Recognition and Cost of Intangible Assets (IAS 38)

IAS 38 governs the accounting treatment for intangible assets that are not specifically addressed by another IFRS standard. IAS 38 provides guidance on recognising an expenditure either as an intangible asset or an expense in profit or loss. Moreover, it outlines what should be included in the cost of an intangible asset. The types of expenditures under IAS 38’s scope include software, licences, advertising, brands, prepayments, customer relationships, training, start-up and R&D activities.

According to IAS 38.18 and IAS 38.21-23, an expenditure is recognised as an intangible asset if it satisfies all of the following criteria:

  • Identifiability.
  • Probability of future economic benefits.
  • Control over the future economic benefits.
  • Reliable cost measurement.

IAS 38.24 mandates that an intangible asset is initially recognised at cost and offers application guidance for both separate acquisition of intangible assets and acquisition as part of a business combination.

Let’s dive in.


An asset is identifiable if it is either (IAS 38.12):

Probability of future economic benefits

As stated in IAS 38.25, the criterion for future economic benefits’ probability is always satisfied for separately acquired intangible assets.

Control over future economic benefits

The general concept of control is explored in the Conceptual Framework for Financial Reporting. The most common application of the control criterion in intangible assets pertains to training expenditures and employee expertise, which typically can’t be recognised as assets due to insufficient control over the expected future economic benefits (IAS 38.15).


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Separate acquisition of intangible assets

IAS 38 provides guidance for separate acquisition of intangible assets (IAS 38.25-32) and acquisition as part of a business combination (IAS 38.33-37). The cost of a separately acquired intangible asset can usually be measured reliably (IAS 38.26). Most of the requirements for elements of cost mirror those in IAS 16, with the specific ones related to intangible assets discussed separately.

It is important to distinguish between the separate acquisition of intangible assets and the procurement of services used by the entity to internally develop an intangible asset. In the case of the latter, the guidelines for internally generated intangible assets apply.

Prepayments and prepaid expenses

Paragraph IAS 38.70 notes that prepayments can be recognised as assets, even if the goods or services received will be recognised as an expense. Such an asset represents the right to receive goods or services. See the example below and IAS 38.BC46A-BC46I for more discussion by the IASB. Please note that IFRS 15 deals with the capitalisation of costs incurred to obtain or fulfil a contract with a customer.

Example: Prepayment on advertising services

On 1 May, Entity A orders promotional samples of its products for a new commercial period at a total cost of $1m. On the same day, it pays an advance of $0.3m to the manufacturing company. The samples are delivered to Entity A on 1 August and dispatched to customers on 1 September. On 1 May, Entity A recognises a prepayment of $0.3m as an asset. This represents the right to receive samples or a refund if the manufacturing company fails to deliver. On 1 August, Entity A recognises expenses in P/L amounting to $1m as the samples are delivered. The timing of the delivery to customers at a later date is irrelevant (IAS 38.69A).

Goods acquired for promotional activities

All expenditures on promotional or advertising activities fall within the scope of IAS 38. These expenditures are always recognised immediately in P/L as a revenue expense. This applies even when the entity acquires a tangible asset (IAS 38.5, 69(c)). Refer to the agenda decision regarding a pharmaceutical entity that acquires goods (such as refrigerators, air conditioners, and watches) to distribute to doctors as part of its promotional activities.

Software as a Service (SaaS)

Software as a Service (SaaS) is a common type of cloud computing arrangement where software applications are hosted remotely on a provider’s servers and made available to users over the internet. Rather than purchasing and installing software on individual computers or servers of a company, employees can access and use the software, typically through a web browser, on a subscription basis. The service provider hosts the software, manages the associated infrastructure, and installs updates. This model allows for easier maintenance and reduced upfront costs for companies using the software.

The IFRS Interpretations Committee published two agenda decisions regarding SaaS arrangements:

  • March 2019 agenda decision: This decision focuses on whether a customer receives a software asset or merely a service when they pay a fee for access to software hosted by the supplier on a cloud infrastructure. The Committee concluded that in cases where the customer only has access rights without significant control or economic benefits typically associated with ownership, the arrangement does not constitute a software asset. Instead, the fees are treated as payments for a service, with the associated costs being expensed as they are incurred.
  • April 2021 agenda decision: This decision concerns the accounting of costs involved in configuring or customising software in SaaS arrangements, which are generally recognised as an expense, not an asset. Configuration involves setting parameters within the application software, while customisation may involve modifying software code. The recognition of these activities as expenses rather than assets aligns with the principle that the customer does not control the software or the enhancements resulting from these services, hence cannot capitalise these costs as intangible assets.

Learn more in these publications by Deloitte, PWC and GrantThornton.

Subsequent expenditure

IAS 38 imposes stringent requirements on capitalising subsequent expenditure on intangible assets. IAS 38.20 states: ‘most subsequent expenditures are likely to maintain the expected future economic benefits embodied in an existing intangible asset rather than meet the definition of an intangible asset and the recognition criteria in IAS 38. In addition, it is often difficult to attribute subsequent expenditure directly to a particular intangible asset rather than to the business as a whole.

