IAS 38 establishes the standards for recognising and measuring intangible assets controlled by the entity; future economic benefits are expected to be derived from the asset and require disclosures. An intangible asset is an identifiable non-monetary asset lacking physical substance.
Note: The above criteria apply to all Intangible assets that can be developed internally, acquired separately or acquired in a business combination. It is essential to distinguish between the three categories for the appropriate accounting treatment of the expenses incurred.
It could be challenging to evaluate whether an internally generated intangible asset is eligible for recognition due to issues in the:
- Classifying whether and when the identifiable asset will generate expected future economic benefits; and
- Determining the costs of the asset reliably. In some instances, the cost incurred in producing an intangible asset internally and maintaining or improving the entity’s internally generated goodwill or running day-to-day operations cannot be distinguished.
Tip: Recognition is the process or recordation of business transactions in the entity accounting records like balance sheet or income statement, meeting the definition of a component and satisfying the criteria for recognition.
As per HMRC, IAS38 will also be relevant to those entities that prepare their accounts under the UK accounting standard FRS101. IAS38 adopts a similar approach to FRS102 s18 that requires the expenditure of the research phase of a project to be recognised as an expense when incurred.
For an entity to qualify as an intangible asset and the recognition criteria cited above, it has to classify the generation of the assets into two stages:
- Research is original, and the planned investigation commenced with the possibility of gaining new scientific or technical knowledge and understanding.
Examples of research events include:
- Activities directed at acquiring brand-new knowledge;
- The search for, assessment and final selection of applications of research outcomes or additional expertise;
- The pursuit for substitutes for services, materials, devices, products, processes, systems; and
- The formulation, design, assessment and final selection of possible replacements for new or improved services, devices, materials, products, processes or systems.
- Development is the purpose of research discoveries or additional knowledge to a plan or
design for the production of new or considerably enhanced systems or services, materials, devices, products, and processes before the start of commercial production or use.
Examples of development activities are: –
- The design, construction and testing of pre-production or pre-use prototypes and models; and
- The application and infrastructure development, graphical design and content development (content falls under development to the extent that it is developed for purposes other than to advertise and promote an entity’s own products and services).
Given the above, a company needs to be able to distinguish between the 2 phases of its projects. The costs attributable to activities that fall under the research phase (as defined above), need to be accounted for as an expense. On the other hand, anything that qualifies as development could be capitalised if they satisfy the recognition criteria that will be discussed in more detail below.
FRS102 s18 permits but does not require expenditure on development to be recognised as an intangible asset provided certain conditions are met.
If it is impossible to distinguish between the research and development phases of a project, all of the expenditure should be treated as if it had been incurred during the research phase and, hence, written off as incurred or expensed when incurred.
R&D expenditure incurred before the adoption of FRS102 was written off through the profit and loss account.
If R&D revenue expenditure which has previously been expensed is written back to the balance sheet as an intangible asset as a result of the adoption of FRS102, only to be amortised over a greater period under this standard, this change of accounting practice will fall within the provisions of CTA09/S183(1) – with the uplift being exempt from tax and the subsequent amortisation (Amortisation is the systematic allocation of the depreciable amount of an intangible
asset over its useful life.) not being allowed.
Note: Development does not include the maintenance or enhancement of ongoing operations. It is also important to note that when the standard refers to development, it does not necessarily need to be related to an entirely new innovation; instead, it needs to be new to the specific entity.
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