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The Covid-19 pandemic has led to an unprecedented rise in the use of information and communication technologies and digitisation in almost all areas of life. While there is a frantic race to search for a vaccine, the ‘new normal’ in the widespread use of technology and investments in research and development (R&D) will have an enduring effect long after the pandemic is over.

The critical asset that stands out in this whole crisis is the intangible asset. This is an elusive asset, rarely seen on a balance sheet outside of a business combination.

The spotlight is on International Accounting Standard (IAS) 38, Intangible Assets, issued by the International Accounting Standards Board (IASB). The current version, issued in 2002, replaced the original 1998 version issued by the International Accounting Standards Committee (IASC), the predecessor of the IASB.

In reality, the origins of IAS 38 can be traced back to the superseded IAS 9, Research and Development Costs, which was first issued in 1978 by the IASC. Although there have been changes since 1978, the basic tenet of a conservative approach in accounting for intangible assets in IAS 38 has remained a constant.

IAS 38 in the digital world

Is IAS 38 relevant in today’s digital economy?

The standard defines an intangible asset as an ‘identifiable non-monetary asset without physical substance’. Unlike the popular perception that intangible assets are uncommon and esoteric, the accounting definition is down to earth and embraces a wide universe of assets.

We rarely think of deferred tax assets, financial assets of a non-monetary nature and contract assets as being intangible assets but they are. If an intangible asset falls under the purview of a separate IFRS Standard or an IAS, it will apply that other standard and not IAS 38.

For example, IFRS 3, Business Combinations, governs the accounting of goodwill acquired in a business combination. As each intangible asset, by virtue of its nature, origination or purpose, has its own peculiar attributes, the scoping out of sub-groups of intangible assets to other standards permits more appropriate accounting to be applied to each.


It is also necessary to understand the characteristic of ‘identifiability’ of intangible assets. This requires the intangible asset to be either separable or arising from contractual or other legal rights (IAS 38 paragraph 12).

On this basis, many expenditures fail to meet the identifiability criterion. Examples include internally generated goodwill or brands, mastheads, publishing titles, customer lists and other items that are similar in substance (IAS 38 paragraphs 48 and 63).

The benefits of these internally generated assets flow from the synergistic use of assets of the business, hence it is difficult to isolate their benefits from other assets.

In the Covid-19 crisis, information and communication technologies and R&D work on vaccines would be identifiable. Typically, they can be sold, leased out or used on a stand-alone basis. Often, they will be accompanied by legal rights such as patents and copyrights.

However, even though an expenditure may pass the definition test, it may fail the recognition criteria of IAS 38. Two conditions must be met: existence of probable future economic benefits and reliable measurement of costs.

Separately acquired or internally generated?

Intangible assets typically originate from two sources: separately acquired or internally generated. Separate acquisition in an arm’s-length transaction is less contentious as the purchase price reflects the estimated probabilities of benefits to be received.

However, internally generated intangible assets lack an exchange transaction (or past event as referred to in the conceptual framework) to corroborate the existence of probable future benefits.

In the absence of exchange transactions for internally generated intangible assets, IAS 38 paragraphs 52 to 67 provide specific recognition criteria for these assets.

Although R&D is often used with reference to scientific processes, under IAS 38 the term can be applied to any internal project . ‘Research’ and ‘development’ are defined in paragraph 8 of IAS 38.

In a nutshell, ‘research’ is search for knowledge and understanding while ‘development’ is the application of that knowledge and understanding to a plan or design for new or substantially improved products or processes before the start of commercial production or use.

Meet the conditions

Research expenditures are always expensed off but development expenditures are recognised if (and only if) specific conditions are met. IAS 38 requires all six conditions to be met:

  • technical feasibility so that it will be available for use or sale
  • intention to complete, use or sell
  • ability to use or sell
  • the generation of probable future economic benefits
  • availability of resources to complete, use or sell
  • reliable measurement of expenditures (IAS 38 paragraph 57).

It is the R&D tests that will prevent most projects from being recognised on the balance sheet. The reporting entity can recognise the expenditures as an asset only from the point when all six conditions are met.

Expenditures in development activities that do not meet these requirements are expensed off.

In many projects, it will be the technical feasibility that is the most difficult to meet and which will affect the other conditions.

