IAS 38
Active
Intangible Assets
Prescribes the accounting treatment for intangible assets, including recognition, measurement, amortisation, impairment and derecognition.
1
Conceptual Framework Linkage
Why an intangible is an asset under the Framework
An item qualifies as an asset under the Conceptual Framework if it is
a present economic resource controlled by the entity as a result of
past events, with the potential to produce economic benefits – the
challenge with intangibles is proving control and separability without
physical substance.
HOW INTANGIBLES MAP TO THE FRAMEWORK'S ELEMENTS
Control – the entity has the
power to obtain future economic benefits from the resource AND restrict
others' access (usually via legal rights such as patents, copyrights,
or contracts – without legal enforceability, control is very hard to demonstrate,
e.g. for a skilled workforce) Past event – purchase, internal
development, or acquisition in a business combination Future economic benefit – revenue
from sale of products/services, cost savings, or other benefits from the
asset's use
IAS 38 operationalises the Framework's general asset definition for
identifiable, non-monetary items without physical substance,
deliberately setting a HIGHER recognition bar than for tangible assets
because reliable measurement is harder.
Measurement principles applied by IAS 38
The Conceptual Framework lists several possible measurement bases; IAS
38 selects specific ones for initial and subsequent measurement.
Framework basisUsed by IAS 38 for…
Historical costInitial recognition (always)
Current value (fair value)Revaluation model (optional, only if an active market exists)
Value in use / FVLCDRecoverable amount under IAS 36 (impairment)
Qualitative characteristics in action: IAS 38 leans heavily toward faithful representation – this is precisely why internally generated goodwill, brands, and most
research costs are banned from recognition: their cost cannot be reliably
distinguished from the cost of developing the business as a whole.
2
Scope & Applicability
What IAS 38 covers
IAS 38 applies to all intangible assets EXCEPT those specifically
covered by another standard. An intangible asset is an identifiable,
non-monetary asset without physical substance.
THE THREE-PART DEFINITION
(a) Identifiable – separable (can
be sold, transferred, licensed, rented, or exchanged) OR arises from contractual/legal
rights
(b) Controlled by the entity as
a result of past events
(c) Expected to generate future economic benefits
SCOPE EXCLUSIONS – GOVERNED BY OTHER STANDARDS
Intangible assets held for sale in the ordinary course of business
→ IAS 2 Deferred tax assets → IAS 12 Leases within the scope of IFRS 16 → IFRS 16 Goodwill acquired in a business combination → IFRS 3 (though subsequent impairment testing still follows IAS 36) Financial assets (as defined in IFRS 9) → IFRS 9 Exploration and evaluation assets → IFRS 6
Key definitions you must know
Identifiability
The critical feature separating an intangible asset from goodwill –
separable from the entity, or arising from contractual/legal rights,
regardless of whether those rights are transferable.
Research
Original and planned investigation undertaken to gain new scientific
or technical knowledge and understanding – ALWAYS expensed.
Development
The application of research findings to a plan or design for the
production of new/substantially improved materials, devices,
products, or processes – capitalised ONLY if strict criteria
(PIRATE, see Section 4) are met.
Active market
A market where items traded are homogeneous, willing buyers/sellers
can normally be found, and prices are available to the public – rare
for intangibles, which is why the revaluation model is seldom used
in practice.
Amortisation
The systematic allocation of the depreciable amount of an intangible
asset with a FINITE useful life over that life – the
intangible-asset equivalent of depreciation.
3
Recognition Criteria
The two-part recognition test – plus the definition hurdle
Before the general recognition test can even be applied, the item must
FIRST meet the definition of an intangible asset (identifiable,
controlled, future benefits). Only then are the two recognition
conditions assessed.
Condition 1 – Probable future economic benefit
It is probable that the expected future economic benefits
attributable to the asset will flow to the entity.
Condition 2 – Reliable measurement
The cost of the asset can be measured reliably.
Never recognised as intangible assets, however much is spent: internally generated goodwill, brands, mastheads, publishing titles, customer
lists, and similar items generated internally – because they cannot be distinguished
from the cost of developing the business as a whole and lack reliably measurable
cost.
4
Internally Generated Intangibles – Research vs Development
The research/development split
RESEARCH PHASE
Always expensed to SOPL as incurred – no exceptions
DEVELOPMENT PHASE – CAPITALISE ONLY IF ALL "PIRATE" CRITERIA MET
Probable future economic
benefits can be demonstrated Intention to complete and
use/sell the asset Resources (technical,
financial, other) adequate to complete the project Ability to use or sell the
intangible asset Technical feasibility of
completing the asset Expenditure can be
measured reliably
If an entity cannot distinguish the research phase from the
development phase of an internal project, ALL expenditure is treated
as if incurred in the research phase – i.e. expensed.
