IAS 38: intangible assets

Some of the most valuable things a company owns cannot be touched: a patent, a software platform, a licence, a customer database, a famous brand. Yet the statement of financial position often shows none of them. International Accounting Standard (IAS) 38, Intangible Assets, explains why.

It lets a company record an intangible only if it can identify it, control it, expect benefits from it and measure its cost reliably, and it bans some of the most tempting ones, such as internally built brands.

This topic covers the definition and attributes of an intangible asset, recognition, how intangibles are acquired, the research and development rules, intangibles acquired in a business combination, measurement after recognition (cost and revaluation models), amortisation and indefinite lives, and the judgements. The previous topics covered property, plant and equipment and investment property. The next topics cover provisions and impairment.

May 2026 Question 7(c) asked whether a valued brand name could be recorded as an asset.

Key terms in plain English

Syllabus check

IAS 38 is examinable at this level. This topic covers:

• B2(a) the effect of recognition and measurement choices and timing on non-financial assets;
• B2(b) appraising the treatment of intangible assets under IAS 38;
• D1(d) appraising the nature and validity of items in published statements, which includes challenging an intangible that should not be there.

CAMA 2020 and intangible assets

The Companies and Allied Matters Act 2020 (CAMA 2020) sets the records and statements, not the intangible rules.

Definition and recognition

An intangible asset is an identifiable, non-monetary asset without physical substance. An asset is a resource controlled by the entity as a result of past events from which future economic benefits are expected. The critical attributes are:

• Identifiability: it is separable (can be sold, transferred, licensed, rented or exchanged, alone or with a contract, asset or liability) or arises from contractual or other legal rights.
• Control: the entity has the power to obtain the benefits and restrict others’ access.
• Future economic benefits: revenues or cost savings.

Examples: patented technology, software, databases, trademarks, domain names, films, customer lists (if acquired), licensing and franchise agreements, import quotas, marketing rights.

An intangible asset is recognised if, and only if, (i) it is probable that the expected future benefits will flow to the entity and (ii) the cost can be measured reliably, and it meets the definition. It is first measured at cost. Later expenditure is capitalised only if it can be attributed to the asset and enhances it, which is rare.

How intangibles are obtained

• Purchased separately: the probability test is always met, and cost is usually reliable.
• Acquired in an exchange: measured at fair value unless the exchange lacks commercial substance or neither fair value can be measured reliably, in which case at the carrying amount of the asset given up.
• Government grant: treated under IAS 20.
• Internally generated: see below.
• Acquired in a business combination: see below.

Internally generated intangibles

These items are never recognised: internally generated goodwill, brands, mastheads, publishing titles and customer lists, because their cost cannot be distinguished from the cost of developing the business as a whole.

For other internally generated intangibles, split the project into two phases:

• Research (original and planned investigation to gain new knowledge): expense.
• Development (applying research findings to a plan or design before commercial production): capitalise only if all of these are shown:
  1. it is technically feasible to complete the asset;
  2. the entity intends to complete it and use or sell it;
  3. the entity is able to use or sell it;
  4. it will generate probable future economic benefits (a market for the output or usefulness within the entity);
  5. adequate technical, financial and other resources are available to complete it; and
  6. the expenditure can be measured reliably.

Only expenditure after all the conditions are met can be capitalised. Expenditure already expensed cannot be reinstated as an asset later. If research and development cannot be separated, the whole is treated as research.

Intangibles acquired in a business combination

The acquirer recognises an identifiable intangible at fair value at the acquisition date, because the recognition criteria are taken as met. If the cost cannot be measured reliably, the item is included in goodwill. The acquirer also recognises the target’s in-process research and development if it meets the definition of an asset and is identifiable, even though the target expensed it.

Further spending on that project is treated under the normal rules: research is expensed, and development is capitalised only when the six conditions are met.

Measurement after recognition

• Cost model: cost less accumulated amortisation and impairment.
• Revaluation model: fair value at the revaluation date less later amortisation and impairment, allowed only if fair value can be found in an active market. Active markets for intangibles are rare, so very few entities revalue. The same model applies to the whole class.

