Financial Reporting · Intangible assets

Internally Generated Intangibles: Research and Development Costs under IAS 38

Updated 11 October 2026 · Fact-checked

Under IAS 38, research costs are always expensed. Development costs are capitalised as an intangible asset only when all the PIRATE criteria are proven; otherwise they are expensed. Internally generated goodwill, brands, mastheads, publishing titles, customer lists and similar items are never recognised as assets.

Understand Internally Generated Intangibles: Research and Development

Companies spend money to create new things. Some of that spend may produce future income, but at an early stage nobody knows. IAS 38 Intangible Assets deals with this uncertainty by splitting the activity into two phases.

Research is original investigation to gain new scientific or technical knowledge. Examples: searching for new materials, evaluating alternatives for a new process. At this stage you cannot show that any future benefit will arise. So all research cost is an expense in profit or loss when incurred.

Development is applying research findings to a plan or design for new or improved products or processes before commercial production starts. Here the project is more certain. IAS 38 therefore allows, and in fact requires, capitalisation once all the criteria are met. The criteria are remembered as PIRATE. Before they are met, costs are expensed.

Timing matters. Costs expensed before the criteria are met cannot be reinstated later as an asset. Capitalisation starts from the date the criteria are first met, and only costs from that date are included in the asset. Once capitalised, amortisation starts when the asset is available for use, over its useful life, usually matching the pattern of benefits (often straight line).

Some internally generated items can never be recognised, because their cost cannot be separated from the cost of running the business and they are not reliably measurable. These are internally generated goodwill, brands, mastheads, publishing titles, customer lists and similar items. Also expensed: training, start-up, advertising and promotion, and relocation costs. If a project's research and development phases cannot be distinguished, treat all of it as research and expense it.

Key rules to remember

Research costs: Research expenditure → expense in profit or loss when incurred; No exceptions. An entity cannot show that research will generate future benefits.
Development criteria (PIRATE): P – Probable future economic benefits; I – Intention to complete and use or sell; R – Resources adequate to complete; A – Ability to use or sell the asset; T – Technical feasibility; E – Expenditure can be measured reliably; All must be met. Also show how the asset will generate benefits, for example a market exists or it is useful internally. Failing any one means expense.
Cost of capitalised development: Capitalised cost = directly attributable costs incurred from the date the criteria are met; Includes materials, employee costs and fees for registering legal rights. Excludes general overheads, selling costs and earlier expensed costs.
Amortisation: Annual amortisation = (Cost − residual value) ÷ useful life; Starts when the asset is available for use. Residual value is normally nil. Charge it in profit or loss.
Never recognised: Internally generated goodwill, brands, mastheads, publishing titles, customer lists → expense; Purchased versions can be recognised, but internally generated ones cannot.

How to solve Internally Generated Intangibles: Research and Development questions

Use this method for any question on research and development under IAS 38.

1Split the costs by phase: research, development before the criteria are met, and development after the criteria are met.
2Check each PIRATE criterion against the facts. Note the date on which the last criterion is satisfied.
3Expense all research costs and all development costs incurred before that date.
4Capitalise only the directly attributable development costs from that date. Leave out general overheads, training and marketing.
5Calculate amortisation from the date the asset is available for use, over its useful life. Time-apportion in the first year if needed.
6Calculate the carrying amount: cost less accumulated amortisation. Consider impairment if the facts suggest it.
7State the totals: the profit or loss charge (expenses plus amortisation) and the statement of financial position figure.

Quickest way: Date-line shortcut

When to use it: Use for objective test questions and for the first part of a constructed response question when time is short.

Draw a line in time: costs before the criteria date go to profit or loss; costs after go to the asset.
Scan the scenario for the PIRATE words: feasibility confirmed, funding secured, market proven. The latest one sets the date.
Ignore anything on the never-recognised list, such as brand building or training. It is an expense.
Amortise from the start of commercial production, not from the date capitalisation began.
Check the answer: capitalised cost plus expensed cost must equal total spend.

