IAS 38 Explained: Recognition and Measurement of Intangible Assets

What Is IAS 38?

IAS 38 Intangible Assets is the International Accounting Standard that prescribes how companies recognise, measure, and disclose intangible assets in their financial statements. It applies to all intangible assets except those specifically dealt with by other standards — such as goodwill arising from business combinations (covered by IFRS 3), financial assets, mineral rights, and insurance contracts.

IAS 38 has been in force since 1998, with amendments in 2004 aligning it with the broader IFRS framework. For over two decades it has been the primary standard governing intangible asset accounting globally — and for over two decades, practitioners have debated whether its recognition criteria are fit for purpose in an economy where intangible investment far exceeds tangible.

The Three Recognition Criteria

Under IAS 38, an intangible asset is recognised on the balance sheet only if it meets all three of the following criteria simultaneously:

Why the criteria are difficult to meet

The control criterion is the most challenging for many intangible assets. Consider:

• Human capital — a company cannot control its employees; they are free to leave. Therefore, workforce expertise and training investment cannot be recognised as an asset under IAS 38 (unless acquired in a business combination as part of a broader contract)
• Customer relationships — without a binding contract, the entity lacks sufficient control over the customer to recognise the relationship as an asset
• Brand equity — internally generated brands are specifically prohibited from recognition under IAS 38 (paragraph 63), even when they clearly generate economic value

How Intangible Assets Are Measured

For assets that meet the recognition criteria, IAS 38 prescribes different measurement rules depending on how the asset was obtained.

Separately acquired intangible assets

When an intangible asset is purchased in an arm's-length transaction, it is initially measured at cost — the purchase price plus any directly attributable costs of preparing the asset for its intended use.

Intangible assets acquired in a business combination

Under IFRS 3, intangible assets acquired in a business combination are measured at fair value on the acquisition date. This is the more complex measurement and typically requires specialist valuation using methods such as Relief-from-Royalty, MPEEM, or the Cost Approach.

Internally generated intangible assets

This is where IAS 38 is most restrictive. The standard divides internal generation into two phases:

The Six Development Capitalisation Criteria

For development expenditure to be capitalised as an intangible asset, the entity must demonstrate all six of the following:

Practical application to software development

Software capitalisation is the most common application of the development capitalisation criteria. The challenge is determining when a project transitions from research to development.

What cannot be capitalised

IAS 38 explicitly prohibits the capitalisation of:

• Internally generated brands — even if the brand has significant market value
• Internally generated mastheads — newspaper and magazine titles
• Internally generated customer lists — even if compiled at significant cost
• Internally generated goodwill — by definition not identifiable
• Start-up costs — costs of establishing a new business or operation
• Training costs — investments in workforce development
• Advertising and promotional costs — brand-building expenditure
• Relocation and reorganisation costs — operational restructuring

This list encompasses many of the most valuable intangible assets in a modern business. The gap between what IAS 38 permits on the balance sheet and what drives economic value is the central problem that Opagio addresses through its Intangible Asset Valuator and growth accounting framework.

Subsequent Measurement: Amortisation and Impairment

After initial recognition, intangible assets are carried at either cost less accumulated amortisation and impairment (the cost model) or at a revalued amount (the revaluation model, rarely used in practice due to the absence of active markets for most intangible assets).

Finite useful life

Assets with a finite useful life are amortised systematically over that life. The amortisation method should reflect the pattern in which the asset's economic benefits are consumed — but in practice, most entities use the straight-line method.

Indefinite useful life

Assets with an indefinite useful life are not amortised but must be tested for impairment at least annually. An indefinite useful life does not mean infinite — it means there is no foreseeable limit to the period over which the asset will generate cash flows.

Amortisation periods — market practice

IAS 38 vs Economic Reality: The Measurement Gap

The most significant criticism of IAS 38 is the gap it creates between balance sheet values and economic reality.

The ONS estimates that UK businesses invested £185.5 billion in intangible assets in 2021 — yet the vast majority of this investment was immediately expensed under IAS 38 rather than capitalised. The result is that the most valuable companies in the economy carry balance sheets that systematically understate their true asset base.

This has practical consequences:

• Lending decisions based on balance sheet assets exclude the majority of company value
• Investment analysis must look through reported financials to assess true intangible value
• Management decisions about R&D, training, and brand investment lack balance sheet visibility
• Tax planning opportunities are missed when amortisable intangible assets go unrecognised

IAS 38 vs FRS 102 (UK Comparison)

For UK companies not reporting under full IFRS, FRS 102 provides an alternative framework with some notable differences.

Practical Guidance for CFOs

If you are a CFO or finance director applying IAS 38, focus on these priorities:

1. Establish a capitalisation policy — document the criteria and internal thresholds for determining when development expenditure qualifies for capitalisation
2. Train project managers — the research/development phase determination is made by project leaders, not accountants; they need to understand the criteria
3. Maintain an intangible asset register — track all capitalised intangible assets with their cost, useful life, amortisation method, and carrying amount
4. Review useful lives annually — IAS 38 requires that the useful life and amortisation method be reviewed at each financial year-end
5. Understand the gap — use tools like the Opagio Questionnaire to identify the intangible assets that IAS 38 does not capture but that drive your company's value

Further Reading

• Assess your intangible assets — Use the Intangible Asset Valuator to quantify assets beyond what IAS 38 recognises
• Understand IFRS 3 — Read our step-by-step guide to IFRS 3 for intangible assets in business combinations
• Learn valuation methods — The Valuation Methods programme covers every method referenced in this guide
• Explore the taxonomy — See how IAS 38 relates to the CHS framework