Financial Reporting · Intangible assets

IAS 38 Definition and Recognition of Intangible Assets

Updated 11 October 2026 · Fact-checked

Under IAS 38, an intangible asset is an identifiable non-monetary asset without physical substance. To recognise it, the item must meet the definition (identifiable, controlled, future economic benefits) and two criteria: benefits are probable and cost can be measured reliably. Internally generated goodwill is never recognised.

Understand IAS 38 Definition and Recognition of Intangible Assets

An intangible asset is a resource a business owns or controls that has no physical form. Think of software, licences, patents, trademarks, customer lists and franchise rights. You cannot touch them, but they can earn money for the business.

IAS 38 defines an intangible asset as an identifiable non-monetary asset without physical substance. Three features decide whether an item passes: identifiability, control and future economic benefits. You must be able to show all three.

Identifiability means the item is either separable or arises from contractual or other legal rights. Separable means it could be sold, transferred, licensed or rented on its own. A legal right, such as a patent, counts even if it cannot be separated from the entity. This is the feature that distinguishes an intangible asset from goodwill.

Control means the entity has the power to obtain the benefits and to restrict others' access to them. Legal rights usually give control. A skilled workforce or good staff relations normally fail, because the entity cannot control whether staff stay. Customer relationships usually fail unless there are legal rights or contracts protecting them.

Future economic benefits can be revenue, cost savings or other benefits from using the asset. Even when an item meets the definition, it is only recognised if it is probable that the benefits will flow to the entity and the cost can be measured reliably. Purchased items usually meet these tests easily because the price paid reflects expected benefits. Internally generated goodwill, brands, mastheads, publishing titles and customer lists are never recognised. Goodwill arising on a business combination is dealt with under IFRS 3, not IAS 38.

Key rules to remember

Definition: Intangible asset = identifiable + non-monetary + no physical substance; The item must also be controlled and expected to give future economic benefits.
Identifiability test: Separable OR arises from contractual/legal rights; Only one limb is needed. Goodwill fails both.
Recognition criteria: Probable future economic benefits AND cost measured reliably; Both must be met, as well as the definition.
Separate acquisition: Cost = purchase price + import duties and non-refundable taxes + directly attributable costs, less trade discounts and rebates; The probability criterion is taken as satisfied for separately acquired items.
Items never recognised: Internally generated goodwill, brands, mastheads, publishing titles, customer lists; Costs are expensed as incurred.
Expense when no asset: Expenditure on an intangible item that fails recognition = expense in profit or loss when incurred; Examples: training, start-up costs, advertising and promotion.

How to solve IAS 38 Definition and Recognition of Intangible Assets questions

Use this order for any scenario asking whether an intangible item is recognised and at what amount.

1Check it is non-monetary and has no physical substance. If it is physical, think IAS 16 or IAS 2 instead.
2Test identifiability: is it separable, or does it arise from legal or contractual rights? If neither, it looks like goodwill.
3Test control: does the entity have power over the benefits and can it restrict others' access?
4Test future economic benefits: revenue, cost savings or other benefits expected.
5Decide how it arose. Separately purchased, part of a business combination, or internally generated. Internally generated goodwill, brands and similar items are never recognised.
6Apply recognition: probable benefits and reliable cost. For separate purchases both are normally met.
7Measure at cost: price plus directly attributable costs, less discounts. Expense anything that fails recognition.
8State your conclusion clearly and give the journal or amount if asked.

Quickest way: Three tests, then source

When to use it: Use in Section A and OT case questions where you must pick the correct statement quickly.

Ask: identifiable, controlled, future benefits? One 'no' means not an asset.
Ask: where did it come from? Bought means likely recognised. Home-grown brand, customer list or goodwill means expense.
If it is bought, add directly attributable costs only. Exclude training, admin overheads and advertising.
Remember goodwill is not an IAS 38 asset: purchased goodwill is under IFRS 3.