Common mistakes in Internally Generated Intangibles: Research and Development

Capitalising research costs because the project looks promising.
Students focus on the expected profit rather than on the phase of the project.
Fix: Research is always expensed. Only development can be capitalised, and only after all PIRATE criteria are met.
Capitalising development costs incurred before the criteria were met.
Students include the whole development phase because the project eventually succeeded.
Fix: Capitalise only from the date all criteria are met. Earlier costs stay expensed and cannot be reinstated.
Treating capitalisation as optional.
Students confuse it with the revaluation choice or with a prudence argument.
Fix: If all criteria are met, development costs must be capitalised. If any is not met, they must be expensed.
Recognising an internally generated brand or goodwill.
Students assume that spending on advertising or a successful brand creates an asset.
Fix: These can never be recognised. Only brands and goodwill acquired in a business combination or purchase can be recognised.
Starting amortisation when capitalisation begins.
Students mix up when cost is incurred with when the asset is ready for use.
Fix: Amortise from when the asset is available for use, such as the start of commercial production. Costs capitalised before that point are not amortised yet.
Including general overheads or training in the capitalised cost.
Students include every cost linked to the project.
Fix: Include only directly attributable costs. Exclude general overheads, selling costs, training and inefficiencies.

Worked examples

Example 1

Lumen Co began a development project on 1 January 20X1. Research costs of $120,000 were incurred in 20X1. From 1 April 20X1 all PIRATE criteria were met. Development costs were $30,000 for January to March and $210,000 for April to December. Commercial production started on 1 January 20X2. The product is expected to sell for 5 years. Show the treatment in the year ended 31 December 20X1 and the 20X2 amortisation.

Show the solution

Research of $120,000 is expensed.
Development costs from January to March of $30,000 were incurred before the criteria were met, so they are expensed.
Development costs from April to December of $210,000 are capitalised as an intangible asset.
Profit or loss charge for 20X1 = 120,000 + 30,000 = $150,000.
No amortisation in 20X1 because commercial production has not started.
Statement of financial position at 31 December 20X1: intangible asset of $210,000.
Amortisation for 20X2 = 210,000 ÷ 5 = $42,000.

Answer: In 20X1, $150,000 is expensed and $210,000 is capitalised. The 20X2 amortisation is $42,000, leaving a carrying amount of $168,000 at 31 December 20X2.

Example 2

Orion Co spent the following in the year: $80,000 on a new brand it created internally, $45,000 on staff training for a new process, $60,000 on research into a new material, and $90,000 on development of a product after all criteria were met. Calculate the amount capitalised and the amount expensed.

Show the solution

The internally generated brand of $80,000 can never be recognised, so it is expensed.
Training of $45,000 is expensed. It is not directly attributable to creating an asset.
Research of $60,000 is expensed.
Development of $90,000 meets all the criteria, so it is capitalised.
Total expensed = 80,000 + 45,000 + 60,000 = $185,000.
Check: 185,000 + 90,000 = 275,000, which equals total spend of 80,000 + 45,000 + 60,000 + 90,000.

Answer: Capitalised: $90,000. Expensed: $185,000.

Exam tips

In objective tests, look for a trap word such as research, brand or training. These are expensed regardless of how successful the project is.
Write the PIRATE criteria against the facts in the scenario and name the date they are all met. It earns method marks in constructed response questions.
Show a clear table of expensed versus capitalised amounts and check that it adds up to total spend.
Do not forget amortisation in a full question. Use the start of commercial production and time-apportion if the asset is used for part of the year.
If the question says the criteria were not met or cannot be shown, the answer is to expense everything.

Practice questions from Intangible assets

Internally Generated Intangibles: Research and Development in other exams

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

Internally Generated Intangibles: Research and Development: frequently asked questions

What is the difference between research and development costs under IAS 38?

Research is original investigation to gain new knowledge, and its costs are always expensed. Development applies research findings to a plan or design for new or improved products before commercial production. Its costs are capitalised only once all the criteria are met.

What does PIRATE stand for in IAS 38?

It stands for Probable future economic benefits, Intention to complete, Resources to complete, Ability to use or sell, Technical feasibility and Expenditure measured reliably. All must be demonstrated before you capitalise development costs.

Can I capitalise development costs I already expensed?

No. IAS 38 does not allow costs that were expensed to be reinstated as an asset later. Capitalisation starts only from the date all criteria are met.

Why can't internally generated brands and goodwill be recognised?

Their cost cannot be distinguished from the cost of developing the business as a whole, and they cannot be measured reliably. IAS 38 therefore requires the spending to be expensed. Purchased brands and goodwill from an acquisition can be recognised.