Skip Nav

IAS 38 (Research and Development cost)

Accounting, Financial, Tax

❶The IASB expects to complete its discussions in the first half of

IFRS Perspectives: Update on IFRS issues in the US

History of IAS 38
Contact us
Login to MY CIMA

Some multinational entities even hire famous performing artists or movie stars to act as brand ambassadors of the new products. Because the amounts spent on these advertising campaigns are so huge, these entities sincerely believe that the benefits from this promotion would last longer than a year and thus they are inclined to defer the costs of introducing new products over a period of two to three years.

When the financial statements of these entities have to be audited, this is usually a contentious issue. Assessing the fair value of an intangible asset in a business combination can be difficult ; obvious techniques are the use of comparable market transactions or quoted prices. Sometimes there may be a range of values to which probabilities can be assigned. Such uncertainty enters into the measurement of the asset rather than demonstrating an inability to measure the value. If an intangible asset has a finite life, then it is presumed to have a reliably measurable fair value.

In some circumstances , it may not be possible to reliably measure the fair value of an intangible asset in a business combination because it is inseparable or there is no history or evidence of exchange transactions for the asset, and any fair value estimates would be based on immeasurable variables.

If an intangible asset is acquired in exchange for another asset, then the acquired asset is measured at its fair value unless the exchange lacks commercial substance or the fair value cannot be reliably measured, in which case the acquired asset should be measured at the carrying amount of the asset given up, where carrying amount is equal to cost less accumulated depreciation and impairment losses.

For impairment losses, reference should be made to IAS In this context, any compensation received for impairment or loss of an asset shall be included in the income statement. Lie Dharma Record Inc. The agreement with the singer allows the company to record and rerecord the singer for a period of five years.

During the initial six-month period of the agreement, the singer is very sick and consequently cannot record.

The studio time that was blocked by the company had to be paid even during the period the singer could not sing. Which of the above items is a cost that can be capitalized as an intangible asset?

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. Goodwill — The Standard 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 — The Standard 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. Development expenditure may be recognized as an intangible asset when, and only when, all of the following can be demonstrated:. Examples of activities that may fail to be recognized as intangible assets include:.

In order to implement the foregoing in practice, generally some form of business plan will be required to demonstrate the feasibility of a project, the availability of resources, and the future cash flows that can reasonably be expected to be derived there from.

Very often a project will commence with a research phase and after a time will evolve into the development phase. It will be necessary to determine at what point in time the project has so evolved, as expenditure up to that date will have to be recognized as an expense in the income statement and expenditure incurred after that date can be capitalized as an intangible asset. The use of hindsight and the resultant claim to capitalize the entire expenditure is not permissible , as research expenditure must be expensed when incurred and the Standard does allow the reinstatement of previously written-off costs.

One is not permitted accumulate costs in an account and then consider the nature of the entire project only when preparing the year-end financial statements. It was set up by an entrepreneur who is generally interested in the business of providing engineering and operational support services to aircraft manufacturers. For this project, Lie Dharma Inc.

The expenditures Lie Dharma Inc. What is the proper accounting treatment for the various costs incurred during 20X8?

Treatment of various costs incurred during 20X8 depends on whether these costs can be capitalized or expensed as per IAS Although IAS 38 is clear that expenses incurred during the research phase should be expensed, it is important to note that not all development costs can be capitalized. In order to be able to capitalize costs, strict criteria established by IAS 38 should be met.

Based on the criteria prescribed by IAS 38 , these conclusions can be drawn:. Therefore , the costs that were incurred before October 20X8 should be expensed. The costs eligible for capitalization are those incurred after October 20X8. The Standard requires that all expenditure on an intangible item be written off as an expense unless it meets the recognition criteria or it is acquired as part of a business combination and cannot be separately identified, in which case it is subsumed as part of goodwill and treated in accordance with IFRS 3.

