Under IFRS, capitalising development costs is not a choice. Once an entity can demonstrate the six criteria in IAS 38.57, the cost from that date onwards must be recognised as an intangible asset. So what is a capitalisation policy for?
It sets out how the company applies those tests consistently, as IAS 8.13 requires for similar transactions: which projects are in scope, what evidence proves each criterion and on what date, which costs count, how long assets last, and who signs off. Auditors test the policy first and the numbers second. A company with a clear written policy and dated evidence usually has a short conversation; a company that reconstructs its reasoning at year end usually has a long one.
Under FRS 102 the policy carries more weight still, because capitalisation is a genuine choice. The template below is written for IFRS, with the FRS 102 changes at the end.
Under IFRS the policy does not decide whether to capitalise; IAS 38.57 does. The policy decides how consistently and defensibly the company applies the test, and the evidence file decides whether an auditor can agree.
Copy the sections below into your own policy and replace the bracketed text. Each section notes the paragraph it implements. This is a starting point for a company's own policy, which its finance team and auditors should review against its facts.
This policy applies to expenditure on internal projects to develop new or substantially improved software, products, processes or systems for sale or internal use by [Company] and its subsidiaries reporting under IFRS. It does not apply to intangible assets acquired separately or in a business combination, or to cloud computing arrangements in which [Company] receives only a right to access software, except additional code [Company] controls (IFRIC agenda decisions, March 2019 and April 2021).
| Term | Definition used in this policy |
|---|---|
| Research | Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding (IAS 38.8) |
| Development | The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use (IAS 38.8) |
| Capitalisation date | The date on which the last of the six criteria in Section 3 is met and evidenced |
| Available for use | The date the asset is in the location and condition necessary for it to operate as management intends (IAS 38.97) |
Development expenditure is capitalised from the date [Company] can demonstrate all six criteria in IAS 38.57. Each project owner records the evidence for each criterion and the date it first existed.
| Criterion | Evidence required | Approved by |
|---|---|---|
| (a) Technical feasibility | Signed-off technical design or working prototype | [CTO] |
| (b) Intention to complete and use or sell | Board or executive committee minute approving the project | [Board] |
| (c) Ability to use or sell | Named operating owner (internal use) or approved launch plan (sale) | [Product director] |
| (d) Probable future economic benefits | Business case with quantified benefits and demand evidence | [CFO] |
| (e) Adequate resources | Approved budget to completion and resourcing plan | [CFO] |
| (f) Reliable measurement | Project cost code and time recording in place | [Financial controller] |
If the research and development phases of a project cannot be distinguished, all its expenditure is treated as research and expensed (IAS 38.53).
Capitalisation starts on the capitalisation date and covers only expenditure incurred from that date (IAS 38.65). Expenditure recognised as an expense before that date is not added to the asset later (IAS 38.71). Capitalisation stops when the asset is available for use (IAS 38.66; see also 38.30), and amortisation starts on the same date. Expenditure after that date is expensed (IAS 38.20), unless it is a separately identifiable enhancement that meets Section 3 as a new project.
The cost of an internally generated asset is the directly attributable cost of creating, producing and preparing it to operate as management intends (IAS 38.66). Costs listed in IAS 38.67 and IAS 38.69 are expensed. [Company]'s eligible and excluded cost types are listed in Appendix A.
The table under "What Counts as Cost" below can serve as that appendix.
Projects with expected capitalisable cost below [£X] are expensed, provided the effect of doing so, individually and in aggregate on profit and net assets, is not material. The [CFO] checks the aggregate of sub-threshold projects at each year end, and the threshold is never used to achieve a particular presentation (IAS 8.5, 8.8, 8.41).
| Policy point | Wording |
|---|---|
| Useful life | Estimated per asset from the factors in IAS 38.90; for internal software, normally [3 to 5] years unless evidence supports another period |
| Method | Straight-line from the date available for use, unless another pattern of consumption can be determined reliably (IAS 38.97); revenue-based methods are not used (IAS 38.98A presumes them inappropriate) |
| Residual value | Nil, unless a third party has committed to buy the asset at the end of its useful life, or an active market exists that sets its residual value and is expected to exist at that date (IAS 38.100) |
| Review | Useful life and method reviewed at each financial year end; changes accounted for prospectively (IAS 38.104, IAS 8) |
Assets not yet available for use are tested for impairment at least annually (IAS 36.10). Assets in use are tested whenever there is an indication of impairment, such as a cancelled launch, lost customer or failed milestone (IAS 36.9).
When a project is abandoned, or no future economic benefits are expected from its use or disposal, the carrying amount is derecognised and the loss recognised in profit or loss (IAS 38.112-113).
The project owner maintains the evidence file. Finance reviews new projects against Section 3 before the first capitalisation entry, and reviews every capitalised project at each reporting date for continued compliance and impairment indicators.
The financial statements disclose, for each class of intangible asset and distinguishing internally generated from other intangible assets, useful lives or amortisation rates, methods, gross carrying amount and accumulated amortisation (with accumulated impairment), the line item that includes amortisation, and a reconciliation of the carrying amount (IAS 38.118), together with the research and development expenditure expensed in the period (IAS 38.126).