Amortisation and useful life

The entity assesses whether the life is finite or indefinite. A finite-life asset is amortised systematically over its useful life from the date it is available for use, to the earlier of classification as held for sale and derecognition. Residual value is normally nil. An indefinite-life asset is not amortised, but is tested for impairment annually and whenever there is an indication of impairment.

The assessment of an indefinite life is reviewed each period, and a change to finite is a change in estimate. Goodwill acquired in a business combination is also tested annually and never amortised.

Areas of judgement

• Whether an internally generated asset meets the recognition criteria.
• Allocating the price in a business combination, including which intangibles to recognise.
• Cash flows and discount rates in impairment tests.
• Amortisation periods.

The rules in more depth

Why research is expensed and development capitalised

At the research stage, it is not yet clear that the work will produce anything. At the development stage, a specific product is near and the six conditions are evidence that it will pay off.

Why brands and customer lists cannot be recognised if built internally

The money spent on advertising or building a client base cannot be separated from the cost of the business as a whole, and a valuation is not a cost. A bought brand has a price paid and is recognised.

Why a valuation by a consultant does not help

Reliable measurement here means a reliable cost of an item that meets the definition. IAS 38 prohibits the item itself. A consultant’s valuation is an opinion of value, not a cost.

Why no amortisation does not mean no test

An asset with no foreseeable end to its benefits is not worn out year by year. But its value can fall suddenly, so the impairment test every year stands in for amortisation.

Worked examples

1. Expensed:
   research ₦3m + development before criteria ₦2m = ₦5 million.
2. Capitalised: ₦6 million (only expenditure after the conditions were met). The ₦2m cannot be added later.
3. Amortisation.
   ₦6m ÷ 5 = ₦1.2 million a year, from when the asset is available for use.
4. The costing records support the six conditions and the reliable measurement (s. 374(1) of CAMA 2020).

1. The patent is identifiable (a legal right), so the group recognises it at fair value, ₦6 million, even though Cocoa’s own statements do not.
2. Amortisation = ₦6m ÷ 4 = ₦1.5 million a year.
   After one year the carrying amount is ₦4.5m.

1. In Y’s own statements nothing is recognised.
2. In the group statements the know-how is recognised at fair value, ₦500,000.
3. The further ₦150,000 is expensed, because it is research or development that does not meet the criteria.

1. IAS 38 prohibits recognising internally generated brands. A reliable valuation does not change that.
2. The brand cannot be recorded. The cost of the valuation and the market research are expensed.
3. Only a brand that is bought, separately or in a business combination, can be recognised, at its cost or fair value.

How to score full marks

• Test the definition first: identifiable, control, future benefits. Then the two recognition tests.
• Name how the asset arose: bought, exchanged, internally generated or from a business combination, because the rule differs.
• For internal projects, split research from development and list the six conditions. Recognise only from the date they are all met.
• For prohibited items, state the rule and say why a valuation does not help.
• For amortisation, say finite or indefinite, give the charge and, for indefinite life, state the annual impairment test.
• Remember business combinations: fair value, and in-process research and development.

Common mistakes in the exam

• Capitalising research costs.
• Capitalising development costs incurred before the conditions are met, or reinstating them later.
• Recognising an internally built brand, mastheads, publishing titles or customer lists.
• Amortising goodwill or an indefinite-life intangible.
• Revaluing intangibles without an active market.
• Forgetting that a business combination recognises intangibles the target never recorded.
• Treating the consultant’s valuation as proof that the asset can be recognised.

Quick revision

• Definition: identifiable, non-monetary, no physical substance. Attributes: identifiable, control, future benefits.
• Recognise at cost if probable benefits and reliable cost.
• Never recognise internally generated goodwill, brands, mastheads, publishing titles, customer lists.
• Research: expense. Development: capitalise only if six conditions are met, from that date.
• Business combination: fair value, including in-process research and development.
• Models: cost, or revaluation only with an active market.
• Finite: amortise. Indefinite: no amortisation, annual impairment test.
• CAMA 2020: ss. 374(1), 377(1), 378, 404(7), 405.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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