## **Learning Outcomes**

After reading this article, you will be able to explain and apply the key recognition and measurement rules in IAS 38 for intangible assets, including internally generated brands and R&D expenditure. You will assess the accounting treatment of goodwill, distinguish between initial and subsequent measurement, and understand the impact of these policies on financial statements and exam scenarios.

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

For ACCA Strategic Business Reporting (SBR), you are required to understand how intangible assets and related expenditure are accounted for under international standards, with particular attention to IAS 38. Revision should pay particular attention to the following syllabus areas:

- Explain and apply the criteria for the recognition of intangible assets, including internally generated assets and goodwill
- Apply and discuss the accounting treatment for expenditure on research and development activities
- Assess the initial and subsequent measurement bases for intangible assets, including amortisation and impairment reviews
- Distinguish between acquired goodwill and internally generated goodwill, including their treatment in business combinations
- Evaluate disclosure requirements for intangible assets and R&D expenditure

## **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 be recognised as an intangible asset under IAS 38?  
   a) Internally developed brand  
   b) Purchased patent  
   c) Staff training costs  
   d) Advertising expenditure
2. A company incurs \$2m on research and \$1.5m on development of a new software. At the reporting date, the product is not yet marketable and the company cannot demonstrate future economic benefits. How should these costs be accounted for in the current period?
3. True or false? Internally generated goodwill should be recognised on the statement of financial position if it can be reliably measured.
4. Briefly explain the difference between purchased goodwill and internally generated goodwill according to IFRS.

## **Introduction**

Intangible assets are non-monetary assets without physical substance, such as software, brands, and patents. IAS 38 _Intangible Assets_ sets strict requirements for recognising such assets to ensure financial statements remain reliable and relevant. R&D activities and brands are core areas where recognition rules are often misunderstood. Meanwhile, goodwill, arising only from business combinations, is subject to special rules and impairment reviews. Understanding when and how to recognise, measure, and disclose intangible assets and related expenditure is fundamental for ACCA SBR candidates.

## INTANGIBLE ASSETS – SCOPE AND RECOGNITION

Under IAS 38, an intangible asset must be:

- Identifiable (separable or arises from contractual/legal rights)
- Controlled by the entity
- Expected to generate future economic benefits
- Measurable at cost reliably

Expenditure that does not meet all criteria cannot be capitalised and must be expensed as incurred. This rule is especially relevant in the case of internal activities, such as self-developed brand names or in-house software development.

> **Key Term: intangible asset**  
> A non-monetary asset without physical substance that is identifiable and controlled by an entity, expected to provide future economic benefits.

## INTERNALLY GENERATED INTANGIBLE ASSETS

Many companies incur significant costs developing brands, customer lists, and know-how. However, IAS 38 is strict: expenditure on internally generated brands, publishing titles, customer lists, or similar items cannot be recognised as intangible assets.

> **Key Term: internally generated intangible**  
> An intangible asset arising from the entity's own development activities rather than separate acquisition.

Internally developed computer software may be recognised, but only if stringent conditions are met (see development stage below). Advertising, promotional, and staff training costs are always expensed.

> **Key Term: control**  
> The power to obtain the future economic benefits flowing from the related resource and to restrict others' access to those benefits.

## RESEARCH AND DEVELOPMENT (R&D) EXPENDITURE

IAS 38 draws a clear line between research and development phases.

### Research Phase

All research expenditure must be expensed as incurred. This phase covers original investigation to gain new scientific or technical knowledge.

### Development Phase

Development costs can only be capitalised as an intangible asset when all of the following are demonstrable:

- Technical feasibility of completion
- Intention to complete the asset and use/sell it
- Ability to use/sell the asset
- The asset is likely to generate future economic benefits
- Adequate technical, financial, and other resources are available
- Expenditure attributable to the asset can be reliably measured

> **Key Term: research**  
> Original and planned investigation with the prospect of gaining new scientific or technical knowledge and understanding.
>
> **Key Term: development**  
> Application of research findings or knowledge to a plan or design for the production of new materials, products, or services before commercial production begins.
>
> **Key Term: capitalisation**  
> Recognising expenditure as an asset on the statement of financial position rather than as an immediate expense.

### **Worked Example 1.1**

_SimplySoft Ltd spends \$800,000 researching a new app and \$1,700,000 on further development. By year-end, the company has not established technical feasibility or demonstrated probable future economic benefits._

> **Answer:**  
>
> All research costs (\$800,000) are expensed immediately. The \$1,700,000 in development costs also must be expensed, as the project does not meet the six development criteria by year-end.  
> **Exam Warning:** The most common error is capitalising all development costs as soon as any R&D phase begins. For exam purposes, be able to explain and apply each of the six development criteria.