The advent of the Internet has created new ways of performing tasks that were unknown in the past. Most entities have their own Web site that serves as an introduction of the entity and its products and services to the world at large. A Web site has many of the characteristics of both tangible and intangible assets. With virtually every entity incurring costs on setting up its own Web site, there was a real need to examine this issue from an accounting perspective.

An interpretation was issued that addressed the Web site costs:. SIC 32 lays down guidance on the treatment of Web site costs consistent with the criteria for capitalization of costs established by IAS Thus costs incurred in setting up such a Web site should be expensed.

Measurement after recognition is the next topic that you should not miss. It is available on my next post. This usually means that the cost of the intangible asset is automatically reliably measured as what was paid for it and hence can be recognised.

For example brands, goodwill, publishing titles or customer lists. Such internally generated items are not recognised as they cannot be measured reliably and are usually not capable of separation from the business. For example, a brand is usually not sold unless the whole business is sold. Costs such as start-up costs, training, advertising or promotion should be expensed.

In addition, many larger businesses will internally develop their own products, systems or processes. This falls under the category of research and development, an internally generated intangible which has its own set of guidelines within IAS All expenditure on research, defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge, or understanding or gathering new knowledge, is written off directly to profit or loss.

Development is defined as use of knowledge gained. This includes the application of research or other knowledge gained to plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or general use. Expenditure on development is capitalised if, and only if, an entity meets all below requirements:. It is important to note that the criteria relate to the intangible asset generated by the development work and not the physical products that might arise as a result of the development.

The intangible asset is the applied knowledge that has been gained, which can either be sold to another business in the form of a patent or used by the business itself. LM has developed and patented a new drug which has been approved for use. The expenditure incurred developing the new drug was USD10m. An independent valuer has estimated that the future sales revenue from the drug means that the knowledge gained from the development work is worth USD20m.

Can an intangible asset be recognised? The knowledge gained from the development work is ready for use and is technically feasible because the drug has been approved.

In addition, the knowledge is going to generate future economic benefit, and therefore an intangible asset can be recognised. The cost of USD10m will be capitalised as an intangible asset and amortised over an appropriate useful economic life. The valuation of USD20m cannot be recognised as there is no guarantee that the sales will be generated so it is not a reliable value. In addition, there is no active market for this asset. What did you think of this article?

Velocity is the global e-magazine for CIMA students. The capitalization of development phase cost will commence right from the date, when the project meets the capitalization criteria as above. The development phase cost which is initially recognized as expense is allowed to be reinstated as intangible asset later on, in future.

If the entity is unable to differentiate between the research and development phase then all the cost incurred on the project will be charge to the statement of profit or loss as an expense. The amortization of intangible asset will start when it is available for commercial use by the entity. Any in-process research and development project acquired separately or as part of a business combination can be recognized as an intangible asset, if it meets the definition of intangible asset.

However, if the intangible asset is being used in the construction of another asset, then the amortization charge will be added to the cost of such asset under construction or being produced. However, any amortization will not be charged if the residual value of the intangible asset exceeds its carrying value.

If the pattern of economic benefits is not determinable, then use straight line method. However, if no active market exits for a particular intangible asset it will be measured at cost less accumulated amortization less accumulated impairment loss.

However first, it will reverse any loss related to the same intangible asset up to the extent it is recognized in the previous years. However first, it will offset any revaluation surplus related to the same intangible asset up to the extent it is recognized in the previous years. Any gain or loss on the disposal of intangible asset will be charged to the statement of profit or loss which will be the difference between carrying value of the intangible asset and its disposal proceeds.

If the intangible asset is sold on extended credit period or on deferred installment basis, then its disposal proceeds will be taken as cash price equivalent and any excess over the cash price will be treated as Interest Income which will be recognized over the period of credit.

Any change in accounting estimate during the current year such as change in residual value, useful life or amortization method. AB Ltd started a research and development project to develop a new production process on 1 January The director of AB Ltd stated that, at 1 December , the production process met the criteria for recognition as an intangible asset.