Common mistakes in IAS 38 Definition and Recognition of Intangible Assets

Capitalising internally generated brands or customer lists
Students see that they have value and assume they are assets.
Fix: IAS 38 prohibits recognition of internally generated brands, mastheads, publishing titles, customer lists and goodwill. Expense the costs.
Treating goodwill as an identifiable intangible asset
Both are intangible and appear in non-current assets.
Fix: Goodwill is not identifiable: it is not separable and has no legal right. It is governed by IFRS 3 and IAS 36.
Recognising a skilled workforce as an asset
Staff clearly generate future benefits.
Fix: The entity lacks control over staff, so the control test fails. Say this explicitly.
Including training or advertising in the cost of a purchased asset
Students include every cost linked to the asset.
Fix: Only directly attributable costs to prepare the asset for use are included. Training, advertising, admin and start-up costs are expensed.
Forgetting trade discounts when computing cost
Students start from the list price.
Fix: Deduct trade discounts and rebates, then add non-refundable taxes, duties and attributable costs.
Saying recognition needs only the definition to be met
The definition and recognition criteria are blurred.
Fix: Always state both: it must meet the definition and the recognition criteria.

Worked examples

Example 1

Kiran Co bought a software licence for ₹12,00,000 less a 10% trade discount. It paid non-refundable purchase taxes of ₹50,000 and installation and testing costs of ₹70,000. It also spent ₹40,000 on staff training to use the software and ₹30,000 on a launch advertising campaign. Calculate the cost of the intangible asset and say how the other costs are treated.

Show the solution

Licence price after discount: ₹12,00,000 × 90% = ₹10,80,000.
Add non-refundable purchase taxes: ₹10,80,000 + ₹50,000 = ₹11,30,000.
Add directly attributable installation and testing: ₹11,30,000 + ₹70,000 = ₹12,00,000.
Training of ₹40,000 is not directly attributable to bringing the asset to working condition, so it is an expense.
Advertising of ₹30,000 is also an expense.

Answer: Cost of the intangible asset is ₹12,00,000. The ₹40,000 training and ₹30,000 advertising (₹70,000 in total) are expensed in profit or loss.

Example 2

Meera Ltd spent ₹25,00,000 over several years building a well-known brand for its own products and has a loyal customer list. It has also acquired a taxi licence from another company for ₹8,00,000, which is transferable. Explain which items can be recognised under IAS 38.

Show the solution

The self-developed brand: it is internally generated. IAS 38 prohibits recognising internally generated brands, so the ₹25,00,000 is expensed as incurred.
The customer list: internally generated customer lists are also prohibited, and Meera lacks legal control over customers.
The taxi licence: it is non-monetary with no physical substance. It arises from a legal right and is transferable, so it is identifiable.
Control: the licence gives legal power to operate and exclude others. Future benefits: it allows taxi revenue.
Separately acquired, so probable benefits are assumed and cost is reliably measured at ₹8,00,000.

Answer: Recognise the licence at ₹8,00,000 as an intangible asset. Do not recognise the brand or the customer list; expense the related costs.

Exam tips

In OT questions, spot the keyword: 'internally generated' brand, customer list or goodwill means not recognised.
When asked to explain, name the three tests and apply each to the scenario in one sentence.
Show cost workings line by line: discount, taxes, attributable costs, so you earn method marks in Section C.
Do not mix up with research and development: development costs can be capitalised if criteria are met, which is a separate topic.
If a question mentions a business combination, remember acquired goodwill is under IFRS 3, not IAS 38.

Practice questions from Intangible assets

IAS 38 Definition and Recognition of Intangible Assets in other exams

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

IAS 38 Definition and Recognition of Intangible Assets: frequently asked questions

What is an intangible asset under IAS 38?

It is an identifiable non-monetary asset without physical substance. The entity must control it and expect future economic benefits from it. It must also meet the recognition criteria before it appears in the statement of financial position.

What is the difference between an intangible asset and goodwill?

An intangible asset is identifiable, meaning separable or arising from legal rights. Goodwill is not identifiable: it is the excess of the cost of a business combination over the net identifiable assets. Purchased goodwill is dealt with under IFRS 3 and tested for impairment under IAS 36.

What are the recognition criteria for an intangible asset?

It must meet the definition, it must be probable that expected future economic benefits will flow to the entity, and its cost must be measured reliably. For separately acquired assets, the probability test is taken as met.

Can a company recognise its own brand?

No. IAS 38 does not allow recognition of internally generated brands, mastheads, publishing titles, customer lists or goodwill. The costs are expensed as incurred. A brand that is purchased may be recognised.