In many instances, intangibles are generated internally by an entity, rather than being acquired via a business combination or some other purchase transaction. Because of the nature of intangibles, the measurement of the cost is constrained by the fact that many of the costs have already been expensed by the time the entity is able to determine that an asset has indeed been created.


For example, when launching a new magazine, an entity may have to operate the magazine at a loss in its early years, expensing large promotional and other costs which all flow through profit or loss, before such time as the magazine can be determined to have become established, and have branding that might be taken to represent an intangible asset.

At the point the brand is determined to be an asset, all the costs of creating it have already been expensed, and no retrospective adjustment is allowed to create a recognized asset. IAS 38 provides that internally generated intangible assets are to be capitalized and amortized over the projected period of economic utility, provided that certain criteria are met.

Expenditures pertaining to the creation of intangible assets are to be classified alternatively as being indicative of, or analogous to, either research activity or development activity. The former costs are entirely expensed as incurred; the latter are capitalized, if future economic benefits are reasonably likely to be received by the reporting entity. Per IAS 38:

1. Costs incurred in the research phase are expensed immediately; and

2. If costs incurred in the development phase meet the recognition criteria for an intangible asset, such costs should be capitalized. However, once costs have been expensed during the development phase, they cannot later be capitalized.

In practice, distinguishing research-like expenditures from development-like expenditures might not be easily accomplished. This would be especially true in the case of intangibles for which the measurement of economic benefits cannot be accomplished in anything approximating a direct manner.

Assets such as brand names, mastheads, and customer lists can prove quite resistant to such direct observation of value (although in many industries there are rules of thumb, such as the notion that a customer list in the securities brokerage business is worth $1,500 per name, implying the amount of promotional costs a purchaser of a customer list could avoid incurring itself).

Thus, entities may incur certain expenditures in order to enhance brand names, such as engaging in image-advertising campaigns, but these costs will also have ancillary benefits, such as promoting specific products that are being sold currently, and possibly even enhancing employee morale and performance.

While that may be argued that the expenditures create or add to an intangible asset, as a practical matter it would be difficult to determine what portion of the expenditures relate to which achievement, and to ascertain how much, if any, of the cost may be capitalized as part of brand names. Thus, it is considered to be unlikely that threshold criteria for recognition can be met in such a case. For this reason IAS 38 has specifically disallowed the capitalization of internally generated assets like brands, mastheads, publishing titles, customer lists, and items similar in substance to these.

Apart from the prohibited items, however, IAS 38 permits recognition of internally created intangible assets to the extent the expenditures can be analogized to the development phase of a research and development program. Thus, internally developed patents, copyrights, trademarks, franchises, and other assets will be recognized at the cost of creation, exclusive of costs which would be analogous to research, as further explained in the following paragraphs.

The Basis for Conclusion to IAS 38 notes that “some view these requirements and guidance as being too restrictive and arbitrary” and that they reflect the standard setter’s interpretation of the recognition criteria, but it agrees that they reflect the fact that it is difficult in practice to determine whether there is an internally generated asset separate from internally generated goodwill.

When an internally generated intangible asset meets the recognition criteria, the cost is determined using the same principles as for an acquired tangible asset. Thus, cost comprises all costs directly attributable to creating, producing, and preparing the asset for its intended use.

IAS 38 closely mirrors IAS 16 with regard to elements of cost that may be considered as part of the asset, and the need to recognize the cash equivalent price when the acquisition transaction provides for deferred payment terms. As with self-constructed tangible assets, elements of profit must be eliminated from amounts capitalized, but incremental administrative and other overhead costs can be allocated to the intangible and included in the asset’s cost. Initial operating losses, on the other hand, cannot be deferred by being added to the cost of the intangible, but rather must be expensed as incurred.

The standard takes this view based on the premise that an enterprise cannot demonstrate that the expenditure incurred in the research phase will generate probable future economic benefits, and consequently, that an intangible asset has been created (therefore, such expenditure should be expensed).

Examples of research activities include: activities aimed at obtaining new knowledge; the search for, evaluation, and final selection of applications of research findings; and the search for and formulation of alternatives for new and improved systems, etc.

The standard recognizes that the development stage is further advanced towards ultimate commercial exploitation of the product or service being created than is the research stage. It acknowledges that an enterprise can possibly, in certain cases, identify an intangible asset and demonstrate that this asset will probably generate future economic benefits for the organization.

Accordingly, IAS 38 allows recognition of an intangible asset during the development phase, provided the enterprise can demonstrate all of the following:

  • Technical feasibility of completing the intangible asset so that it will be available for use or sale;
  • Its intention to complete the intangible asset and either use it or sell it;
  • Its ability to use or sell the intangible asset;
  • The mechanism by which the intangible 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; and
  • The entity’s ability to reliably measure the expenditure attributable to the intangible asset during its development.

Examples of development activities include: the design and testing of preproduction models; design of tools, jigs, molds, and dies; design of a pilot plant which is not otherwise commercially feasible; design and testing of a preferred alternative for new and improved systems, etc.