## Learning Outcomes

After reading this article, you will be able to distinguish research from development activities under IAS 38, explain the recognition criteria for intangible assets, and apply the rules for expensing or capitalising research and development costs. You will also understand how to account for internally generated brands and acquired intangible assets, and accurately address exam-style scenarios involving R&D.

## ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand and apply the accounting treatment for intangible assets and research and development under IAS 38. In particular, you should be comfortable with:

- The definition and initial recognition criteria for intangible assets
- The distinction between research and development phases
- The capitalisation and expensing rules for R&D expenditure
- Measurement and subsequent accounting of intangible assets
- Restrictions on recognising internally generated intangibles such as brands and customer lists
- 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, look more closely at that area during your revision._

1. Which of the following is a requirement for the capitalisation of development expenditure under IAS 38?
   a) It relates to market research activities.
   b) There is only an intention, not a plan, to complete and use or sell the asset.
   c) Costs can be measured reliably.
   d) The research project will probably generate future economic benefits, but this is not yet demonstrated.

2. A company has spent \$800,000 on research and \$400,000 on development for a new product. At what stage can the company begin capitalising expenses as an intangible asset under IAS 38?

3. True or false? Internally generated brands can be recognised as intangible assets provided their fair value can be measured reliably.

4. List two examples of expenditure that can never be capitalised as part of an internally generated intangible asset.

## Introduction

IAS 38 _Intangible Assets_ sets out how entities should account for non-monetary assets lacking physical substance, such as software, patents, and R&D activities. A key challenge is deciding which costs qualify for capitalisation as assets, and which must be expensed. For ACCA SBR, you must be able to distinguish between research and development phases, apply the recognition criteria for intangible assets, and identify situations where expenditures (such as on brands or start-up activities) cannot be capitalised.

> **Key Term: Intangible Asset**
> An identifiable non-monetary asset without physical substance.
>
> **Test Tip:**
> When revising Research vs development and recognition criteria, connect each definition, method, or rule to the kind of question the assessment is likely to ask.

### Definition and Recognition Criteria

An intangible asset must be:

- Identifiable (separable or arises from contractual/legal rights)
- Controlled by the entity as a result of past events
- Expected to generate future economic benefits
- Have a cost that can be measured reliably

If an item does not meet all these criteria, the expenditure must be expensed as incurred.

> **Key Term: Identifiable**
> The asset is separable (capable of being sold, transferred, or licensed) or arises from contractual or legal rights.
> **Key Term: Control**
> The power to obtain future economic benefits from the asset and restrict others' access to those benefits.
> **Key Term: Research**
> Original and planned investigation to gain new scientific or technical knowledge and understanding.
> **Key Term: Development**
> Application of research findings or other knowledge to a plan or design for the production of new or substantially improved products or services before commercial production begins.

### Research Versus Development

![Development expenditure recognition under IAS 38 through technical feasibility, intent, ability, probable future economic benefits, resources, and reliable cost measurement before capitalisation.](https://static.pastpaperhero.com/images/acca-sbr-intangible-assets-and-r-and-d-ias-38-research-vs-development-and-recognition-criteria_00.png)

_IAS 38 sets out six conditions that must be demonstrated before development costs are capitalised from the recognition date._

### Research Phase

Expenditure on research must **always** be expensed as incurred. Research involves activities aimed at obtaining new knowledge, such as laboratory work, exploring alternatives, or searching for new materials. Since it is uncertain whether research will result in future economic benefits, capitalisation is not allowed.

### Development Phase

Development includes applying research findings to produce new or improved products, processes, or services. Capitalisation of development costs is permitted **only if all** of the following are demonstrated:

1. Technical feasibility of completing the asset
2. Intention to complete and use or sell the asset
3. Ability to use or sell the asset
4. Probability of future economic benefits
5. Availability of adequate technical, financial, and other resources to complete the development
6. Ability to reliably measure the expenditure attributable to the asset

Until all six criteria are met, costs must be expensed.

> **Key Term: Capitalisation**
> Recognising expenditure as part of the cost of an asset that will provide future economic benefits.

### Internally Generated Intangibles: Restrictions

Certain internally generated intangibles **cannot** be recognised as assets. Examples include brands, publishing titles, customer lists, start-up costs, and training expenses. Even if they may deliver value, reliably separating their development cost and estimating future benefits is generally not possible.

### Worked Example 1.1

A pharmaceutical company incurs \$1 million on early-stage research for a new drug, then spends \$500,000 trialling a specific drug formula after proving commercial viability.

**Question:** How should these costs be accounted for?

> **Answer:**
> The initial \$1 million research is expensed. The \$500,000 can be capitalised as a development asset if all six IAS 38 recognition criteria are demonstrated at the point development commences.

### Worked Example 1.2

A company spends \$100,000 designing new packaging for a well-known internally developed brand. Can it recognise an intangible asset for the brand or the packaging design cost?

> **Answer:**
> No intangible asset is recognised for the internally generated brand. The packaging design can be capitalised as a separable intangible asset only if the design is clearly separable and identifiable and meets the recognition criteria; otherwise, it is expensed.
>
> **Exam Warning:**
> In the exam, never suggest capitalising costs on brands, publishing titles, customer lists, or start-up activities created internally. Such expenditure must always be expensed.

### Measurement of Intangible Assets

### Initial Measurement

Intangible assets are initially measured at cost. For internally generated assets, this includes directly attributable costs from the date the asset meets the recognition criteria.

### Subsequent Measurement

After recognition, an entity must choose either the cost model (cost less amortisation/impairment) or the revaluation model (fair value, if an active market exists). Active markets for intangibles are rare.

### Amortisation

If the asset has a finite useful life, amortise it over that life. If indefinite (no foreseeable limit to economic benefits), do not amortise but test for impairment every year.

### Research and Development: Additional Points

- Costs incurred **before meeting the development criteria** must be expensed and cannot be reinstated as an asset retroactively.
- Once a project becomes capitalisable, record only further costs from that point.
- If a capitalised development project is abandoned, the carrying amount is immediately written off.

### Worked Example 1.3

Mellow Ltd spends \$50,000 on research (Jan–Mar), then meets all IAS 38 criteria on 1 April and spends a further \$120,000 (Apr–Dec) developing a product. At year-end, the project remains incomplete.

**Question:** How much should be capitalised as an intangible asset at year-end?

> **Answer:**
> Only \$120,000 (costs incurred after criteria are met) are capitalised as an intangible asset. The initial \$50,000 research is expensed.

### Disclosures

- The amount of R&D expense recognised in the period
- Amortisation and impairment methods/periods for intangibles
- For each significant class of intangible asset: useful life, gross carrying amount, accumulated amortisation, movement, and reasons for indeﬁnite life (if applicable)

## Summary

IAS 38 requires strict distinction between research and development phases. Research is always expensed, while development may be capitalised only if specific criteria are met. Internally generated brands and several other intangibles cannot be recognised. Intangible assets are subsequently measured at cost or, rarely, at revalued amount, amortised or reviewed for impairment as required.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Explain the recognition criteria for intangible assets under IAS 38
- Distinguish between research and development phases for accounting purposes
- Apply the capitalisation criteria for development expenditure
- Identify types of expenditure never eligible for capitalisation
- Outline initial and subsequent measurement of intangible assets
- Summarise disclosure requirements for intangible assets and R&D

## Key Terms and Concepts

- Intangible Asset
- Identifiable
- Control
- Research
- Development
- Capitalisation


Intangible assets and R&D (IAS 38) - Research vs development and recognition criteria