IAS 38 vs ASC 350: Intangible Asset Standards
IAS 38 and ASC 350 treat intangible assets differently. Compare recognition, revaluation, amortisation, and impairment rules side by side.
Introduction
IAS 38 and ASC 350 are the foundational standards governing how companies recognise, measure, and report intangible assets throughout their lifecycle — from initial recognition through amortisation and impairment. While both aim to ensure faithful representation of intangible value on the balance sheet, they diverge in several areas that can materially affect reported assets, profits, and key financial ratios.
The most consequential difference concerns the treatment of internally generated intangible assets. IAS 38 allows — indeed requires — the capitalisation of development costs when specific criteria are met. US GAAP under ASC 350 (read together with ASC 730) generally requires these costs to be expensed. For technology companies, pharmaceutical firms, and any business investing heavily in R&D, this single difference can shift millions from the income statement to the balance sheet, or vice versa.
Understanding these divergences is essential for CFOs, auditors, investors comparing companies across reporting frameworks, and anyone involved in cross-border transactions where both sets of rules may apply.
Development Costs: The Defining Difference
IAS 38: Capitalise when criteria are met
IAS 38 distinguishes between research (always expensed) and development (capitalised when all six criteria are met):
- Technical feasibility of completing the asset
- Intention to complete and use or sell it
- Ability to use or sell the intangible asset
- Probable future economic benefits — a market or internal use exists
- Adequate resources (technical, financial, other) to complete development
- Ability to measure the development expenditure reliably
When all six criteria are met, capitalisation is mandatory — not optional. The entity must capitalise qualifying development costs from that point forward.
ASC 350 / ASC 730: Generally expensed
US GAAP takes a more conservative approach. Under ASC 730, research and development costs are generally expensed as incurred. Exceptions exist for:
- Software development (ASC 985-20 for external-use software; ASC 350-40 for internal-use software): capitalisation begins at technological feasibility (external) or, today, the application development stage (internal)
- Film, music, and similar content (ASC 926): specific capitalisation rules
ASU 2025-06: internal-use software without stages
In September 2025 the FASB issued ASU 2025-06, Targeted Improvements to the Accounting for Internal-Use Software. It removes every reference to project stages from ASC 350-40. Instead, capitalisation starts when both of these are true:
- Management has authorised and committed to funding the software project, and
- It is probable that the project will be completed and the software will be used to perform the function intended.
The probable-to-complete threshold is not met while there is significant development uncertainty: when the software involves technological innovations or novel, unique or unproven functions or features whose uncertainty has not been resolved through coding and testing, or when its significant performance requirements have not been identified or are being substantially revised. Until then, the costs stay expensed.
ASU 2025-06 at a glance
| Point | Detail |
|---|---|
| Effective | Annual periods beginning after 15 December 2027, and interim periods within them (calendar 2028 for December year-ends), for all entities |
| Early adoption | Permitted, applied from the beginning of an annual reporting period |
| Transition | Prospective, modified or retrospective |
| Website development costs | Guidance moves into ASC 350-40 |
| Unchanged | Which costs are eligible, when capitalisation stops, and software for sale under ASC 985-20 |
ASU 2025-06 does not bring US GAAP into line with IAS 38. It still applies only to internal-use software, and research and development outside software stays expensed under ASC 730. What it changes is the trigger: a probability threshold replaces a stage label, which is closer in spirit to the evidence IAS 38.57 asks for. For the IFRS side of the same software decisions, see our R&D capitalisation guide.
A company developing new products (other than software) under IFRS might capitalise £5 million in development costs that would be fully expensed under US GAAP's ASC 730. That creates a £5 million difference in reported assets and higher reported profits under IFRS in the years the money is spent, followed by amortisation charges that US GAAP reporters do not have. Software narrows the gap: a SaaS company's own platform is internal-use software under ASC 350-40, so US GAAP capitalises part of that spend too. Investors comparing companies across frameworks must adjust for the difference.
Impact on financial statements
| Metric | IFRS (capitalise) | US GAAP (expense) |
|---|---|---|
| Total assets | Higher (capitalised development on balance sheet) | Lower |
| Reported profit (year of spend) | Higher (cost on balance sheet, not P&L) | Lower |
| Reported profit (later years) | Lower (amortisation charges hit P&L) | Higher (no amortisation — already expensed) |
| EBITDA | Higher: capitalised spend leaves operating costs and its amortisation sits below EBITDA | Lower: all development spend is an operating cost |
| Return on assets | May be lower (larger asset base) | May be higher (smaller asset base) |
Revaluation: Permitted vs Prohibited
IAS 38: Revaluation model available
IAS 38 permits entities to carry intangible assets at a revalued amount — fair value at the date of revaluation less subsequent amortisation and impairment — provided an active market exists for the asset.
In practice, this option is rarely used because active markets for most intangible assets do not exist. Exceptions include:
- Taxi licences (in some jurisdictions)
- Transferable fishing quotas
- Production quotas or rights
ASC 350: Cost model only
US GAAP does not permit revaluation of intangible assets. All intangibles are carried at cost less accumulated amortisation and impairment. There is no fair value option for subsequent measurement.
