IAS 38: Intangible assets · Trial Balance

New to this topic?

What it is: IAS 38 is the standard for intangible assets. These have value but you cannot touch them, such as software, patents, licences and brand names.

Bought intangibles: Show them at cost as an asset.

Intangibles the business creates itself: Split the spending into two stages. Research (finding out if an idea could work) is always an expense. Development (turning a working idea into a product) becomes an asset only when the product is proven to work, will be finished, and will make money.

Example. A games studio spends £40,000 testing ideas. This is research, so it is an expense. It then spends £150,000 building a game that is proven to work and will sell. This is development, so the £150,000 is an asset.

Key words

Intangible asset: A long-term asset with no physical form that can be separated or comes from a legal right, such as software, patents or licences.Example: A patent bought for £50,000.
Research: Original work to find new knowledge. Its cost is always an expense.Example: Testing new coffee packaging materials in a laboratory.
Development: Using research results to design or build a specific new product or process. Its cost can be recorded as an asset once strict conditions are met.Example: Building and testing a new app after proving the idea works.
Amortisation: Spreading the cost of an intangible asset (one you cannot touch, such as software or a patent) as an expense over the years it is used. It works in the same way as depreciation.Example: A patent costing £50,000 that lasts 10 years gives amortisation of £5,000 each year.
Indefinite useful life: When there is no foreseeable end to the time an intangible asset will bring benefits. The asset is not amortised, but it is tested for impairment every year.Example: A broadcasting licence that can be renewed forever at little cost may have an indefinite useful life.

Learn

An intangible asset has no physical form but can be identified separately. It is not money. Examples: software, patents, licences, customer lists.

When to include one

Include it when it will probably bring money in and its cost can be measured reliably.

Bought on its own, or as part of buying a business: usually included.
Brands, customer lists and goodwill the company built itself: never included. Their cost cannot be separated from the cost of running the business as a whole.

Research and development

Research (looking for new knowledge): always an expense.
Development (using that knowledge to make a specific product or process): becomes an asset from the date all six conditions below are met. Before that date, it is an expense.

Condition (PIRATE)	What it means
Probable future benefits	There is a market for it, or it will be useful inside the business
Intention to complete	The company plans to finish it and use or sell it
Resources available	There is enough money and staff to finish it
Ability to use or sell	The company is able to use or sell the result
Technically feasible	It can be made to work
Expenditure measurable	The costs can be measured reliably

Example: A company spends £30,000 from January to March. All six conditions are met on 1 April. It then spends £90,000 from April to December. Expense = £30,000. Asset = £90,000.

After it is included

Finite life (it has an end date): amortise it (spread the cost) over its useful life, starting when it is ready to use. Example: £90,000 over 5 years = £18,000 a year.
Indefinite life (no end date): do not amortise it, but test it for impairment every year.
The revaluation model is only allowed if there is an active market with published prices. This is rare for intangible assets.

Watch it explained

Press play to watch the animation, or step through it at your own pace with the arrows.

Videos from YouTube tutors

These videos are made by independent tutors on YouTube, not by Trial Balance. Some use US terms or older exam names (for example F7 for FR), but the principles are the same.

Worked example

A company spends £40,000 on research into new materials from January to March. From April it spends £120,000 developing a product. All the PIRATE criteria are met from 1 July. Development costs were spread evenly (£20,000 a month).

Cost	£	Treatment
Research, January to March	40,000	Expense
Development, April to June	60,000	Expense (criteria not yet met)
Development, July to September	60,000	Capitalise
Total expensed	100,000
Total capitalised	60,000	Amortise once the product is available for use

Practice questions

Type or choose your answers, then press Check answer. Questions with a New numbers button can be repeated with different figures.