Therefore, only rarely will subsequent expenditure be recognised in the carrying amount of an asset. In particular, subsequent expenditure on brands, mastheads, publishing titles, customer lists and items similar in substance (whether externally acquired or internally generated) is always recognised in profit or loss as incurred. This is because such expenditure cannot be distinguished from expenditure to develop the business as a whole.’

Acquisition as part of a business combination

As noted earlier, IAS 38 provides guidance for both separate acquisition of intangible assets (IAS 38.25-32) and acquisition as part of a business combination (IAS 38.33-37). The cost of an asset acquired as a part of a business combination is its fair value at the acquisition date, which aligns with IFRS 3 requirements. More on recognising intangible assets acquired as part of a business combination can be found in Identifiable assets.

Exchange of assets

Asset exchanges are dealt with in IAS 38.45-47. These requirements mirror those of IAS 16.

Internally generated intangible assets

Framework for recognising internally generated intangible assets

IAS 38 provides a comprehensive framework for the recognition of internally generated intangible assets. It assists in identifying if there is an identifiable asset that is expected to produce future economic benefits and determining the asset’s cost reliably. To aid this process, IAS 38.51-52 breaks down the asset’s generation into research and development phases.

Note that intangible assets can be internally created with contributions from external entities. However, the acquisition of a service from a third party that contributes to an intangible asset doesn’t automatically justify capitalising such expenditure. It must be evaluated against the general criteria for capitalising internally generated intangible assets.

Research phase

Research (as defined in IAS 38.8) is an original and planned investigation carried out with the aim of acquiring new scientific or technical knowledge and understanding. Paragraph IAS 38.56 provides examples of research activities such as gaining new knowledge or exploring alternative solutions.

Expenditures on research, or the research phase of an internal project, must be expensed in profit or loss when incurred. This is because an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits (IAS 38.54-55).

Development phase

Development (as defined in IAS 38.8) involves applying research findings or other knowledge to a plan or design for creating new or significantly improved materials, devices, products, processes, systems, or services before commercial production or use commences. Paragraph IAS 38.59 gives examples of development activities like the design, construction, and testing of prototypes or pilot projects.

Expenditures on development, or the development phase of an internal project, are recognised as intangible assets if an entity can demonstrate all of the following (IAS 38.57):

  • The technical feasibility of completing the intangible asset to make it available for use or sale.
  • Its intention to complete and use or sell the intangible asset.
  • Its ability to use or sell the intangible asset.
  • How the intangible asset will generate probable future economic benefits.
  • The availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset.
  • Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

These criteria aren’t easily applied to intangible assets created by entities for internal use, like internally used software. Regrettably, IAS 38 doesn’t offer specific guidance for such intangible assets. A notable exception relates to website costs covered by SIC-32, which might provide analogies for other intangible assets generated for internal purposes. Generally, the planning phase should be treated as the research phase under IAS 38 and expensed in P/L.

Website costs

The SIC-32 Interpretation ‘Website Costs’ offers specific guidance on expenditure related to an internally generated website. This interpretation links the typical phases of website development to the IAS 38’s classification into research and development phases. It also provides a helpful illustrative example.

Internally generated goodwill, brands, customer lists and similar items

Internally generated goodwill, brands, customer lists, and similar items cannot be recognised as assets because expenditure on them can’t be differentiated from the cost of developing the business as a whole (IAS 38.48-50, 63-64).

Cost of internally generated intangible assets

The cost of an internally generated intangible asset includes expenditure incurred from the date all the criteria for recognising the intangible asset are met, including distinguishing between research and development costs (IAS 38.65). As mentioned earlier, most requirements relating to elements of cost for a separately acquired intangible asset mirror those in IAS 16.

Expenditure on an intangible item initially recognised as an expense in P/L cannot be recognised as part of the cost of an intangible asset at a later date (IAS 38.71). Such a transfer from P/L to assets would indicate a correction of error and should be accounted for under IAS 8.

Recognition as an expense

When an expenditure on an intangible item fails to meet the recognition criteria set out in IAS 38, it should be recognised as an expense in P/L as it is incurred, unless it is part of goodwill recognised under IFRS 3 (IAS 38.68). To put it differently, such expenses cannot be distributed over time in P/L even if they are intended to yield future economic benefits to the entity. IAS 38.69 provides examples of expenditures that are expensed in P/L as incurred:

  • Start-up activities.
  • Training activities.
  • Advertising and promotion.
  • Relocating or reorganising part or all of an entity.

An expense is recognised when goods or services are received, or as IAS 38.69A precisely articulates, when the entity obtains the right to access those goods or services, not when the entity utilises them to deliver another service, for example, to deliver an advertisement to customers.

More about IAS 38

See other pages relating to IAS 38:

IAS 38 Intangible Assets: Scope, Definitions and Disclosure
IAS 16 and IAS 38: Depreciation and Amortisation of Property, Plant and Equipment and Intangible Assets
IAS 16 and IAS 38: Revaluation Model for Property Plant and Equipment and Intangible Assets

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