IAS 38 Intangible Assets distinguishes between the research phase and the development phase when assessing internal expenditure on a project. Research costs are always recognised as an expense when incurred, while development costs are capitalised as an intangible asset only if the entity can demonstrate six criteria together.
The General Rule for Recognising an Intangible Asset
The Standard provides that an intangible asset shall be recognised if, and only if, it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity, and the cost of the asset can be measured reliably. These two criteria underlie how internal research and development expenditure is treated.
The Difference Between Research and Development
The Standard defines research as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development is defined as the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services, before the start of commercial production or use.
Why Is No Asset Recognised From the Research Phase?
The Standard states expressly that no intangible asset arising from research (or from the research phase of an internal project) shall be recognised, and that expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred. The reason is that, in the research phase, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits.
The Standard gives examples of research activities, including activities aimed at obtaining new knowledge, and the search for, evaluation and final selection of, applications of research findings or other knowledge.
The Six Criteria for Recognising a Development Asset
The Standard provides that an intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following:
- the 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 use or sell it;
- 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; and
- its ability to measure reliably the expenditure attributable to the intangible asset during its development.
If an entity cannot distinguish the research phase from the development phase of an internal project, it treats the expenditure on that project as if it were incurred in the research phase only.
Examples of development activities given by the Standard include the design, construction and testing of pre-production or pre-use prototypes and models, and the design of tools, jigs, moulds and dies involving new technology.
Items That Are Never Capitalised, Whatever the Expenditure
The Standard states that internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets, because the expenditure on them cannot be distinguished from the cost of developing the business as a whole.
Legal References
- IAS 38 — Intangible Assets, paragraph 21 (general rule for recognising an intangible asset)
- IAS 38 — Intangible Assets, paragraph 8 (definitions of research and development)
- IAS 38 — Intangible Assets, paragraph 54 (no asset recognised from the research phase)
- IAS 38 — Intangible Assets, paragraph 56 (examples of research activities)
- IAS 38 — Intangible Assets, paragraph 57 (the six criteria for recognising a development asset)
- IAS 38 — Intangible Assets, paragraph 59 (examples of development activities)
- IAS 38 — Intangible Assets, paragraph 63 (exclusion of internally generated brands and customer lists)
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