International Accounting Standard 38 (IAS 38) is the IFRS standard that governs how intangible assets are recognised, measured, and disclosed in financial statements. Published by the International Accounting Standards Board (IASB), IAS 38 applies to all entities reporting under IFRS — which means most public companies outside the United States, and many private companies that have adopted IFRS voluntarily.
The standard defines an intangible asset as an identifiable non-monetary asset without physical substance. Three characteristics must all be present:
| Characteristic | Definition | Example |
|---|---|---|
| Identifiability | The asset is separable (can be sold, licensed, or transferred) or arises from contractual or legal rights | A patent can be sold separately from the business |
| Control | The entity has the power to obtain future economic benefits and restrict others' access | A trade secret protected by confidentiality agreements |
| Future economic benefits | The asset will generate revenue, cost savings, or other economic benefits | A customer database that drives repeat sales |
IAS 38 covers a wide range of intangible assets: patents, copyrights, trademarks, customer lists, franchise agreements, software, and development costs that meet the recognition criteria. But the standard explicitly excludes goodwill arising from business combinations (covered by IFRS 3), financial assets (covered by IFRS 9), mineral rights (IFRS 6), and insurance contracts (IFRS 17).
IAS 38 creates a strict boundary between intangible assets that qualify for balance sheet recognition and those that do not. Understanding where that boundary falls — and what it excludes — is essential for anyone involved in valuation, M&A, or financial reporting.
IAS 38 draws a sharp line between research and development. Research costs are always expensed as incurred — no exceptions. Development costs may be capitalised, but only when the entity can demonstrate all six of the following criteria (IAS 38.57):
The entity can demonstrate that completing the intangible asset is technically feasible — that it can be made to work as intended.
Management has a stated intention to complete the asset and use or sell it. Abandoned or speculative projects do not qualify.
The entity can demonstrate that the asset will be usable or saleable upon completion — there is a viable market or internal use case.
The entity can show that the asset will generate future economic benefits — through revenue, cost savings, or other measurable gains.
Adequate technical, financial, and other resources exist to complete the development and to use or sell the asset.
The expenditure attributable to the intangible asset during its development can be measured reliably — the entity has proper cost tracking in place.
All six criteria must be met simultaneously. If any one fails, the entire expenditure must be expensed. There is no partial capitalisation.
A SaaS company developing a new analytics module has completed its proof-of-concept (technical feasibility), the board has approved the project budget (intention and resources), market research confirms demand (economic benefits and ability to sell), and the team tracks development hours in Jira (reliable measurement). All six criteria are met — development costs from this point forward can be capitalised. Costs incurred during the earlier research phase (market exploration, feasibility studies) remain expensed.
| Criterion | Key Evidence Required | Common Failure Points |
|---|---|---|
| Technical feasibility | Working prototype, completed proof-of-concept | Early-stage R&D with no proof-of-concept |
| Intention to complete | Board approval, project plan, resource allocation | Projects without formal approval or ongoing funding |
| Ability to use or sell | Market research, licensing agreements, internal deployment plan | No identified market or internal use case |
| Probable economic benefits | Revenue projections, cost-benefit analysis, market demand data | Speculative benefits with no supporting evidence |
| Availability of resources | Budget approval, staffing plan, technical infrastructure | Underfunded projects, key person dependency |
| Reliable measurement | Time tracking systems, cost allocation methodology | Costs commingled with other projects or operations |
IAS 38 treats acquired and internally generated intangible assets very differently — and this asymmetry is one of the most significant features of the standard.
When one company acquires another, IFRS 3 requires the acquirer to identify and measure at fair value all intangible assets that are separable or arise from contractual/legal rights — even if the target company never recognised them on its own balance sheet. This includes customer relationships, order backlogs, non-compete agreements, and technology assets. The acquirer must recognise these assets separately from goodwill.
Intangible assets purchased individually (a patent licence, a domain name, a customer list) are recognised at their purchase price plus any directly attributable costs. The purchase price is considered to reflect the probability of future economic benefits, so the recognition criteria are deemed to be met automatically.
This is where the standard is most restrictive. IAS 38 specifically prohibits the recognition of internally generated brands, mastheads, publishing titles, customer lists, and items similar in substance. Internally generated goodwill is also prohibited.
For other internally generated intangible assets, the research/development split applies: research is always expensed; development can only be capitalised when all six criteria are met.
The IASB added intangible assets to its research agenda in April 2024, signalling that the recognition rules for internally generated intangibles may be reconsidered. The current project is exploring whether improved disclosure — rather than expanded recognition — might address the information gap. Any changes are likely several years away, but the direction of travel suggests the accounting profession recognises that IAS 38's current scope is too narrow for the modern economy.
All recognised intangible assets are initially measured at cost:
After initial recognition, entities choose between two models:
| Aspect | Finite Useful Life | Indefinite Useful Life |
|---|---|---|
| Subsequent measurement | Cost model (cost less accumulated amortisation and impairment) | Cost model (cost less accumulated impairment) |
| Amortisation | Systematic allocation over useful life | No amortisation |
| Impairment testing | When indicators suggest carrying amount may not be recoverable | Annual impairment test required (IAS 36) |
| Useful life review | Reviewed at least annually | Reviewed annually — must be reclassified to finite if circumstances change |
| Common examples | Software licences, patents with expiry dates, customer contracts | Trademarks renewed indefinitely, broadcasting licences |
IAS 38 also permits a revaluation model for intangible assets with an active market — but in practice this is extremely rare because active markets for intangible assets almost never exist.