## GOODWILL: RECOGNITION AND MEASUREMENT

Goodwill arises only from a business combination (e.g., an acquisition) and represents future economic benefits from assets that cannot be individually identified and recognised.

> **Key Term: goodwill**  
> The excess of the cost of an acquired entity over the net fair value of its identifiable assets and liabilities at acquisition date.

Internally generated goodwill (essentially, the value of reputation, skilled workforce, or customer loyalty built up over time) can never be recognised as an asset.

> **Key Term: internally generated goodwill**  
> The inherent value created by an entity through its own operations, not arising from an acquisition.

Purchased goodwill is initially recognised at cost on acquisition and is subject to annual impairment reviews (not amortisation).

### **Worked Example 1.2**

_EuroMedia acquires PressCo for \$8m. PressCo's identifiable net assets have a fair value of \$6.9m. EuroMedia pays \$150,000 on branding consultants for PressCo after acquisition._

> **Answer:**  
>
> Goodwill at acquisition: \$1.1m (\$8m – \$6.9m). The \$150,000 spent post-acquisition on branding consultants is expensed, not added to goodwill.

## SUBSEQUENT MEASUREMENT OF INTANGIBLE ASSETS

After initial recognition, IAS 38 allows a choice between:

- The cost model: cost less accumulated amortisation and impairment
- The revaluation model: fair value (only if an active market exists), less accumulated amortisation and impairment

Most intangibles, such as brands or software, have no active market.

> **Key Term: active market**  
> A market in which items traded are homogeneous, willing buyers and sellers can be found at all times, and prices are available to the public.

Intangible assets with finite useful lives are amortised over that life. Assets with indefinite useful lives (such as some brands) are not amortised, but subject to annual impairment review.

> **Key Term: amortisation**  
> The systematic allocation of the depreciable amount of an intangible asset over its useful life.

## IMPAIRMENT OF INTANGIBLE ASSETS AND GOODWILL

Intangible assets not yet available for use, assets with indefinite lives, and goodwill must be tested for impairment annually under IAS 36. Useful lives, residual values, and amortisation methods must also be reviewed at least annually.

### **Worked Example 1.3**

_Silverline Technologies has an internally developed customer database which has not been amortised over the past year. Management argue the useful life is indefinite because customer churn is unpredictable._

> **Answer:**  
>
> A useful life is indefinite only when there is no foreseeable end to benefits. Uncertainty over useful life is not the same as indefinite usefulness. If a finite useful life can be estimated, amortisation is required. If truly indefinite, conduct annual impairment review.

## ACCOUNTING FOR INTERNALLY GENERATED BRANDS

Expenditure on creating, maintaining, or enhancing an internally generated brand is always expensed, regardless of future economic benefits or management intent.

> **Exam Warning:** Recognition of an internally generated brand or customer list as an asset is never correct under IAS 38. This is frequently examined and is a common area of mistake.

## DISCLOSURE REQUIREMENTS

Entities must disclose:

- The total research and development expense for the period
- For intangible assets with indefinite useful lives, the reasons for such assessment
- Reconciliation of the carrying amount of intangibles at the start and end of the reporting period

Additional disclosure may be required where impairment losses or reversals occur.

## **Summary**

IAS 38 enforces strict recognition criteria for intangible assets, prohibiting capitalisation of internally generated brands, customer lists, or goodwill. Research costs are always expensed, while development expenditure is capitalised only when evidence supports all six recognition criteria. Goodwill can only be recognised when acquired in a business combination and is subject to annual impairment review rather than amortisation. Most internally developed intangibles, such as brands or workforce skills, are expensed and never capitalised. Disclosures must be clear and detailed for exam and real-world compliance.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Recognise the IAS 38 definition and recognition criteria for intangible assets
- Identify the distinction between research and development and their accounting treatment
- Differentiate between internally generated and acquired intangibles, including goodwill
- Apply the rules on subsequent measurement, amortisation, and impairment of intangibles
- Explain and apply the prohibition on recognising internally generated goodwill or brands
- Outline key disclosures mandated by IAS 38 for intangible assets and R&D

## **Key Terms and Concepts**

- intangible asset
- internally generated intangible
- control
- research
- development
- capitalisation
- goodwill
- internally generated goodwill
- active market
- amortisation


Intangible assets and R&D (IAS 38) - Internally generated intangibles and goodwill