Worked example – capitalising development costs
Example 1: Software development project
A company spends $200,000 over a year on a new software product.
$80,000 was spent before technical feasibility was established
(general feasibility studies) and $120,000 was spent afterward, once
management had approved funding and a clear plan to complete and
sell the product, with all six PIRATE criteria met from that point
onward.
Expensed (research-type, pre-feasibility): $80,000 →
SOPL
Capitalised (development, post-feasibility): $120,000 → Intangible asset
Capitalisation begins only from the date all six criteria are FIRST met – never retrospectively for costs already expensed.
Capitalised (development, post-feasibility): $120,000 → Intangible asset
Capitalisation begins only from the date all six criteria are FIRST met – never retrospectively for costs already expensed.
JOURNAL ENTRY – DEVELOPMENT COSTS CAPITALISED
Dr
Intangible asset – development costs $120,000
SOFP – non-current asset
Cr
Cash / payables / wages payable $120,000
SOFP
Previously expensed research costs can NEVER be reinstated as an asset
in a later period, even if the project later meets all PIRATE
criteria.
5
Subsequent Measurement – Cost vs Revaluation Model
Cost model
Carrying amount = Cost − Accumulated amortisation − Accumulated
impairment losses
The default and by far the most common model in practice, applied
consistently to an entire CLASS of intangible assets.
Revaluation model
Permitted ONLY where fair value can be determined by reference to an
ACTIVE MARKET – a condition rarely met for intangibles because most
are unique (e.g. patents, brands). Exceptions do exist in practice:
taxi licences, fishing quotas, production quotas.
JOURNAL ENTRIES – UPWARD REVALUATION (no prior deficit)
Dr
Intangible asset – increase to FV
SOFP
Cr
Revaluation surplus
OCIEquity
An intangible asset can ONLY be revalued if it was initially
recognised at cost (i.e. it must already qualify for recognition) AND
an active market exists – an asset that has never been recognised
cannot suddenly be revalued onto the SOFP.
Worked example – indefinite-life asset with no active market
Example 2: Acquired trademark
An entity acquires a well-known trademark for $2m in a separate
purchase. Management assesses that there is no foreseeable limit to
the period over which the trademark is expected to generate cash
inflows, and no active market exists for similar trademarks.
Classification: Indefinite useful life → NOT amortised
(see Section 6).
Measurement: Cost model only, since no active market exists for revaluation.
Subsequent treatment: Tested for impairment at least ANNUALLY, and whenever an indicator of impairment exists (IAS 36).
Measurement: Cost model only, since no active market exists for revaluation.
Subsequent treatment: Tested for impairment at least ANNUALLY, and whenever an indicator of impairment exists (IAS 36).
"Indefinite" does not mean "infinite" – it means management can see no foreseeable limit to the period of benefit.
The classification is reassessed every period; a change from indefinite
to finite is a change in accounting estimate, applied prospectively.
6
Amortisation
Amortisation mechanics by useful life type
FINITE LIFE – STRAIGHT-LINE (DEFAULT)
Annual amortisation = (Cost − Residual value) ÷ Useful life
FINITE USEFUL LIFE
Amortised on a systematic basis over the useful life, reflecting
the pattern of consumption of benefits (straight-line used if
pattern cannot be determined reliably) Residual value assumed to be ZERO unless a third party commits to
purchase it, or an active market exists to determine residual value
at end of life Amortisation begins when the asset is available for use, and stops
at the earlier of classification as held-for-sale (IFRS 5) or
derecognition
INDEFINITE USEFUL LIFE
NOT amortised – instead tested for impairment annually and whenever
indicators exist Useful life reassessed each period to confirm indefinite
classification remains appropriate
Worked example – patent amortisation
Example 3: Purchased patent
An entity purchases a patent for $600,000 with a legal life of 15
years, but management expects the technology to be commercially
viable for only 6 years before it becomes obsolete. Residual value
is nil.
Useful life used = 6 years (the SHORTER of legal life
and expected economic/commercial life – never automatically the legal
life).
Annual amortisation = $600,000 ÷ 6 = $100,000 p.a.
Annual amortisation = $600,000 ÷ 6 = $100,000 p.a.
Dr
Amortisation expense $100,000
SOPL
Cr
Accumulated amortisation $100,000
SOFP – asset ↓
Amortisation is normally presented within operating expenses,
classified by function or nature, consistent with the entity's policy
for other similar expenses.
7
Impairment Linkage (IAS 36)
How IAS 38 and IAS 36 interact
IAS 38 itself does not contain impairment rules – IAS 36 governs
whenever an indicator exists (finite-life assets) or, mandatorily, at
least once a year regardless of indicators (indefinite-life assets,
goodwill, and intangibles not yet available for use).
