons supporting this assessment

For capitalised development costs, entities must disclose the amount capitalised during the period and the carrying amount at the reporting date.

### **Worked Example 1.3**

**Scenario:** Innovex Co. has the following movements in its patents during the year ended 31 December 20X3:

- Opening carrying amount: \$2,000,000
- Additions: \$400,000
- Amortisation: \$300,000
- Disposals (carrying amount): \$100,000

**Question:** What reconciliation is presented in the intangible assets note?

> **Answer:**  
>
> The reconciliation will disclose:  
> Opening balance: \$2,000,000  
> Additions: +\$400,000  
> Amortisation: –\$300,000  
> Disposals: –\$100,000  
> Closing balance: \$2,000,000

### **Revision Tip**

> List disclosure requirements separately for intangible assets with finite and indefinite useful lives in your revision notebook to avoid omissions in the exam.

## **Summary**

IAS 38 requires that intangible assets are only recognised if their cost can be measured reliably and future benefits are probable. Expenditure on research is always expensed. Development costs are only capitalised when strict conditions are met. Intangible assets with finite useful lives are amortised over their expected period of benefit, and the useful life and amortisation method must be reviewed each year. Intangible assets with indefinite lives are not amortised but must be tested for impairment annually. Specific disclosures are required for each asset class, including movements, amortisation, impairment, and the basis for any assessment of indefinite life.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- State the recognition and measurement criteria for intangible assets under IAS 38
- Distinguish between research and development costs, and describe their treatment
- Explain when and how amortisation applies to intangible assets
- Describe the process for determining and reviewing useful lives
- Set out the disclosure requirements for intangible assets and development costs

## **Key Terms and Concepts**

- intangible asset
- research
- development
- control (of an asset)
- useful life
- amortisation
- impairment


Intangible assets and R&D (IAS 38) - Amortisation, useful lives, and disclosures