International Accounting Standard 38 (IAS 38) governs how intangible assets are recognised, measured, and reported in financial statements. It was last substantially revised in 2004. In the two decades since, the global economy has undergone a fundamental structural shift from tangible to intangible value creation — and IAS 38 has not kept pace.
IAS 38 is the International Accounting Standard that sets out the criteria for recognising, measuring, and disclosing intangible assets on a company's balance sheet. It distinguishes between externally acquired and internally generated intangibles.
The result is a widening gap between what companies are actually worth and what their financial statements report. For growth-stage companies, where intangible assets often represent the vast majority of enterprise value, this gap is not an accounting technicality. It is a strategic problem that affects fundraising, M&A transactions, investor relations, and capital allocation decisions.
Under IAS 38, an intangible asset can only be recognised on the balance sheet if it meets three criteria:
For externally acquired intangible assets — those purchased in a transaction — recognition is relatively straightforward. When a company acquires a patent, a customer list, or a brand through an acquisition, the purchase price provides a market-based value that can be recognised on the balance sheet.
The problem lies with internally generated intangible assets. IAS 38 draws a sharp line between research expenditure (which must be expensed immediately) and development expenditure (which can be capitalised only if specific criteria are met, including technical feasibility, intention to complete, ability to use or sell, and reliable cost measurement).
In practice, this means that most internally developed intangible assets — workforce expertise, organisational processes, data assets, brand equity, customer relationships — are expensed as incurred. They never appear on the balance sheet, regardless of their economic value.
A company spends three years and two million pounds building a proprietary dataset, training a specialist team, and developing operational processes that give it a competitive edge. Under IAS 38, none of this investment appears as an asset. The balance sheet shows cash going out and operating costs going up — not the accumulation of productive capital.
This creates several practical problems.
| Problem | Impact |
|---|---|
| Company appears less valuable | Investors see costs, not investments — intangible assets that justify valuation are invisible |
| Capital allocation distorted | Intangible investments look like a drag on profitability, creating pressure to cut them |
| Company comparisons misleading | Acquired intangibles go on balance sheet; organically built ones do not |
| Board reporting incomplete | Financial reports systematically exclude the most strategically important assets |
The International Accounting Standards Board (IASB) has acknowledged the limitations of IAS 38 and has initiated work to address them. Several developments are worth tracking.
Reform is underway across multiple bodies simultaneously — IASB, EU (CSRD), UK (FRC), and IVSC. Companies that prepare now will be ahead when new requirements take effect.
The IASB added a project on intangible assets to its research agenda, signalling recognition that the current standard does not adequately serve users of financial statements. The project is examining whether and how the standard should be updated to reflect the economic reality of intangible-intensive businesses.
| Body | Initiative | Impact |
|---|---|---|
| IASB | Intangible assets research project | Potential revision of IAS 38 recognition criteria |
| EU (CSRD) | Human capital and innovation disclosure | Creating disclosure momentum beyond financial reporting |
| UK FRC | Review of intangible asset adequacy | Parliamentary scrutiny of reported vs actual corporate value |
| IVSC | Updated valuation guidance | Methodological infrastructure for expanded reporting |
The regulatory landscape is moving, but comprehensive reform of IAS 38 is likely still years away. This does not mean companies should wait.
Companies that begin measuring and reporting intangible assets now — even if the reporting is supplementary rather than required — will be positioned to benefit when standards do change. They will have historical data, established measurement processes, and the internal capability to produce intangible asset reports efficiently.
More immediately, supplementary intangible asset reporting can be used today in investor communications, fundraising materials, board reporting, and M&A preparation. The fact that IAS 38 does not require this reporting does not prevent companies from providing it voluntarily — and the evidence suggests that investors increasingly value the transparency.
The practical first step is to adopt a framework for categorising and measuring intangible assets that is consistent with the direction of travel in international standards. The seven-category framework (human capital, intellectual property, data assets, customer relationships, organisational capital, innovation capital, and supplier relationships) provides a comprehensive starting point that aligns with both academic research and emerging regulatory thinking.
Every time an accounting standard lags behind economic reality, an opportunity exists for companies that move ahead of the standard. In the 1990s, companies that adopted activity-based costing before it became widespread gained better cost visibility than their competitors. In the 2000s, companies that adopted SaaS metrics before they became standard gained better investor communications.
The same dynamic applies to intangible asset measurement today. The companies that begin measuring, valuing, and reporting their intangible assets now will not only be better prepared for regulatory change — they will gain an immediate advantage in capital allocation, investor relations, and competitive positioning.
The gap between what IAS 38 requires and what the economy demands is not just an accounting problem. It is a strategic opportunity for companies that choose to lead rather than follow. Start measuring now and you will be prepared — not scrambling — when standards catch up.
Start measuring your intangible assets with the Intangible Asset Valuator, or explore key terms in our Glossary.
This is the seventh in a series of articles on intangible asset valuation and growth accounting. Read the complete guide: The Complete Guide to Intangible Asset Valuation
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