MANDATORY ANNUAL IMPAIRMENT TEST – NO TRIGGER NEEDED
Intangible assets with an indefinite useful life Intangible assets not yet available for use (e.g. development
projects still in progress) Goodwill acquired in a business combination (tested at the
cash-generating unit level)
FINITE-LIFE INTANGIBLES
Tested only when an indicator of impairment exists – same
trigger-based approach as PPE under IAS 16.
See the dedicated IAS 36 poster for the full recoverable amount, CGU
allocation, and reversal mechanics. Note: impairment losses on
goodwill can NEVER be reversed.
8
Derecognition
Derecognition rules & journal entries
Gain/loss on disposal = Net disposal proceeds − Carrying amount
Dr
Accumulated amortisation
SOFP
Dr
Cash / receivable (proceeds)
SOFP
Cr
Intangible asset – at cost
SOFP
Cr
Gain on disposal (or Dr if loss)
SOPL – other income/expense
An intangible asset is derecognised on disposal, or when no future
economic benefits are expected from its use or disposal (e.g. a
technology becomes obsolete with no resale value).
Worked example – retirement with no proceeds
Example 4: Abandoned software licence
A software licence with a carrying amount of $30,000 becomes
obsolete mid-year following a system migration. It has no resale
value and generates no further benefit.
Loss on derecognition = 0 − 30,000 = $(30,000) → SOPL, written off in full.
Dr
Loss on derecognition $30,000
SOPL
Cr
Intangible asset (net carrying amount) $30,000
SOFP
Unlike PPE, there is rarely a revaluation surplus to transfer on
derecognition, since most intangibles are held under the cost model.
9
Disclosure Requirements
Required disclosures for each class of intangible asset
MEASUREMENT & RECONCILIATION
Whether useful lives are finite or indefinite, and if finite,
the lives/amortisation rates used Amortisation methods used for finite-life assets Gross carrying amount and accumulated amortisation (and
impairment) at the beginning and end of the period Line item(s) of the statement of profit or loss in which
amortisation is included A reconciliation of carrying amount at the beginning and end of
the period (additions, disposals, amortisation, impairment,
revaluation movements)
ADDITIONAL DISCLOSURES
Aggregate amount of research and development expenditure
recognised as an expense during the period For indefinite-life assets: the carrying amount and the reasons
supporting the indefinite-life assessment Existence and carrying amounts of intangible assets pledged as
security or subject to restrictions on title Amount of contractual commitments for the acquisition of
intangible assets
10
Critical Judgments & Estimates
Where management judgement matters most
SIGNIFICANT ESTIMATES (IAS 8 – reviewed annually)
Useful life of each finite-life intangible Residual value (usually assumed nil) Amortisation method reflecting the pattern of benefit
consumption
SIGNIFICANT JUDGEMENTS
Identifying the point at which technical feasibility is
achieved, triggering development cost capitalisation Whether an asset has a finite or indefinite useful life Whether expenditure meets the "identifiability" test (separable
or arises from legal/contractual rights) or is simply an
internally generated cost that must be expensed
Subsequent expenditure on an already-recognised intangible asset
(e.g. ongoing brand advertising, staff training) is almost always
expensed – it is very rare that further capitalisation is permitted,
because such spend usually cannot be separately attributed to the
asset rather than the business as a whole.
11
IFRS vs US GAAP – Key Differences
Comparison – IAS 38 vs US GAAP (ASC 350 / ASC 730)
FeatureIFRS (IAS 38)US GAAP
Development costsCapitalised once PIRATE criteria metGenerally expensed as incurred (very limited exceptions, e.g.
certain software)
Revaluation modelPermitted, only if active market existsNOT permitted – historical cost only
Research costsAlways expensedAlways expensed (same principle)
Impairment test trigger (finite-life)Indicator-based (IAS 36)Indicator-based (similar), but different quantitative test
mechanics
Impairment reversalPermitted for finite-life assets (never for goodwill)Prohibited – never reversed
The development-cost treatment is the single most heavily examined
IFRS vs US GAAP difference for IAS 38 – under US GAAP, most software
and R&D spend hits the income statement immediately, producing
materially lower reported intangible assets and higher expenses in the
development period.
