Internally-Generated Intangible
Definition
An intangible asset created within the business (R&D output, brand, customer relationships, organisational know-how) rather than acquired through a transaction. IAS 38 conservatism rules make these difficult to capitalise on statutory books — six development-cost capitalisation criteria must all be met. ASC 730 under US GAAP is stricter still: virtually all internally-generated R&D is expensed as incurred, with narrow exceptions for internal-use software and software for sale. The result is the asymmetry founders meet at term sheet: a company that grew its £20M intangible base organically has a £0 entry on the balance sheet for it; a company that acquired the same base through a £20M transaction has £20M of identified intangibles plus residual goodwill. PE/VC funds know about the asymmetry and price for it. Founders who don't get marked down for the gap between statutory and acquisition-equivalent valuation. The judgement management makes is how to hold a full internal record of what the business has built without asserting a statutory position the standard does not support.
Taking a defensible position
The position
IAS 38 treats internally generated items restrictively. Internally generated goodwill is never recognised under IAS 38.48, and IAS 38.63 does not permit recognition of internally generated brands, mastheads, publishing titles and customer lists. IAS 38.57 is the main route by which internally generated intangibles enter the balance sheet. Under US GAAP, ASC 730 expenses research and development as incurred, with narrow software routes in ASC 350-40 and ASC 985-20.
A defensible posture
The realistic posture separates two questions: whether the asset exists and drives value, and whether a reporting framework permits recognising it. A management team can hold a full internal record of internally generated intangibles — what they are, what was spent, what they produce — while stating plainly that the statutory position follows the standard. That combination is credible in front of an investor; asserting recognition the standard does not support is not.
Evidence to hold
- A register of internally generated intangibles with the expenditure attributed to each.
- Contemporaneous development records for any project assessed against the development-phase conditions.
- Contracts, registrations and assignments evidencing control over each item claimed.
- A statement of the basis on which the internal record was prepared, kept separate from the statutory accounts.
- Period-on-period comparability, so the internal record can be tracked rather than restated each year.
The challenge you may face
An investor’s accountant will separate what the standards allow from what management asserts, and will test the second against the first. Expect questions on which items are claimed as assets, what evidence supports control, whether the internal record was prepared on a consistent basis, and how the figures reconcile to the statutory accounts.
Complementary Terms
Concepts that frequently appear alongside Internally-Generated Intangible in practice.
Internally generated brands are brand assets a business builds itself over time rather than acquiring them in a transaction. IAS 38.63 (IFRS) names a specific family — internally generated brands, mastheads, publishing titles and customer lists, together with items similar in substance — and does not permit their recognition as intangible assets.
Development costs are the expenditure incurred applying research findings to a plan or design for a new or substantially improved product, service, process or system before it enters commercial production or use. Under IAS 38 (IFRS — the default framework for UK groups reporting under adopted IFRS), the standard divides the work into two phases and treats them differently.
An intangible investment — R&D, brand-build, customer-acquisition with measurable payback, software development — that has been moved from operating expense to balance-sheet asset and amortised over its useful life under management accounting. Statutory accounting rarely permits the same treatment for internally-generated intangibles: IAS 38 imposes six conservatism criteria that are difficult to meet in practice; ASC 730 forces immediate expensing under US GAAP.
The International Accounting Standard governing the recognition, measurement, and disclosure of intangible assets. IAS 38 requires that an intangible asset be identifiable, controlled by the entity, and expected to generate future economic benefits.
The US GAAP standard requiring immediate expensing of research and development costs as incurred. ASC 730 is the structural source of the gap between statutory and capitalisation-reclassified EBITDA for US-headquartered companies: virtually no R&D is permitted on the balance sheet, regardless of stage, evidence quality, or commercial proximity.
An analytical framework that decomposes economic or firm-level output growth into contributions from labour, capital, and a residual factor often interpreted as technological progress or total factor productivity. Growth accounting is fundamental to understanding how intangible investments — in R&D, software, organisational design, and human capital — drive productivity improvements.
An intangible asset that arises when a company is acquired for more than the fair value of its net identifiable assets. Under IFRS 3, goodwill represents the future economic benefits from assets acquired in the business combination that are not individually identified and separately recognised, including expected synergies and the assembled workforce.
The number of months a company takes to recover its customer acquisition cost from gross profit on the cohort acquired. Calculated as CAC ÷ (monthly gross profit per customer).
Further Reading
What is the IAS 38 revaluation model for intangible assets?
IAS 38 permits revaluation of intangible assets to fair value if an active market exists, but this is rarely used in practice because active markets for most intangible assets do not exist.
Read more →Related FAQ
What is the difference between tangible and intangible assets?
Tangible assets have physical form: land, buildings, machinery, vehicles and stock. Intangible assets have none: they are identifiable non-monetary assets such as patents, trade marks, software and customer contracts.
Read full answer →How does ASC 805 differ from IFRS 3 in business combination accounting?
ASC 805 and IFRS 3 are broadly aligned on acquisition accounting, but differ on contingent consideration remeasurement, bargain purchase treatment, non-controlling interests measurement, and goodwill impairment testing.
Read full answer →What is purchase price allocation (PPA)?
PPA is the process of allocating the total price paid in a business acquisition across the acquired company's identifiable tangible assets, intangible assets, liabilities, and goodwill.
Read full answer →Put this knowledge to work
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