With internally generated intangible assets, problems arise in identifying whether there is an identifiable asset that will generate future economic benefit and in reliably determining its cost.
IAS 38 proscribes the recognition of internally generated goodwill as an asset. The rationale behind this is that any expenditure incurred does not result in an asset that is an identifiable resource – it is not separable, nor does it arise from a contractual or other legal rights – or that is controlled by the entity. In addition, any costs incurred are unlikely to be specifically identifiable as generating the goodwill. The position that the difference between a valuation of a business and the carrying amount of its individual assets and liabilities may be capitalized as goodwill falls down insofar as that difference cannot be categorized as the cost and therefore cannot be recognized as an asset.
Other Internally Generated Intangible Assets
IAS 38 sets out rules for the recognition of other internally generated intangible assets and broadly defines such expenditures as research and development. It proscribes the recognition of internally generated brands, mastheads, publishing titles, customer lists, and similar items, because expenditure thereon, like expenditure on internally generated goodwill, cannot be distinguished from the cost of developing the business as a whole and is therefore not separately identifiable.
In order to determine whether an internally generated intangible asset qualifies for recognition, its generation is divided into a research phase and a development phase. If the two phases cannot be distinguished, then the entire expenditure is classified as research.
Expenditure on research (or the research phase of an internal project) is to be written off as an expense as and when incurred, as it is not possible to demonstrate that an asset exists that will generate future economic benefit. Examples include :
- Activities aimed at obtaining new knowledge
- The search for, evaluation, and selection of applications of research findings or knowledge
- The search for alternatives for materials, devices, products, systems, or processes
- The formulation, design, evaluation, and selection of possible alternatives for new or improved materials, devices, products, systems, or processes
Development expenditure may be recognized as an intangible asset when, and only when, all of the following can be demonstrated :
- The technical feasibility of completing the asset so that it will be available for use or sale
- The intention to complete the asset and use or sell it
- The ability to use or sell the asset
- How the asset will generate probable future economic benefit, including demonstrating a market for the asset’s output, or for the asset itself, or the asset’s usefulness
- The availability of sufficient technical, financial, and other resources to complete the development and to use or sell the asset
- The ability to reliably measure the expenditure attributable to the asset during its development
Examples of activities that may fail to be recognized as intangible assets include :
- The design, construction, and testing of pre-use prototypes or models
- The design of tools and jigs involving new technology
- The design, construction, and operation of a pilot plan that is not capable of commercial production
- The design, construction, and testing of a chosen alternative for new or improved materials, devices, products, systems, or processes
Source : IFRS Practical Implementation Guide and Workbook (2nd Edition) – Abbas Ali Mirza, Magnus Orrell and Graham J. Holt