Intangible Asset Masterclass — Lesson 8 of 10
The valuation methods covered in Lesson 7 produce numbers. Accounting standards determine what happens to those numbers — which assets are recognised on the balance sheet, how they are measured initially and subsequently, and how their values flow through the income statement over time.
Three standards are central to intangible asset accounting: IAS 38 (Intangible Assets), IFRS 3 (Business Combinations), and ASC 805 (the US GAAP equivalent of IFRS 3). This lesson covers the key requirements of each, the practical differences between them, and the compliance considerations that CFOs, investors, and advisors need to navigate.
Accounting standards create asymmetries that significantly affect how intangible assets appear on financial statements. Internally generated brands and customer relationships cannot be recognised, but acquired ones must be. IFRS requires annual goodwill impairment testing while prohibiting amortisation, while US GAAP now allows private companies to amortise goodwill. These differences directly affect reported earnings, balance sheet strength, and the comparability of financial statements across jurisdictions and business histories.
The Three Standards at a Glance
Standards Scope Comparison
| Standard | Jurisdiction | Scope | Key Focus |
|---|---|---|---|
| IAS 38 | IFRS (international) | All intangible assets — purchased and internally generated | Recognition, measurement, amortisation, impairment |
| IFRS 3 | IFRS (international) | Intangible assets acquired in business combinations | Identification and fair value measurement in PPA |
| ASC 805 | US GAAP | Business combinations (equivalent to IFRS 3) | Similar to IFRS 3 with some differences |
| ASC 350 | US GAAP | Intangible assets (equivalent to IAS 38) | Goodwill and other intangibles — post-acquisition |
| FRS 102 s18 | UK GAAP | Intangible assets for UK private companies | Simplified IAS 38 with some differences |
IAS 38: Recognition and Measurement
IAS 38 establishes the rules for when an intangible asset can be placed on the balance sheet and how it is measured both initially and over its life.
Recognition Criteria
An intangible asset is recognised if and only if:
- It is probable that future economic benefits attributable to the asset will flow to the entity
- The cost of the asset can be measured reliably
For purchased intangible assets — including those acquired in a business combination — the recognition criteria are presumed to be met. The asset is recognised at its fair value on the acquisition date.
For internally generated intangible assets, recognition is more restrictive. IAS 38 divides the creation process into two phases.
Research Phase
- All expenditure must be expensed
- Cannot be capitalised under any circumstances
- Examples: original investigation, evaluation of alternatives, searching for new knowledge
Development Phase
- Expenditure must be capitalised if ALL six criteria are met
- Technical feasibility demonstrated
- Intention to complete and use/sell
- Ability to use or sell the asset
- Probable future economic benefits
- Adequate resources to complete
- Expenditure reliably measurable
IAS 38 contains explicit prohibitions on recognising certain internally generated assets. Internally generated brands, mastheads, publishing titles, customer lists, and items similar in substance may not be recognised as intangible assets — regardless of the investment made to create them. This prohibition reflects the view that the cost of creating these assets cannot be reliably distinguished from the cost of developing the business as a whole.
Subsequent Measurement
After initial recognition, IAS 38 permits two models.
| Model | Measurement | When Used |
|---|---|---|
| Cost model (default) | Cost less accumulated amortisation and impairment | Most common in practice |
| Revaluation model | Fair value at revaluation date less subsequent amortisation and impairment | Only permitted when an active market exists for the asset; rarely used |