Financial Accounting · Intangible non-current assets and amortisation

Intangible Assets and IAS 38 Recognition Criteria

Updated 11 October 2026 · Fact-checked

An intangible asset is an identifiable non-monetary asset without physical substance, such as a licence, patent or brand. Under IAS 38 you recognise it only if it is identifiable, the entity controls it, future economic benefits are probable, and its cost can be measured reliably. Otherwise you expense the cost.

Understand Intangible Assets and IAS 38 Recognition Criteria

A non-current asset is held for use over more than one year. Tangible ones, like machinery, have physical form. An intangible asset has no physical form. Examples are licences, patents, copyrights, trademarks, brands, software and franchises.

IAS 38 defines an intangible asset as an identifiable non-monetary asset without physical substance. Receivables are not intangible, because they are monetary. Inventory and machinery are not intangible, because they are physical.

Three features must be present. Identifiable means the item is separable (it can be sold, licensed or rented on its own) or arises from contractual or legal rights. Control means the entity can obtain the benefits and stop others from getting them, usually through legal rights. Future economic benefits mean the asset will bring in revenue or reduce costs.

To recognise the asset you also need two tests: it is probable that the benefits will flow to the entity, and the cost can be measured reliably. If any test fails, the spending is an expense in profit or loss when incurred.

Goodwill needs care. Purchased goodwill arises when you buy a business for more than the fair value of its net identifiable assets. It is recognised as an intangible asset. Internally generated goodwill, and internally generated brands, mastheads and customer lists, must never be recognised, because their cost cannot be separated from the cost of running the business.

Key formulas to remember

Definition of an intangible asset: Identifiable + non-monetary + no physical substance; All three parts are needed. Receivables fail the non-monetary test.
Recognition criteria (IAS 38): Definition met + future economic benefits probable + cost measured reliably; The definition includes identifiability, control and future economic benefits. If any test fails, expense the cost.
Purchased goodwill: Goodwill = consideration paid − fair value of net identifiable assets acquired; Recognised only on acquisition of a business. Never recognise internally generated goodwill.
Initial measurement of a separately acquired intangible: Cost = purchase price + import duties and non-refundable taxes + directly attributable costs − trade discounts; Costs of staff training and general overheads are excluded.
Items never capitalised if internally generated: Brands, mastheads, publishing titles, customer lists, goodwill; These are expensed even if the business believes they have value.

How to solve Intangible Assets and IAS 38 Recognition Criteria questions

Use this method for any question asking whether an item is an intangible asset or how to treat spending on it.

1Check the item has no physical substance and is not monetary. If it is physical or monetary, it is not an intangible asset.
2Ask whether it is identifiable: separable, or arising from legal or contractual rights.
3Ask whether the entity controls it, through legal rights or other means to restrict others' access.
4Ask whether future economic benefits are probable, such as revenue or cost savings.
5Ask whether the cost can be measured reliably.
6Decide the source. If purchased separately, capitalise at cost. If internally generated goodwill, brands or similar, expense it.
7If recognised, record Dr Intangible asset, Cr Cash or Payables. If not, record Dr Expense (profit or loss).
8Check the question wording for the number to select or enter, and re-read before confirming.

Quickest way: Four-question filter

When to use it: Use it for multiple choice or multiple response questions where you must pick which items are recognised as intangible assets.

Cross out anything physical or monetary first.
Cross out internally generated goodwill, brands, mastheads and customer lists.
Keep items bought or held through legal rights, such as licences, patents and purchased software.
Treat purchased goodwill as recognised, but only when a business was acquired.
Check amounts: include only directly attributable costs, and exclude training and general overheads.

Common mistakes in Intangible Assets and IAS 38 Recognition Criteria

Capitalising an internally generated brand
Students think a valuable brand must be an asset.
Fix: IAS 38 bans recognising internally generated brands. Expense the spending. A brand bought as part of buying a business can be recognised.
Treating all goodwill as an intangible asset
The word goodwill is used loosely.
Fix: Only purchased goodwill, from acquiring a business, is recognised. Internally generated goodwill is never recognised.
Calling receivables or investments intangible because they are not physical
Students stop at 'no physical substance'.
Fix: The item must also be non-monetary. Receivables are monetary assets and fall under other standards.
Including training or general overheads in cost
Students add every cost linked to the asset.
Fix: Include only the purchase price, non-refundable taxes and costs directly attributable to preparing the asset for use. Expense training and overheads.
Forgetting that control is a separate test
Students assume skilled staff or a loyal customer base is an asset.
Fix: The entity cannot control staff or customers through legal rights, so these are not recognised.

Worked examples

Example 1

Which TWO of the following would be recognised as intangible assets in the statement of financial position of Kestrel Co? (1) A patent bought from another company for $80,000. (2) A brand developed internally over ten years, with $300,000 of marketing spend. (3) Purchased goodwill of $150,000 from acquiring a business. (4) A trained workforce valued by management at $200,000.

Show the solution

Item 1: the patent is identifiable through legal rights, controlled, and has a reliable purchase cost. It is recognised.
Item 2: an internally generated brand cannot be recognised. The marketing spend is expensed.
Item 3: purchased goodwill arises from acquiring a business and is recognised.
Item 4: the entity cannot control a workforce through legal rights, and it has no reliable cost. It is not recognised.

Answer: Items 1 and 3 are recognised.

Example 2

Delta Co buys a manufacturing licence for $60,000. It also pays $2,000 of non-refundable legal fees to obtain the licence, $1,500 to train staff to use it, and receives a trade discount of $3,000 on the licence price. At what amount is the licence recorded at initial recognition?

Show the solution

Start with the purchase price of $60,000.
Deduct the trade discount: $60,000 − $3,000 = $57,000.
Add directly attributable legal fees: $57,000 + $2,000 = $59,000.
Exclude the $1,500 training cost, which is expensed.

Answer: $59,000

Exam tips

In multiple response questions, read how many answers to select and test every item against the criteria before choosing.
Learn the never-recognise list: internally generated goodwill, brands, mastheads, publishing titles and customer lists.
In number entry questions, build cost from price, less trade discounts, plus directly attributable costs, and leave out training and overheads.
Separate purchased from internally generated. The same word, such as brand or goodwill, can be recognised or not depending on its source.
Do not mix up this topic with research and development. Keep IAS 38 recognition rules separate from the development-phase tests.

Practice questions from Intangible non-current assets and amortisation

Intangible Assets and IAS 38 Recognition Criteria in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Intangible Assets and IAS 38 Recognition Criteria: frequently asked questions

What is an intangible asset under IAS 38?

It is an identifiable non-monetary asset without physical substance. Examples are licences, patents, copyrights and purchased software. It is recognised only if the benefits are probable and cost can be measured reliably.

What is the difference between tangible and intangible assets?

Tangible assets have physical form, such as machinery and buildings, and are covered mainly by IAS 16. Intangible assets have no physical form, such as patents, and are covered by IAS 38. Both are non-current assets used over more than one year.

Can a company recognise its own internally generated brand?

No. IAS 38 prohibits recognising internally generated brands, mastheads, publishing titles, customer lists and goodwill. The costs are expensed when incurred. A brand acquired in a business purchase can be recognised.

Is goodwill an intangible asset?

Purchased goodwill is recognised as an intangible asset when a business is acquired. Internally generated goodwill is never recognised. In the FA exam, check where the goodwill came from.