Strategic Business Reporting (International) · Non-current assets

IAS 38 Intangible Assets and Goodwill for ACCA SBR

Updated 11 October 2026 · Fact-checked

IAS 38 governs identifiable non-monetary assets without physical substance. To solve a question, test definition (identifiable, controlled, future benefits), then recognition. Research costs are expensed. Development costs are capitalised only when all six criteria are met. Internally generated goodwill, brands and similar items are never recognised. Then amortise over useful life.

Understand IAS 38 Intangible Assets and Goodwill

An intangible asset is an identifiable non-monetary asset without physical substance. Examples are patents, licences, software and customer lists. To qualify, it must be identifiable (separable, or arising from contractual or legal rights), controlled by the entity, and expected to give future economic benefits.

If an item meets the definition, you recognise it only when it is probable that future benefits will flow and the cost can be measured reliably. Purchased intangibles normally meet these tests, so you recognise them at cost. In a business combination, an acquiree's intangibles are recognised at fair value, even if the acquiree never recorded them.

Internally generated items are different. IAS 38 splits a project into a research phase and a development phase. Research is looking for new knowledge, so future benefits cannot be shown. You expense it. Development is applying research to a plan or design for new or improved products. You capitalise it only once all the criteria are met. If you cannot separate research from development, treat the whole spend as research.

Some internally generated items can never be capitalised: goodwill, brands, mastheads, publishing titles, customer lists and similar items. Their cost cannot be separated from running the business. Also, costs expensed earlier cannot be reinstated later as an asset.

Goodwill is covered by IFRS 3, not IAS 38. Purchased goodwill in a business combination is recognised as an asset, not amortised, and tested for impairment each year under IAS 36. Internally generated goodwill is never recognised.

After recognition, you choose the cost model or the revaluation model. Revaluation needs an active market, which is rare for intangibles. Finite-life assets are amortised. Indefinite-life assets are not amortised but are tested for impairment every year.

Key rules to remember

Definition of an intangible asset: Identifiable + controlled + future economic benefits + no physical substance; All parts must be met before you consider recognition.
Recognition criteria: Probable future benefits AND reliably measurable cost; Usually met for purchased assets. Internally generated assets need extra tests.
Development capitalisation criteria (PIRATE): Probable future benefits; Intention to complete the asset; Resources to complete; Ability to use or sell it; Technical feasibility; Expenditure reliably measured; All six must be shown. Capitalise only from the date all are met.
Research costs: Research expenditure → expense to profit or loss when incurred; Applies even if the project later succeeds.
Amortisation: Amortisable amount ÷ useful life, over the period from when the asset is available for use; Residual value is normally assumed to be zero unless a third-party commitment or active market exists.
Indefinite useful life: No amortisation; impairment test annually and when there is an indication; Review each year whether the indefinite life assessment still holds.
Goodwill in a business combination: Consideration + non-controlling interest + fair value of previously held interest − net identifiable assets at fair value; Governed by IFRS 3. Not amortised. Tested for impairment annually under IAS 36.

How to solve IAS 38 Intangible Assets and Goodwill questions

Use this order for any IAS 38 question. It keeps you on the mark-earning points and gives you a clear structure to write in.

1Identify the item: purchased, acquired in a business combination, or internally generated.
2Test the definition: identifiable, controlled, future economic benefits. State the result in one sentence each.
3For internally generated items, split the spend into research and development. Spend before the criteria are met is expensed.
4For development, go through each of the six criteria against the scenario facts. Name the date they are all met.
5Capitalise only the spend from that date. Calculate the asset and the expense to profit or loss.
6Decide the useful life and start amortisation when the asset is available for use. Calculate the charge, pro-rated for part years.
7Consider impairment (IAS 36) and any ethical or judgement issues, such as aggressive capitalisation to boost profit.
8Conclude with the figures for the statement of financial position and profit or loss, and explain the reason.

Quickest way: Date-line method for development projects

When to use it: Use it when a question gives a timeline of costs for one project and asks for the carrying amount and expense.

Draw a quick timeline of the project with the cost per period.
Mark the date when all six criteria are first met.
Everything before that date goes to expenses. Everything from that date goes into the asset.
Start amortisation only at commercial launch or when available for use.
Compute amortisation for the period, then carrying amount = capitalised cost − amortisation.

Common mistakes in IAS 38 Intangible Assets and Goodwill

Capitalising all development spend of the project, including costs before the criteria were met.
Students see the word 'development' and capitalise everything.
Fix: Capitalise only from the date all criteria are demonstrated. Earlier spend stays expensed and cannot be reinstated.
Treating research as capitalisable because the project is expected to succeed.
Confusing expected profit with the evidence IAS 38 requires at the research stage.
Fix: Expense research always. At that phase future benefits cannot be demonstrated.
Capitalising internally generated brands or customer lists.
The item feels valuable, and purchased brands are recognised.
Fix: State that internally generated brands, mastheads, publishing titles, customer lists and goodwill are prohibited. Acquired brands and customer lists are recognised, and purchased goodwill is recognised under IFRS 3.
Amortising goodwill or starting amortisation at the date of spend.
Mixing old rules with IFRS 3 and IAS 38.
Fix: Goodwill is not amortised; test it annually for impairment. Start amortising other intangibles when available for use.
Listing the criteria without applying them to the scenario.
Memorising the list but not reading the facts.
Fix: Take each criterion and quote the scenario fact that supports or fails it. This earns the application and professional skills marks.
Ignoring indefinite useful lives and impairment.
Assuming every intangible is amortised.
Fix: If the life is indefinite, do not amortise. Test for impairment annually and review the life assessment.