Section 5 of the policy is where most audit adjustments come from. IAS 38.66 lists the kinds of directly attributable cost that belong in the asset; IAS 38.67 lists what never does.
| Directly attributable: capitalise (IAS 38.66) | Excluded: expense (IAS 38.65, 67, 69, 71) |
|---|---|
| Materials and services used or consumed in generating the asset, including contractors working on the project | Selling, administrative and other general overheads, unless directly attributable to preparing the asset for use |
| Employee benefits arising from generating the asset, for time recorded against the project | Identified inefficiencies and initial operating losses before the asset reaches planned performance |
| Fees to register a legal right | Training staff to operate the asset |
| Amortisation of patents and licences used to generate the asset | Start-up and launch costs (IAS 38.69(a)) |
| Borrowing costs, where the project necessarily takes a substantial period to complete: required by IAS 23.8, including on general borrowings (IAS 23.14) | Costs incurred before the capitalisation date (IAS 38.65, 71) |
Allocations of general overhead are the most common challenge. Rent, HR and finance costs are not capitalised just because developers sit in the building. An overhead charge is defensible only where it is directly attributable to creating the asset (IAS 38.66-67(a)) and allocated on a documented basis.
Most short-cycle software projects, and scale-ups funded by equity, will have no borrowing costs to capitalise; a multi-year build funded by venture debt may.
The policy is tested project by project. For each capitalised project an auditor will typically ask to see:
| Criterion | What auditors expect to see | Common gap |
|---|---|---|
| (a) Technical feasibility | A dated design sign-off or prototype review, before the capitalisation date | Feasibility asserted, with the prototype dated after capitalisation began |
| (b) Intention | Board or committee minute, or another record of approval by someone with authority | Approval not documented by anyone with authority, or only a roadmap slide |
| (c) Ability to use or sell | Named owner, launch plan, pilot agreement | No evidence of who will run or sell the asset |
| (d) Future benefits | Business case with numbers, refreshed at year end | A strategic narrative with no quantified benefit |
| (e) Resources | Approved budget to completion, or a lender's indication of its willingness to fund the plan (IAS 38.61) | Completion depends on a funding round that has not closed, with no signed indication of willingness to fund |
| (f) Measurement | Time records and project codes from the capitalisation date | Labour allocated at year end by estimate |
| Cost | Reconciliation of capitalised cost to time records and invoices | Overheads included without a basis |
| Useful life | Analysis supporting the period chosen | Every project defaulted to five years |
| Impairment | Annual test for projects in progress under IFRS (IAS 36.10) | No test until the asset goes live |
To see how the six tests apply to a single project, run the interactive recognition test in our R&D capitalisation guide. For the standard as a whole, see our IAS 38 intangible assets guide.
Under FRS 102, capitalising development costs that meet the criteria is a policy choice (18.8H). A company may adopt a policy of capitalising qualifying development costs or of expensing all of them, but it must apply its choice consistently to all expenditure that meets the criteria (18.8K).
The main changes to turn the template above into an FRS 102 policy:
| Section | Change |
|---|---|
| Section 1 | State the election: [Company] capitalises development expenditure that meets the criteria, or expenses all of it; the choice applies to all qualifying development (18.8H, 18.8K) |
| Section 5 | Capitalising borrowing costs is also a policy choice under FRS 102 (25.2), applied consistently to a class of qualifying assets |
| Section 7 | Every intangible asset has a finite life; add the fallback that, in the exceptional cases where it cannot be reliably estimated, it does not exceed 10 years (18.19-18.20) |
| Section 7 | Review useful life and method when there is an indication that they have changed (18.24), rather than at every year end |
| Section 8 | Replace the annual test for projects in progress with an indicator review at each reporting date (27.7); FRS 102 has no annual test for assets not yet available for use |
All paragraph references then switch to their FRS 102 equivalents: Section 18 for recognition and cost, Section 27 for impairment, Section 10 for estimates and 18.27-18.29 for disclosure.
A company that moves from FRS 102 to IFRS, for example ahead of a listing, must apply IAS 38 from its date of transition, the start of the earliest comparative period. Development that met the criteria then must be recognised, but only for costs incurred after the company documented its assessment at the time and while it captured costs reliably as they were incurred. Hindsight is not permitted (IFRS 1.IG44, IG46-47), so a policy of expensing does not remove the need to keep project evidence.
A policy is only as good as the records behind it. The questions it asks (which project, which dates, which costs) are answered in the ledger and the evidence file, not in the policy document.
Opagio Intangibles holds each asset's evidence file alongside the ledger spend mapped to it; setting the capitalisation date and the policy remains the company's and its auditor's judgement. It shows a company's accounts on three bases, one at a time: Reported (as filed), Accounting-eligible (what the standards would allow or require the company to capitalise, with the IAS 38.63 bar on internally generated brands and customer lists applied) and Management (a non-statutory view, never for filing). Our article on IAS 38 compliance documentation explains how the evidence file is structured. For scale-ups, see Opagio for growing companies.
No. Under IAS 38.57, development expenditure must be capitalised once the entity can demonstrate all six criteria. The policy sets out how the entity applies the criteria and evidences them. Under FRS 102 it is a genuine choice (18.8H), applied consistently to all qualifying development (18.8K).
Scope, definitions of research and development, the six recognition criteria with the evidence required for each, start and stop dates, costs included and excluded, any materiality threshold, useful lives and the amortisation method, impairment testing, abandoned projects, responsibilities and disclosure.
Only where they are directly attributable to preparing the asset for use (IAS 38.66). Selling, administrative and general overheads are excluded (IAS 38.67(a)), as are training costs and initial operating losses.
Yes, where the effect of expensing projects below the threshold is not material to the financial statements, individually and in aggregate (IAS 8.5, 8.8). The threshold should be documented, checked in aggregate each year end, applied consistently and never used to achieve a particular presentation.
David Stroll is Co-Founder and Chief Scientist at Opagio, where he leads research on intangible asset measurement, accounting standards and the productivity of intangible investment. Meet the team.
Opagio Intangibles runs RFR, MPEEM, With & Without and Cost across every intangible asset you own — the evidence base that survives Fair Value scrutiny.
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