12
Statement Mapping – Where Every Intangible Asset Event Lands
Comprehensive event-to-statement mapping table
Event / transactionStatement(s) affectedNotes
Purchase of an intangible asset (separate acquisition)SOFPRecognised at cost
Research expenditureSOPLExpensed as incurred – never capitalised
Development expenditure meeting PIRATE criteriaSOFPCapitalised as an intangible asset; no SOPL charge at recognition
Development expenditure NOT meeting criteriaSOPLExpensed as incurred
Annual amortisation charge (finite life)SOPL SOFPExpense in SOPL; accumulated amortisation reduces SOFP carrying
amount
Indefinite-life asset – no amortisation–No annual charge; carrying amount unchanged until impaired or
reclassified
Upward revaluation (active market only)OCI Equity SOFPNo SOPL impact; rare in practice
Impairment loss (annual mandatory test or trigger-based)SOPL SOFPDirect expense per IAS 36; goodwill impairment never reversed
Disposal – gain/lossSOPL SOFPPresented as other income/expense, not revenue
Cash paid for intangible asset purchases / capitalised
development spendCash Flow StatementInvesting activities outflow (IAS 7)
Proceeds from disposalCash Flow StatementInvesting activities inflow (IAS 7)
Amortisation add-backCash Flow StatementAdded back in operating activities under indirect method
(non-cash item)
Class-level disclosures (useful life, R&D expense,
reconciliation)NotesRequired regardless of measurement model used
13
Related Standards – Cross-Reference Map
How IAS 38 connects across the IFRS body of literature
StandardNature of the connection
IFRS 3Governs goodwill and identifiable intangibles acquired in a
business combination – recognised at acquisition-date fair value
even if they wouldn't otherwise meet IAS 38's recognition test
standalone
IAS 36Provides the impairment testing mechanics (recoverable amount,
CGUs, mandatory annual tests, reversal rules) for intangibles and
goodwill
IAS 16Shares the recognition/measurement architecture with IAS 38 (cost
model, revaluation model, componentisation logic) – the
tangible-asset counterpart
IFRS 16Right-of-use assets are excluded from IAS 38's scope even when
the underlying asset is intangible in nature (e.g. leased software
rights)
IAS 2Intangible assets held for sale in the ordinary course of
business (e.g. software developed for resale as inventory) fall
under IAS 2, not IAS 38
IFRS 15Costs to fulfil or obtain a contract with a customer may be
capitalised under IFRS 15's own criteria, which interact with but
are distinct from IAS 38's development criteria
IAS 12Revaluation surpluses on intangibles create taxable temporary
differences, generating a deferred tax liability recognised
through OCI
IFRS 9Distinguishes intangible assets from financial assets –
contractual rights to receive cash are financial assets under IFRS
9, not intangibles under IAS 38
IAS 8Governs how changes in useful life, residual value, and
amortisation method are treated (prospective, as changes in
estimate)
IAS 1Determines where intangible assets sit on the SOFP (non-current
assets) and the general presentation framework the related
disclosures sit within
IFRS 5Once classified as held for sale, an intangible asset exits IAS
38's amortisation regime and switches to the
lower-of-CA-and-FVLCTS rule
14
Quick-Reference Glossary
Goodwill
The excess of consideration transferred over the net identifiable assets acquired in a business combination – never recognised internally, only on acquisition (IFRS 3).
Useful life
The period over which an asset is expected to be available for use, or the number of production/similar units expected to be obtained from it – may be finite or indefinite for intangibles.
Separability
The capability of being separated from the entity and sold, transferred, licensed, rented, or exchanged, either individually or with a related contract/asset/liability.
PIRATE criteria
The six mandatory conditions (Probable benefits, Intention, Resources, Ability, Technical feasibility, Expenditure reliably measured) for capitalising development costs.
Recoverable amount
Higher of fair value less costs of disposal and value in use (IAS 36).
Class of intangible assets
A grouping of assets of similar nature/use (e.g. patents, licences, software, brands) used for disclosure and policy application.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
Feb-1977
Exposure Draft E9 Accounting for Research and Development Activities
Jul-1978
IAS 9 (1978) Accounting for Research and Development Activities issued
Effective 1 January 1980
Aug-1991
Exposure Draft E37 Research and Development Costs published
Dec-1993
IAS 9 (1993) Research and Development Costs issued
Operative for annual financial statements covering periods beginning on or after 1 January 1995
Jun-95
Exposure Draft E50 Intangible Assets published
Aug-97
E50 was modified and re-exposed as Exposure Draft E59 Intangible Assets
Sep-1998
IAS 38 Intangible Assets issued
Operative for annual financial statements covering periods beginning on or after 1 July 1998
31-Mar-2004
IAS 38 Intangible Assets issued
Applies to intangible assets acquired in business combinations occurring on or after 31 March 2004, or otherwise to other intangible assets for annual periods beginning on or after 31 March 2004
22-May-2008
Amended by Improvements to IFRSs (advertising and promotional activities, units of production method of amortisation)
Effective for annual periods beginning on or after 1 January 2009
16-Apr-2009
Amended by Improvements to IFRSs (measurement of intangible assets in business combinations)
Effective for annual periods beginning on or after 1 July 2009
12-Dec-2013
Amended by Annual Improvements to IFRSs 2010-2012 Cycle (proportionate restatement of accumulated depreciation under the revaluation method)
Effective for annual periods beginning on or after 1 July 2014
12-May-2014
Amended by Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)
Effective for annual periods beginning on or after 1 January 2016