Worked examples

Example 1

Zeta Co incurred costs on a new product during the year ended 31 December 20X1. January to June: ₹40,00,000 on investigating materials and techniques. On 1 July 20X1 the technical feasibility, resources, intention, ability to sell, probable market and reliable cost measurement were all demonstrated. July to December: ₹60,00,000 on design and testing of the final product. Commercial production starts on 1 January 20X2. Show the treatment in the year ended 31 December 20X1.

Show the solution

January to June spend is research. It was an investigation phase carried out before any of the criteria were demonstrated, so future economic benefits could not be shown. It is expensed: ₹40,00,000 in profit or loss. If Zeta could not separate research from development, it would treat all the spend as research. Any development spend before the criteria are met would also be expensed.
From 1 July all six criteria are met. The ₹60,00,000 is development and is capitalised.
Amortisation starts when the asset is available for use, 1 January 20X2. So the charge for 20X1 is nil.
Under IAS 36, an intangible asset not yet available for use must be tested for impairment annually. So the ₹60,00,000 is subject to that test at 31 December 20X1. Carrying amount at 31 December 20X1 = ₹60,00,000, before any impairment loss the test might reveal.

Answer: Profit or loss for 20X1 bears an expense of ₹40,00,000. An intangible asset of ₹60,00,000 is recognised at 31 December 20X1 with no amortisation. Because it is not yet available for use, it is tested for impairment at 31 December 20X1 under IAS 36. Amortisation begins on 1 January 20X2.

Example 2

On 1 January 20X2 Zeta Co starts selling the product from the previous example. The asset of ₹60,00,000 is expected to generate benefits for 5 years, with no residual value. After one year, a competitor launches a rival product. Zeta also spent ₹8,00,000 on an advertising campaign to build the brand name and wants to capitalise it. Explain the treatment for the year ended 31 December 20X2.

Show the solution

Amortisation = ₹60,00,000 ÷ 5 = ₹12,00,000 for the full year 20X2.
Carrying amount at 31 December 20X2 = ₹60,00,000 − ₹12,00,000 = ₹48,00,000.
The competitor's launch is an indicator of impairment. Under IAS 36 Zeta must estimate the recoverable amount and compare it with ₹48,00,000.
The ₹8,00,000 advertising is spending on an internally generated brand. IAS 38 prohibits recognising it as an asset, and advertising costs are expensed when incurred.

Answer: Amortisation of ₹12,00,000 is charged and the carrying amount is ₹48,00,000, subject to an impairment review triggered by the competitor. The ₹8,00,000 advertising is expensed and not capitalised.

Exam tips

Always apply the six development criteria to the scenario facts. Quote the fact, then say whether the criterion is met.
Watch for dates. A question often hides the date the criteria were met in the narrative. Spend before it is expensed.
Check the ethics angle. Management may want to capitalise to improve profit or covenants. Say that this is a judgement area needing scepticism and evidence.
Link to IFRS 3 when the scenario has an acquisition. Say which intangibles are recognised separately at fair value and what remains as goodwill.
Show both the statement of financial position and profit or loss figures, and state your assumptions on useful life.

Practice questions from Non-current assets

IAS 38 Intangible Assets and Goodwill 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 Intangible Assets and Goodwill: frequently asked questions

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

Research is original investigation to gain new knowledge, and it is always expensed. Development applies that knowledge to a plan or design for new or improved products before commercial production. Development is capitalised only when all six criteria are met.

Can I capitalise internally generated goodwill or brands?

No. IAS 38 prohibits recognising internally generated goodwill, brands, mastheads, publishing titles and customer lists. Their cost cannot be separated from the cost of running the business. Acquired brands and customer lists are recognised under IAS 38, and purchased goodwill in a business combination is recognised under IFRS 3.

Is goodwill amortised under IFRS?

No. Goodwill from a business combination is not amortised. It is tested for impairment at least once a year under IAS 36. Impairment losses on goodwill cannot be reversed.

When does amortisation of an intangible asset start?

It starts when the asset is available for use, meaning it is in the location and condition needed to operate as management intends. It continues until the asset is derecognised or classified as held for sale. It does not start while the asset is still being developed.

Can development costs written off earlier be reinstated?

No. IAS 38 says expenditure originally recognised as an expense cannot later be recognised as part of the cost of an intangible asset. Only spend after the criteria are met is capitalised.