Internally Generated Intangibles and Goodwill under Ind AS 38

Understand Internally Generated Intangibles and Goodwill

Key rules to remember

Research phase

Research expenditure → expense when incurred

Includes obtaining new knowledge and searching for, evaluating and selecting alternatives.

Development phase

Development expenditure → intangible asset only if all six criteria are met

Technical feasibility, intention, ability to use or sell, probable future benefits, adequate resources, reliable measurement.

Cost of internally generated asset

Cost = Σ expenditure incurred from the date the criteria are first met

Earlier expenditure already expensed cannot be reinstated.

Directly attributable costs

Materials and services + employee benefit costs + fees to register a legal right + amortisation of patents and licences used

Selling, general administrative overheads and similar costs are not directly attributable.

Phases not distinguishable

Cannot separate research from development → treat all as research

The whole project spending is expensed.

Never recognised

Internal goodwill, brands, mastheads, publishing titles, customer lists → not assets

Spending is expensed as incurred.

How to solve Internally Generated Intangibles and Goodwill questions

1. 1Identify the item. If it is internal goodwill, a brand, masthead, publishing title, customer list or similar, expense everything and stop.
2. 2Check whether the project can be split into research and development. If not, treat all spending as research.
3. 3Expense all research-phase spending.
4. 4Find the date on which all six development criteria were first met. Read the case for feasibility, intention, ability, market, resources and measurement.
5. 5Expense development spending incurred before that date. Do not reinstate it later.
6. 6From that date, capitalise only directly attributable costs: materials, services, employee costs, registration fees and amortisation of patents or licences used.
7. 7Expense overheads that are not directly attributable, such as general administration and selling costs.
8. 8Total the capitalised amount and the expensed amount. Check that they add up to total spending, then state the journal or disclosure effect.

Quickest way: Date-line and sort method

Common mistakes in Internally Generated Intangibles and Goodwill

• Capitalising development spending incurred before the criteria were met.

  Students capitalise the whole development phase from its start.

  Fix: Capitalise only from the date all six criteria are first met. Earlier spending stays an expense and cannot be reinstated.

• Capitalising research costs because the project later succeeded.

  Hindsight makes early costs look like part of the asset.

  Fix: Research spending is always an expense. Success later does not change this.

• Recognising internally generated brands or customer lists after spending heavily on them.

  Students see money spent and assume an asset exists.

  Fix: Such items cannot be distinguished from the cost of developing the business as a whole, so they are never recognised.

• Including general administration or selling overheads in the cost of the asset.

  Students treat all development-period costs as attributable.

  Fix: Include only directly attributable costs needed to create, produce and prepare the asset for its intended use.

• Capitalising when the case does not show all six criteria, for example no evidence of funding.

  Students count only feasibility and market.

  Fix: Tick off all six against the facts. If one is missing or unproven, the spending stays an expense.

• Capitalising a project when research and development cannot be separated.

  Students assume part of it must be development.

  Fix: If the phases cannot be distinguished, treat the whole project as research and expense it.

Worked examples