Key Points
- An intangible asset must be identifiable, controlled by the entity, and expected to generate future economic benefits before it qualifies for recognition.
- Internally generated brands, mastheads, customer lists, and similar items are never recognised as intangible assets under IAS 38.63.
- Development costs qualify for capitalisation only when all six criteria in IAS 38.57 are satisfied; research costs are always expensed.
- Intangible assets with indefinite useful lives are not amortised but must be tested for impairment at least annually under IAS 36.
What is Intangible Asset?
IAS 38.8 defines an intangible asset through three characteristics: identifiability, control, and future economic benefits. Identifiability means the asset is either separable (capable of being sold, transferred, or licensed independently) or arises from contractual or legal rights (IAS 38.12). Control exists when the entity can obtain the future economic benefits flowing from the asset and restrict others from accessing those benefits.
Recognition follows two paths. Separately acquired intangible assets (patents, licences, software purchased from a third party) meet the recognition criteria at acquisition because the purchase price itself constitutes evidence that the probability criterion is satisfied (IAS 38.25–26). Internally generated intangible assets face a stricter gate: the entity must demonstrate technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, availability of resources, and reliable cost measurement (IAS 38.57). Costs incurred before all six criteria are met fall into the research phase and go straight to the income statement.
After recognition, the entity measures the intangible asset under either the cost model or the revaluation model (permitted only when an active market exists, which is rare for intangibles). IAS 38.97 requires amortisation over the useful life for finite-life intangibles. For indefinite-life intangibles, amortisation is prohibited; instead, IAS 36 mandates annual impairment testing. ISA 540.13(a) requires the auditor to evaluate whether the entity's method for measuring the intangible is appropriate, which in practice means scrutinising the useful-life determination and the capitalisation-versus-expense boundary for development costs.
Worked example: O'Sullivan Tech Ltd
Client: Irish SaaS company, FY2025, revenue EUR 8M, IFRS reporter. O'Sullivan is developing a new analytics module for its existing platform. The project moved from research into development on 1 July 2025, when the technical feasibility milestone was reached. Total costs incurred from 1 January to 30 June 2025 (research phase) were EUR 190,000. From 1 July to 31 December 2025 (development phase), O'Sullivan incurred EUR 310,000 in salaries for four dedicated developers and EUR 45,000 in cloud infrastructure costs directly attributable to building the module.
Step 1 — Classify costs between research and development
The EUR 190,000 incurred before the technical feasibility milestone on 1 July 2025 is research expenditure. IAS 38.54 requires immediate expensing. The EUR 355,000 incurred from 1 July onward is a candidate for capitalisation.
Step 2 — Test the six capitalisation criteria in IAS 38.57
Technical feasibility was demonstrated through the working prototype. O'Sullivan's board approved completion funding in June 2025 (intention to complete). The module will be integrated into the existing platform sold to 420 subscribers (ability to use or sell). Revenue projections show incremental annual recurring revenue of EUR 680,000 (probable future economic benefits). The board approved a budget of EUR 400,000 for the development phase (adequate resources). Costs are tracked per project in O'Sullivan's time-recording system (reliable measurement).
Step 3 — Measure the intangible asset at 31 December 2025
The capitalised amount is EUR 355,000 (developer salaries of EUR 310,000 plus directly attributable cloud infrastructure of EUR 45,000). General overhead and selling costs are excluded per IAS 38.67.
Step 4 — Determine useful life and amortisation
The module is expected to generate economic benefits for four years before a full platform rebuild. Useful life is finite at four years. Amortisation begins when the asset is available for use (expected launch date: 1 March 2026). No amortisation is recognised in FY2025 because the asset is not yet available for use at the reporting date.
Conclusion: O'Sullivan recognises an intangible asset of EUR 355,000, with the EUR 190,000 research phase expensed. The capitalisation is defensible because each of the six IAS 38.57 criteria is evidenced, costs are directly attributable, and the useful-life estimate ties to the product roadmap.
Why it matters in practice
Teams frequently capitalise development costs from the project start date rather than from the date all six IAS 38.57 criteria are demonstrably met. The research-to-development boundary requires specific evidence of technical feasibility, not just a project phase label. ISA 540.13(b) requires the auditor to evaluate whether the assumptions underlying the capitalisation decision are appropriate, which means verifying the feasibility evidence, not merely accepting management's assertion that the project has entered "development."
Entities often default to a finite useful life for all intangible assets without performing the IAS 38.88 assessment of whether the period over which the asset generates net cash inflows has a foreseeable limit. Broadcast licences, taxi medallions, and certain regulatory permits may have indefinite useful lives. Assigning a finite life without documenting the analysis under IAS 38.90 leads to systematic amortisation of an asset that should instead be tested annually for impairment.
Intangible asset vs. goodwill
| Dimension | Intangible asset (IAS 38) | Goodwill (IFRS 3 / IAS 36) |
|---|---|---|
| Identifiability | Must be identifiable (separable or arising from contractual/legal rights) per IAS 38.12 | Not identifiable; represents future economic benefits from assets not individually identified in a business combination |
| How it arises | Separately acquired, internally generated (development phase only), or acquired in a business combination | Arises only in a business combination as the excess of consideration over net identifiable assets |
| Amortisation | Amortised over useful life if finite; not amortised if indefinite | Not amortised under IFRS; tested annually for impairment per IAS 36.10(b) |
| Impairment reversal | Reversible for finite-life intangibles under IAS 36.110; prohibited for indefinite-life intangibles under certain conditions | Never reversible under IAS 36.124 |
| Separate disposal | Can be sold, licensed, or transferred independently | Cannot be sold separately from the business or CGU to which it is allocated |
The distinction matters because intangible assets acquired in a business combination must be identified and measured separately from goodwill under IFRS 3.18. Failing to identify a customer relationship, technology licence, or trade name as a separate intangible inflates goodwill, which then escapes amortisation and sits on the balance sheet until an impairment test catches it.
Related terms
Frequently asked questions
How do I audit the capitalisation of internally generated intangible assets?
Obtain the entity's feasibility assessment and test it against the six criteria in IAS 38.57. Verify the date each criterion was first met by inspecting board minutes, prototype test results, and approved budgets. Any costs incurred before that date must be expensed regardless of how the entity labels the project phase. ISA 540.18 requires the auditor to evaluate whether management's point estimate (the capitalised amount) is reasonable given the evidence.
Can a brand name developed internally be recognised as an intangible asset?
No. IAS 38.63 explicitly prohibits recognition of internally generated brands, mastheads, publishing titles, and customer lists. The standard concludes that expenditure on these items cannot be distinguished from the cost of developing the business as a whole. Only brands acquired in a business combination or separately purchased qualify for recognition.
When does amortisation of an intangible asset begin?
Amortisation begins when the asset is available for use, meaning it is in the condition necessary for it to operate in the manner intended by management (IAS 38.97). For capitalised development costs, this is typically the date the developed product or process is ready for commercial deployment, not the date it first generates revenue.