How this will be accounted for in the financial statements of AB Ltd for the year ended 31 December and 31 December AB Ltd is a public listed company. It has asked for your opinion in respect of the accounting treatment of the following matter for the year to 31 December On 1 December AB Ltd acquired Darby, a small pharmaceutical drug company that specializes in research and development. Darby owns a patent for an established successful drug that has a remaining life of 8 years.

Darby has developed and patented a new drug which has been approved for medical use. Darby's manufacturing process has recently received a favorable inspection by government officials. Consequently, the company has been allotted a license free of cost, for a period of 10 years to manufacture a new drug. These courses have been expensive, they have led to a marked improvement in production quality, increase in revenue and cost reductions. The directors of Darby believe these benefits will continue for at least two years and wish to treat the training costs as an intangible asset.

Explain how the above items will be treated in the financial statements of AB Ltd for the year to 31 December Intangible assets may arise as a result of business combination and this standard requires intangible assets related to subsidiary which arises as part of business combination, to be recognized at fair value, separately from the goodwill.

The development phase cost of the internally generated intangible asset is capitalized as intangible asset if it satisfies the capitalization criteria given in IAS The market value is irrelevant at initial recognition. IAS 38 requires, intangible assets which arises as a result of government grant are recognized either at fair value or nominal cost.

IAS 38 does not allow the recognition of training cost as an intangible asset as the future actions of employees are not in the control of the entity. Therefore, such cost will be charged to the statement of profit or loss as expense. Have you forgotten your password? Are you a new user? Scope The requirements of this standard are applicable for the accounting treatment of intangible assets except for the following: Financial assets, which are covered under IAS 32 Deferred tax assets, which are covered under IAS 12 Exploration and evaluation assets, which are covered under IFRS 6 Intangible assets which are held for sale and are covered under IAS 2 Goodwill acquired in a business combination which is under IFRS 3 Lease of intangible assets, which are covered under IAS 17 Long term intangible assets which are held for sale, and are covered under IFRS 5 Definitions Cost It is the amount of cash or cash equivalents paid or the fair value of the consideration transferred to acquire, purchase or construct an asset.

Amortization It is the systematic allocation of the depreciable amount of an intangible asset over its related useful life. Useful Life It is the period of time for which asset will be used by the management. Development It is the application of research findings or knowledge to produce new or significantly improved material, device, product, process, system or service before the start of commercial production or use.

Research It is the original and planned investigation undertaken for the purpose of gaining new scientific or technical information and understanding.

Last Accounting News

Main Topics

Privacy Policy

IAS 9 () Research and Development Costs issued: Operative for annual financial statements covering periods beginning on or after 1 January IAS 38 Intangible Assets issued: Applies to intangible assets acquired in business combinations occurring on or after 31 March , or otherwise to other intangible assets for annual periods.

Privacy FAQs

International Accounting Standard 38 Intangible Assets Objective as defined in IAS 32 Financial Instruments: Presentation; (c) the recognition and measurement of exploration and evaluation assets (see start-up, research and development activities. Research and development activities are.

About Our Ads

IAS 38 Intangible Assets - 05 3 Subsequent expenditure on an acquired in-process research and development project Research or development expenditure that. Charge all research cost to expense. [IAS ] Development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have been established. This means that the enterprise must intend and be able to complete the intangible asset and either use it or sell it.

Cookie Info

The IFRS Foundation's logo and the IFRS for SMEs ® logo, the IASB ® logo, the ‘Hexagon Device’, eIFRS ®, IAS ®, IASB ®, IFRIC ®, IFRS ®, IFRS for SMEs ®, IFRS Foundation ®, International Accounting Standards ®, International Financial Reporting Standards ®, NIIF ® and SIC ® are registered trade marks of the IFRS Foundation, . This falls under the category of research and development, an internally generated intangible which has its own set of guidelines within IAS All expenditure on research, defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge, or understanding or gathering new knowledge, is.