IAS 38

IAS 38 Intangible Assets is the standard in International Financial Reporting Standards that prescribes the accounting for intangible assets not dealt with in another standard. It defines an intangible asset as an identifiable non-monetary asset without physical substance, and sets out when such an asset may be recognised, how it is measured and how its cost is spread over its life. Typical examples are computer software, patents, copyrights, licences, customer lists, franchises and trademarks.

The standard was first issued in 1998 and revised in 2004. It is deliberately restrictive: many items that have economic value, such as a workforce's skills, internally built brands or market share, do not meet its tests and are never recorded as assets. It does not apply to goodwill acquired in a business combination, financial assets, mineral rights, or intangible assets held for sale in the ordinary course of business.

Three features define an intangible asset. It must be identifiable, meaning that it is either separable from the entity, so that it could be sold, licensed or transferred, or that it arises from contractual or other legal rights. The entity must control it, having the power to obtain its benefits and restrict others' access to them. And it must be expected to produce future economic benefits, through revenue or cost savings.

An item meeting the definition is recognised only if it is probable that the expected benefits will flow to the entity and its cost can be measured reliably. It is measured initially at cost. For an asset bought separately, cost is the purchase price plus directly attributable costs of preparing it for use. For an asset acquired in a business combination, cost is its fair value at the acquisition date, and it is recognised separately from goodwill even if the acquired company had not recorded it.

The hardest questions concern assets an entity creates itself. Internally generated goodwill is not recognised. Nor are internally generated brands, mastheads, publishing titles, customer lists and similar items, because spending on them cannot be distinguished from the cost of developing the business as a whole.

For other projects, the standard divides the work into a research phase and a development phase. Expenditure on research is always recognised as an expense. Development expenditure must be capitalised as an asset, but only from the point at which the entity can demonstrate all of the following.

• Technical feasibility of completing the asset so that it will be available for use or sale.
• Intention to complete it and to use or sell it.
• Ability to use or sell it.
• How it will generate probable future economic benefits, for example by showing that a market exists for its output.
• Adequate resources, technical and financial, to complete it.
• Reliable measurement of the expenditure attributable to it during development.

Spending recognised as an expense before these criteria were met cannot be reinstated later. Start-up costs, training, advertising and promotion, and relocation or reorganisation costs are always expensed.

An entity chooses between two models. Under the cost model, the asset is carried at cost less accumulated amortisation and impairment losses. Under the revaluation model, it is carried at fair value at the date of revaluation less later amortisation and impairment, but this model is allowed only where fair value can be determined by reference to an active market, which is rare for intangible assets.

The entity assesses whether the useful life is finite or indefinite. An asset with a finite life is amortised on a systematic basis over that life, starting when it is available for use, using a method that reflects the pattern in which its benefits are consumed, or the straight-line method if that pattern cannot be determined reliably. A method based on revenue is presumed to be inappropriate. The residual value is assumed to be zero unless a third party has committed to buy the asset or an active market exists. An asset with an indefinite life, meaning no foreseeable limit to the period over which it will generate cash, is not amortised but is tested for impairment at least annually under IAS 36. Further detail appears under amortization of intangible assets.

Interpretation committee decisions have applied the standard to newer questions. In 2019 the committee concluded that holdings of cryptocurrencies meet the definition of an intangible asset and fall under IAS 38 unless they are held for sale in the ordinary course of business, in which case the inventories standard applies. Decisions on cloud computing concluded that a customer in a software-as-a-service arrangement usually receives a service and not a software asset, so the costs of configuring the supplier's software are generally expensed.

Under US accounting rules, research and development costs are in general expensed as incurred, with separate rules for software, so IFRS reporters may show assets that US reporters do not. Critics of IAS 38 argue that it leaves much of the value of modern, knowledge-based companies off the balance sheet, and that the different treatment of acquired and internally generated assets makes companies that grow by acquisition look different from those that grow organically. The International Accounting Standards Board has begun a project to review the standard.

• IFRS Foundation