Advanced Accounting · AS 26 Intangible Assets

Internally Generated Intangibles: Research and Development under AS 26

Updated 4 October 2026 · Fact-checked

Under AS 26, research cost and internally generated goodwill are always expensed. Development cost is capitalised as an intangible asset only from the date all six criteria are met. If you cannot separate research from development, treat the whole spend as research and expense it. Costs expensed earlier are never reinstated.

Understand Internally Generated Intangibles: Research and Development

Some intangibles are bought. Others are built inside the business, such as a new formula, a software tool or a process. AS 26 asks: when does the spending on building one become an asset, and when is it just an expense?

The standard splits an internal project into two phases. The research phase is original, planned investigation to gain new scientific or technical knowledge. At this stage the entity cannot show that any future economic benefit will flow. So all research cost is charged to the Statement of Profit and Loss when incurred.

The development phase is applying research findings to a plan or design for new or substantially improved materials, products, processes or systems, before commercial production or use starts. Here the project is more advanced, so some spend can become an asset. But only if the entity can demonstrate all six criteria: technical feasibility, intention to complete, ability to use or sell, how it will generate probable future economic benefits, availability of resources, and ability to measure the expenditure reliably.

Capitalisation starts only from the date the criteria are first met. Expenditure already charged as expense before that date is not added back later. Costs after that date are accumulated as the cost of the asset.

Internally generated goodwill is never recognised as an asset. Its cost cannot be measured reliably and it is not an identifiable resource controlled by the entity. Only purchased goodwill, for example in an amalgamation in the nature of purchase, is recognised. Similarly, internally generated brands, mastheads, publishing titles, customer lists and items like them are not recognised as intangible assets.

Key rules to remember

Research phase rule: Research expenditure = expense in the period incurred; No asset is ever recognised from research. If the phases cannot be separated, treat the whole project spend as research.
Development capitalisation test: Capitalise only if ALL six criteria are met: (1) technical feasibility, (2) intention to complete, (3) ability to use or sell, (4) probable future economic benefits, (5) adequate resources, (6) reliable measurement; Failing even one criterion means the spend is an expense.
Cost of internally generated asset: Cost = Σ expenditure from the date the criteria are first met until the asset is ready for use; Spend before that date stays expensed and is not reinstated.
Internally generated goodwill: Recognised amount = ₹0; Never recognised. Also not recognised: internally generated brands, mastheads, publishing titles and customer lists.

How to solve Internally Generated Intangibles: Research and Development questions

Use this sequence for any question on research and development spend.

1List each cost item with its date and amount.
2Classify each item as research, development, or goodwill and brand-type spend.
3Expense every research item and every internally generated goodwill or brand cost immediately.
4Find the date on which all six criteria were first met. If no date is given, check the facts for it.
5Expense all development spend before that date. Capitalise spend from that date onwards.
6Add up the capitalised amount as the cost of the intangible asset.
7If the question asks for the amount charged to Profit and Loss, add all expensed items, and apply any amortisation after the asset is available for use.
8Show a one-line reason for each treatment, because step marks depend on it.

Quickest way: Date-cut-off method

When to use it: Use it for MCQs and for written problems that give a timeline of spend on one project.

Draw a line at the date the six criteria were first met.
Everything before the line is an expense, including all research.
Everything after the line, if it is development cost, is capitalised.
In MCQs, rule out options that capitalise research or goodwill, or that reinstate earlier expenses.
In written answers, write the heading Expensed, then Capitalised, with a reason against each line.

Common mistakes in Internally Generated Intangibles: Research and Development

Capitalising development cost from the start of the project
Students assume that anything called development is an asset.
Fix: Capitalise only from the date all six criteria are met. Earlier development spend is an expense.
Adding back earlier expensed costs once the criteria are met
Students want the asset to show the full project cost.
Fix: AS 26 prohibits reinstating expenditure already recognised as an expense. The asset includes only later spend.
Recognising internally generated goodwill or brands
Students confuse it with purchased goodwill in amalgamation.
Fix: Internally generated goodwill and brands are never recognised. Only purchased goodwill is.
Capitalising part of the spend when the phases cannot be separated
Students try to split the cost on a guess.
Fix: If research and development cannot be distinguished, treat the whole spend as research and expense it.
Treating the six criteria as 'any four will do'
Students memorise the list loosely.
Fix: All six must be met together. State which criterion fails to justify expensing.

Worked examples

Example 1

A company incurs the following on developing a new process during the year: research costs ₹4,00,000; development costs before 1 October ₹2,50,000; development costs from 1 October to 31 March ₹6,00,000. All six criteria were first met on 1 October. Compute the amount to be charged to Profit and Loss and the amount capitalised. Ignore amortisation.

Show the solution

Research costs of ₹4,00,000 are expensed as incurred.
Development costs before 1 October (₹2,50,000) were incurred before the criteria were met, so they are expensed.
Development costs from 1 October (₹6,00,000) are capitalised, as all six criteria are met.
Expensed = ₹4,00,000 + ₹2,50,000 = ₹6,50,000.

Answer: ₹6,50,000 is charged to Profit and Loss. ₹6,00,000 is capitalised as an intangible asset.

Example 2

A company spent ₹12,00,000 on training staff, advertising to build its own brand, and general expansion, and says that its goodwill and brand are now worth ₹30,00,000. It wants to show ₹30,00,000 as an intangible asset. Advise the company under AS 26.

Show the solution

Internally generated goodwill is not recognised as an asset because it is not an identifiable resource that can be measured reliably.
Internally generated brands are likewise not recognised.
Expenditure on training and brand-building cannot be separated from the cost of developing the business as a whole, so it is an expense.
The ₹12,00,000 is therefore charged to Profit and Loss when incurred.

Answer: The company cannot recognise the ₹30,00,000 as an asset. The ₹12,00,000 spent is expensed. Only purchased goodwill can be recognised.

Exam tips

Always state the date on which the six criteria were met. Most numerical questions turn on this date.
Name the six criteria from memory in theory answers. Marks are awarded per criterion.
In MCQs, watch for options that reinstate expenses or capitalise research. They are almost always wrong.
If the question says phases cannot be separated, expense everything and say why.
Write one-line reasons next to each amount. A correct total with no reasoning can lose step marks.

Practice questions from AS 26 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

Why is research cost never capitalised under AS 26?

At the research stage the entity cannot show that the project will produce future economic benefits. Because that probability cannot be demonstrated, the cost is expensed when incurred.

Can development cost already expensed be capitalised later?

No. If the criteria are met only at a later date, the earlier spend stays as an expense. Only spend from that date onwards forms the cost of the asset.

Is internally generated goodwill ever recognised?

No. It is not recognised as an asset under AS 26. Only goodwill that is purchased, for example on an amalgamation in the nature of purchase, is recognised.

What if I cannot separate research from development?

Treat the entire expenditure on the project as if it were incurred in the research phase. All of it is expensed.