The prohibition on revaluation under US GAAP means that an intangible asset acquired 10 years ago is still carried at historical cost (less amortisation), even if its fair value has increased dramatically. This can create a significant gap between reported and economic value. In practice IFRS reporters face the same gap, because the active market IAS 38 requires for revaluation rarely exists.
Impairment Testing
Indefinite-life intangible assets
| Aspect | IAS 38 / IAS 36 | ASC 350 |
|---|---|---|
| Frequency | Annual (or when indicators exist) | Annual (or when indicators exist) |
| Qualitative screen | Not available under IAS 36 | Optional qualitative assessment |
| Quantitative test | Compare recoverable amount to carrying value | Compare fair value to carrying amount |
| Recoverable amount definition | Higher of fair value less costs of disposal AND value in use | Fair value only (no value in use concept) |
| Impairment loss | Carrying amount less recoverable amount | Carrying amount less fair value (capped at carrying amount) |
Impairment reversal — a critical divergence
| Aspect | IAS 38 / IAS 36 | ASC 350 |
|---|---|---|
| Intangible assets (not goodwill) | Reversal permitted if conditions change | Reversal prohibited |
| Goodwill | Reversal prohibited | Reversal prohibited |
Under IFRS, if an intangible asset was previously impaired and conditions subsequently improve, the impairment loss can be reversed (up to the original carrying amount). US GAAP does not permit reversal under any circumstances. This asymmetry means IFRS reporters may show recovery in good years, while US GAAP reporters cannot.
Useful Life Assessment
Both standards require classification of intangible assets as having either a finite or indefinite useful life.
| Aspect | IAS 38 | ASC 350 |
|---|---|---|
| Finite life | Amortised over useful life | Amortised over useful life |
| Indefinite life | Not amortised; annual impairment test | Not amortised; annual impairment test |
| Reassessment | Finite life: at least each financial year end (IAS 38.104); indefinite life: each period (IAS 38.109) | Each reporting period, for both finite and indefinite lives (ASC 350-30-35-9 and 35-16) |
Both frameworks require a periodic review, and both account for a change prospectively. The practical difference is in impairment, covered above: an IFRS reporter can reverse an impairment of an intangible asset if conditions improve, and a US GAAP reporter cannot.
IAS 38 Distinctive Features
- Development cost capitalisation (mandatory when criteria met)
- Revaluation model available (rare in practice)
- Impairment reversal permitted for intangibles
- Recoverable amount uses value in use as well as fair value less costs of disposal
ASC 350 Distinctive Features
- R&D generally expensed (except software; ASU 2025-06 changes the internal-use software trigger from 2028)
- Cost model only — no revaluation
- No impairment reversal under any circumstances
- Qualitative impairment screen available
Practical Example: Product Development Comparison
Two identical industrial technology companies — one reporting under IFRS, one under US GAAP — invest £3 million annually developing new products (not software). Both companies are profitable and growing at 15% per year.
IFRS reporter (IAS 38):
- Capitalises £2.4 million of qualifying development costs (80% meets the six criteria)
- Balance sheet shows £8 million in capitalised development costs (multi-year accumulation)
- Amortisation charge of £1.6 million reduces reported profit
- Net impact: higher assets, slightly higher profit in growth phase
US GAAP reporter (ASC 730):
- Expenses £3 million in R&D costs through P&L
- Balance sheet shows no capitalised development
- No amortisation charge
- Net impact: lower assets, lower profit in growth phase, but higher profit once development stabilises
An investor comparing these two companies on a P/E ratio basis would see the IFRS reporter trading at a lower multiple (higher reported earnings) despite identical underlying economics. Adjusting for the capitalisation difference is essential for like-for-like comparison.
Decision Framework
1. Determine the reporting framework
Confirm whether the entity reports under IFRS (IAS 38) or US GAAP (ASC 350). For groups with both, identify which entities use which framework.
2. Map the development cost impact
For R&D-intensive businesses, quantify the difference in reported assets and profits between capitalisation (IFRS) and expensing (US GAAP).
3. Consider impairment implications
IFRS allows impairment reversal for intangibles; US GAAP does not. Model the P&L impact under both scenarios for cyclical businesses.
4. Adjust for cross-framework comparisons
When benchmarking IFRS and US GAAP companies, adjust for development cost capitalisation, impairment reversal asymmetry, and revaluation differences.
Conclusion
The divergence between IAS 38 and ASC 350 on development cost treatment is one of the most impactful differences in international financial reporting. It directly affects reported assets, profits, and return metrics. The impairment reversal prohibition under US GAAP creates a further asymmetry for cyclical businesses.
For practitioners and investors, the key is not which standard is "better" but understanding how the same underlying economics produce different reported numbers under each framework. For the PPA-specific comparison, see IFRS 3 vs ASC 805. For UK-specific considerations, see FRS 102 vs IFRS.
The Bottom Line
IAS 38 capitalises development costs, creating higher reported assets and smoother earnings. ASC 350 expenses them, producing a more conservative balance sheet. Neither approach is inherently superior — they reflect different philosophies on reliability versus relevance. What matters is understanding the impact when comparing companies or navigating cross-border transactions.
Related Glossary Terms
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