Intangible Assets

It is a separable asset with non-monetary value and without physical substance. 

An intangible asset is one of the important standards of 'The International Financial Reporting Standards (IFRS). It is referred to as 'IAS 38 - Intangible Assets.' IASB, the UK accounting body, developed this standard.

An Intangible asset, as the term signifies, is a separable asset with non-monetary value and without physical substance. 

Quoting the definition formed by IFRS, these assets are "identifiable, non-monetary assets without a physical substance." Examples of these assets include –

These assets tend to arise due to contractual agreements or legal rights. Although goodwill is a part of these assets, it is specifically the internally generated goodwill rather than the one gained due to the business combination.

IAS 38 - Intangible Assets was developed in April 2001 by the International Accounting Standards Board (IASB). It was initially established in September 1998 by the International Accounting Standards Committee. 

This standard was formed to replace IAS 9 - Research & Development costs in 1993. IAS 9 - Research & Development was formed to replace an older version known as Accounting for Research and Development Activities - July 1978.


In May 2014, the standard (IAS-38) was amended by IASB to explain the revenue-based amortization method.

Identifiable Vs. Unidentifiable Assets

The thought of internationally recognized brands in the apparel industry reminds us of top-notch companies that rule the International market, such as Nike, Louis Vuitton, GUCCI, and many more. This indicates the importance of intangibles (brand name, goodwill, etc.) to rule the world successfully. 

Akin to that, these assets are categorized into two: 

1. Identifiable Assets

An asset is said to be identifiable when a value can be assigned, and it has the potential to provide fruitful returns in the future. Therefore, companies can sell or purchase them as they are separated from other assets. 

The purchasing company records identifiable assets as a part of assets in the Balance Sheet. Examples of identifiable assets are trademarks, patents, copyrights, and logos. 

2. Unidentifiable Assets

An asset is considered unidentifiable when it cannot be separable from the business. Examples of unidentifiable assets are goodwill, brand, customer lists, and publishing titles.

Unidentifiable assets are not separable from the business because they can be disposed of only if the whole or part of the business is sold. This prevents the assets from being recognized as non-current assets

These assets are referred to as 'Internally generated Intangible assets. These are assets formed by the entity as a result of its performance. 

However, IAS 38 does not completely prohibit the recognition of internally generated intangibles, yet it prohibits the asset from being recognized as a non-current asset. This is because entities often can't distinguish the asset separately from the business. 

Nevertheless, if internally generated assets are purchased from other firms, it is likely to be recognized as an asset because the asset purchased is separable from the business. 

Recognition Criteria

As per IAS 38 - these assets are recorded at cost. Therefore, two criteria need to be met to recognize an asset as an Intangible asset - IAS 38. 

1. The entity must control assets:  

As a result of past events, the asset must be in control of the entity. In terms of control, the asset must completely own the entity due to purchase or acquisition. In addition, the firm must have the legal rights to use this asset. 

For example, the legal right to use copyrights. However, it is quite complex to achieve or prove the ownership of an asset because many firms tend to capitalize costs of staff training or customer loyalty. This does not qualify for ownership as a firm does not control the staff.

The reason for not recognizing staff training as an intangible asset or control and ownership is that although the skills are an asset for the company, they cannot control the staff decisions, e.g., A staff member resigning takes with them the skills they have acquired from the training.

2. The entity expects future economic benefits to flow:

An asset qualifies as an intangible asset if the resource generated from it is likely to provide the entity with future economic benefits. For example, an entity purchasing goodwill can result in plausible future economic benefits for the firm.

The cost is amortized once the asset starts generating commercial benefits.


This asset is recognized as Research or Development cost and capitalized or expensed based on certain criteria. 

Accounting Treatment of Intangible Assets 

While accounting for these assets, one of the crucial issues is to identify whether it must be treated as an expense and included in the statement of profit and loss or whether it should be capitalized and treated as a long-term asset. 

The treatment is based on Research and Development costs incurred by an entity. 

1. Research

Firstly, what is research? Research is a planned investigation undertaken by the firm to acquire new knowledge and understanding. 

Since it is not possible to decide whether a product will generate future economic benefit, it is stated by IAS 38 that all expenditures incurred at this stage must be expensed and written off in the statement of profit or loss as the expense and will not be capitalized.

2. Development

Development is the application of research revelations to formulate the plan and design. 

These assets are recognized and development expenditures only if they meet the 'PIRATEcriteria, which are as follows:

  • Probable future economic benefits from this asset, whether acquired from the sale or internal cost saving. 
  • Intention to complete and develop this asset to use in the future. 
  • Availability of the required Resources to complete the development of this asset.
  • Ability to make use of or sell this asset. 
  • Technical attainability of completing this asset development to make use of it.
  • Expenses accountable to intangible assets being developed can be measured. 

If the criteria mentioned above are met, then the expenditure incurred by the firm is capitalized.

Considering amortization, the development expenditure is amortized over its useful life once production begins. Initially, it is recorded as a cost, but after initial recognition, the asset is measured as 'Cost less accumulated amortization.' Amortization, as we know, is equivalent to depreciation used for Tangible assets. 

It is important to review each development project at the end of the accounting period to ensure that it meets the 'PIRATE' criteria to eliminate the possibility of accounting for unqualified intangible assets as a capitalized expenditure. 

This asset is amortized and susceptible to impairment testing, provided it has a fixed useful life. However, if the asset has an eternal useful life, it is susceptible to only annual impairment testing and not amortization.

Key Takeaways

  • Assets that arise due to contractual agreements and do not have a physical substance are considered intangible assets.
  • Internally generated assets are unidentifiable assets.
  • The goodwill purchased can be recognized as this asset.
  • Research expenditure is always expensed in the statement of profit/loss. 
  • Development expenditure is capitalized if it meets the 'PIRATEcriteria.
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Researched and authored by Syeda Huda Imran | LinkedIn

Reviewed and edited by Parul Gupta LinkedIn 

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