For example, a vaccine for Covid-19 would have to undergo many clinical trials and obtain regulatory approval to render it available for use or sale. In the project development cycle, this will be a very late-stage event. The bulk of expenditures are likely to be incurred before this stage and would be expensed off.

In technology-based projects, intense pilot testing or even a free-use trial period may precede the capitalisation of development expenditures. Hence, whatever development expenditures that are capitalised may be at the very tail end of the product development cycle. IAS 38 does not permit expensed-off items to be capitalised subsequently.

Would the measurement models in IAS 38 make up for the stringency of the recognition criteria? IAS 38 allows two models to be used: the cost or the revaluation model. However, an important condition for the use of the revaluation model is the availability of fair value measures by reference to an active market as defined in IFRS 13, Fair Value Measurement.

The availability of level 1 fair value measures is highly unlikely for internally generated intangible assets that are unique assets. Hence, the revaluation model can be applied only in restricted cases, such as for licences that are actively traded.

The cost model will apply to most recognised intangible assets. In economic terms, most of the value of the hidden assets is not reflected on the balance sheet.

Finally, IAS 38 requires disclosures to be made of all R&D expenditures that have been expensed off during a reporting period. In addition, the entity is encouraged but not required to disclose significant intangible assets that the entity controls but which are not recognised as assets because they did not meet the recognition criteria in IAS 38.

While disclosures are no substitute for measurement, in the context of IAS 38, they provide valuable information about ‘off-balance sheet’ assets. That said, some entities prefer not to disclose good news for competitive reasons. Hence, the second disclosure above is a rare example of where the IASB encourages but does not require disclosure.

Conservative philosophy

The underlying philosophy of IAS 38 is clearly one of conservatism. As it is a relatively long-standing standard, its underpinnings were shaped by conceptual frameworks of 2010 and earlier. In fact, the source standard IAS 9 precedes the conceptual framework.

The recognition criteria in the 2018 Conceptual Framework (CF) have moved from a probable threshold to a multidimensional framework that evaluates relevance (existence uncertainty and probability) and faithful representation (measurement uncertainty).

It is not necessarily that IAS 38 would be less conservative under the principles of the 2018 CF but the process of determining the recognition criteria would be different. However, the 2018 CF emphasises the importance of providing information even if an item fails to meet the recognition criteria.

Information on R&D expenses over time may provide useful information in the light of the spirit of the 2018 CF. Further, the IASB may need to look again at the existing stance of encouraging rather than requiring disclosures of significant intangible assets that are not on the balance sheet.

With regards to the measurement basis, the 2018 CF would support the use of the cost model of IAS 38. Essentially, the more sensitive an asset is to market forces, the more appropriate is the use of current value. Intangible assets, being an entity-specific asset, lack the sensitivity to market forces as compared to, say, a derivative instrument.

Intangible assets also contribute indirectly to cashflows, in conjunction with other assets, rather than directly. Both these features would support a historical cost model.

IAS 38 would not fare too poorly when evaluated against the current conceptual framework. However, the non-recognition of internally generated intangible assets has always been a contentious issue, with strong arguments on both sides. For example, proponents argue that certain empirical studies in the US support capitalisation as providing value-relevant information. However, opponents suggest that the costs to support recognition of these assets do not justify the benefits of recognition.

Tension between relevance and representation

Without perfect foresight, the tension between relevance and faithful representation remains an important reality in the accounting for intangible assets. A lesson can be learnt from the dot-com bubble of 1995 to 2002.

The meteoric rise in the share prices of technology companies was fuelled by irrational exuberance and unrealistic expectations of future revenues, partly influenced by pro forma information that was outside of the financial statements.

Accounting standards on intangible assets in both IFRS and US GAAP domains remained unscathed during that crisis; their conservative stance was vindicated.

IAS 38 has chosen the approach of letting actual revenues reveal themselves as and when they occur rather than recognising fair value change in anticipation of the revenues. In an age of uncertainty and volatility, perhaps the conservatism of IAS 38 has its merits.

Dr Pearl Tan FCCA is an associate professor of accounting at Singapore Management University. She was also a panellist on the IAS 38 forum at the ACCA Singapore virtual conference 2020. The views expressed in this article are hers