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.
IAS 38 sets a high bar for recognising intangible assets on the balance sheet. Most internally generated intangible assets — including brands, customer relationships, and human capital — do not qualify for recognition, creating a systematic gap between reported book value and economic reality.
Under IAS 38, an intangible asset is recognised on the balance sheet only if it meets all three of the following criteria simultaneously:
The asset must be identifiable — either separable (capable of being sold, transferred, or licensed independently) or arising from contractual or legal rights. This distinguishes intangible assets from goodwill, which is not identifiable.
The entity must have the power to obtain the future economic benefits flowing from the asset and restrict others' access to those benefits. Control usually arises from legal rights (patents, copyrights) but can also arise from other means.
It must be probable that the expected future economic benefits attributable to the asset will flow to the entity, and the cost of the asset must be measurable reliably.
The control criterion is the most challenging for many intangible assets. Consider:
A technology company invests £5M annually in employee training, building deep expertise in AI and machine learning. This investment creates significant competitive advantage and drives revenue growth. Under IAS 38, none of this investment is capitalised — it is expensed as incurred. The company's balance sheet shows no asset, yet the economic value of this workforce capability may exceed the company's tangible assets.
For assets that meet the recognition criteria, IAS 38 prescribes different measurement rules depending on how the asset was obtained.
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.
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.
This is where IAS 38 is most restrictive. The standard divides internal generation into two phases:
For development expenditure to be capitalised as an intangible asset, the entity must demonstrate all six of the following:
| # | Criterion | Practical Meaning |
|---|---|---|
| 1 | Technical feasibility | The project can be completed to a usable state |
| 2 | Intention to complete | Management intends to finish and use or sell the asset |
| 3 | Ability to use or sell | The entity has the resources and capability to deploy it |
| 4 | Future economic benefits | There is a market or internal use that will generate returns |
| 5 | Adequate resources | Financial and technical resources are available to complete development |
| 6 | Reliable cost measurement | Expenditure attributable to the asset during development can be measured reliably |
Software capitalisation is the most common application of the development capitalisation criteria. The challenge is determining when a project transitions from research to development.
In practice, many companies either over-capitalise (capitalising speculative R&D to inflate assets) or under-capitalise (expensing everything to be conservative). Neither approach complies with IAS 38. The standard requires a genuine assessment of whether the six criteria are met, documented at the time the determination is made — not retrospectively.
IAS 38 explicitly prohibits the capitalisation of:
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.
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).
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.
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.
| Asset Type | Typical Range | Notes |
|---|---|---|
| Software | 3-7 years | Shorter for fast-evolving technology |
| Patents | Remaining legal life | Maximum 20 years from filing |
| Customer relationships | 8-15 years | Based on historical retention data |
| Brands (finite) | 10-20 years | If contract or market-limited |
| Technology | 5-10 years | Based on obsolescence risk |
| Databases | 5-10 years | Depends on data refresh requirements |
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:
IAS 38 was designed for an industrial economy where value was predominantly tangible. In today's intangible-intensive economy, the standard's recognition criteria exclude the majority of corporate value from balance sheets. Understanding this gap is essential for anyone making investment, lending, or strategic decisions.
For UK companies not reporting under full IFRS, FRS 102 provides an alternative framework with some notable differences.
| Feature | IAS 38 | FRS 102 (Section 18) |
|---|---|---|
| Development capitalisation | Mandatory if 6 criteria met | Choice: capitalise or expense |
| Useful life cap | No cap (indefinite permitted) | 10-year cap (rebuttable) |
| Revaluation | Permitted if active market | Not permitted |
| Goodwill amortisation | Not amortised (impairment only) | Amortised (max 10 years default) |
| Internally generated brands | Prohibited | Prohibited |
The FRS 102 rebuttable presumption of a 10-year maximum useful life for intangible assets (including goodwill) is a significant simplification. Under full IFRS, goodwill is not amortised at all — it is tested for impairment annually, which can lead to large impairment charges when performance declines.
If you are a CFO or finance director applying IAS 38, focus on these priorities:
Tony Hillier is an Advisor at Opagio with 30 years of experience in structured finance, M&A advisory, and accounting standards application. He advises companies and investors on intangible asset recognition, valuation, and the practical implications of IAS 38 and IFRS 3. Meet the team.
A comprehensive guide to 35 types of intangible assets classified by IFRS 3, IAS 38, and the CHS growth accounting framework. Includes definitions, examples, and valuation approaches for each type.
Read more →An analysis of why most intangible assets are missing from corporate balance sheets, the gap between market value and book value, and what businesses and investors should do about it. Covers the IAS 38 recognition gap, unmeasured intangibles, and practical solutions.
Read more →A step-by-step guide to recognising and measuring intangible assets under IFRS 3 Business Combinations. Covers the identification criteria, fair value measurement, and purchase price allocation process with practical examples.
Read more →Get the latest insights on intangible asset growth and productivity delivered to your inbox.
Book a free consultation to see how the Opagio Growth Platform can help your business.