Indefinite useful life does not mean infinite. It means there is no foreseeable limit to the period over which the asset is expected to generate cash flows. The entity must reassess this judgement annually. If the asset's useful life becomes finite, the change is applied prospectively.
One of the most common areas of judgement in applying IAS 38 is deciding whether expenditure should be capitalised as an intangible asset or expensed immediately. The following framework summarises the decision logic:
Does the expenditure relate to an identifiable, non-monetary asset without physical substance that the entity controls? If no, expense it.
If acquired separately or in a business combination, capitalise at cost or fair value. If internally generated, proceed to Step 3.
If research (or if the phases cannot be distinguished), expense immediately. If development, proceed to Step 4.
Apply each of the six criteria (IAS 38.57). If all are met, capitalise the expenditure from the date they were first satisfied. If any criterion fails, expense.
Software development costs are the most frequent area of capitalisation judgement. Website development costs are addressed by SIC-32, which distinguishes between the planning phase (expense), application development (capitalise if criteria met), and operating phase (expense). Internal-use software follows a similar pattern.
Brand building expenditure — advertising, sponsorship, trade fair costs, training — is always expensed under IAS 38, even when management can demonstrate a clear link to future revenue. The standard is explicit: internally generated brands cannot be recognised.
Data assets present a growing challenge. IAS 38 was written before data became a primary strategic resource. Customer data, proprietary datasets, and machine learning models rarely meet the recognition criteria because their future economic benefits are difficult to measure reliably and they are hard to separate from the business that generated them.
Capitalising costs that do not meet all six criteria is a material misstatement risk. When in doubt, expense. Auditors scrutinise capitalisation decisions closely, and reversals are costly — both financially and reputationally.
While IAS 38 applies across most IFRS jurisdictions, companies reporting under other frameworks face different rules. The differences matter for cross-border M&A, multinational group reporting, and investor comparisons.
| Topic | IAS 38 (IFRS) | ASC 350/730 (US GAAP) | AASB 138 (Australia) | Section 3064 (Canada ASPE) |
|---|---|---|---|---|
| Development costs | Capitalise if 6 criteria met | Expense all R&D (ASC 730). Exceptions: internal-use software (ASC 350-40) and software for sale (ASC 985-20) | Same as IAS 38 (AASB 138 mirrors IFRS) | Capitalise development costs if criteria met (similar to IAS 38) |
| Acquired intangibles (PPA) | IFRS 3 — identify and measure all separable intangibles at fair value | ASC 805 — similar requirements but with "concentration test" option (no PPA required if substantially all value is in one asset) | Same as IAS 38 (AASB 3 mirrors IFRS 3) | Section 1582 — similar to IFRS 3 for public companies; simpler rules for private |
| Goodwill amortisation | Not amortised; annual impairment test | Not amortised for public companies. Private companies may elect amortisation over ≤10 years (ASC 350 PCC alternative) | Same as IAS 38 | Amortised over useful life (max 40 years under old rules; 10 years if useful life indeterminate) |
| Revaluation | Permitted if active market exists (rare in practice) | Not permitted | Same as IAS 38 | Not permitted |
| Indefinite-life intangibles | No amortisation; annual impairment test | Same approach | Same as IAS 38 | Tested for impairment when events suggest |
| Website costs | SIC-32 guidance: planning = expense, development = capitalise if criteria met | ASC 350-50: similar capitalisation framework for website development | Same as IAS 38 | Similar to IAS 38 |
The most significant difference is in the treatment of development costs. Under US GAAP, virtually all R&D is expensed as incurred — making the gap between economic value and balance sheet value even larger than under IFRS. For cross-border M&A, this means a US-GAAP target's balance sheet will typically show fewer recognised intangible assets than an equivalent IFRS-reporting company, even when the underlying business is identical.
IAS 38 was designed for a world where physical assets dominated corporate value. In that world, the standard's conservative approach to intangible asset recognition was reasonable — intangibles were a small part of the picture, and the measurement challenges were genuine.
That world no longer exists.
Today, intangible assets represent the vast majority of enterprise value across all sectors. But IAS 38's recognition rules mean that most of this value — workforce expertise, proprietary processes, customer trust, data intelligence, organisational culture — never appears on the balance sheet. The result is a systematic gap between what a business is worth and what its financial statements report.
This is not merely an academic concern. The gap has practical consequences:
This is the insight behind the Opagio 12 framework. Where IAS 38 draws a narrow accounting boundary, the Opagio 12 maps the full spectrum of intangible value drivers — including the ones that accounting standards do not recognise. The framework presents two views side by side: the accounting view (what IAS 38 permits on the balance sheet) and the managerial view (the complete picture of value-creating assets).
IAS 38 was designed for a world where physical assets dominated. In today's economy, the standard systematically understates business value. The Opagio 12 framework identifies all intangible value drivers — including the ones IAS 38 does not recognise — giving stakeholders a complete picture of where value resides and how to grow it.
IAS 38 affects different professionals in different ways. Understanding the standard's implications for your specific role is essential.
For CFOs and Financial Controllers: IAS 38 determines what intangible expenditure hits your P&L immediately versus what can be capitalised and amortised over time. Getting the capitalisation decision wrong — in either direction — has material consequences. Over-capitalising inflates assets and defers costs, creating future write-down risk. Under-capitalising depresses reported earnings and asset values, potentially affecting loan covenants and investor perception. Build robust internal processes for tracking development costs and documenting how the six recognition criteria are met.
For M&A Advisors: Every acquisition triggers a purchase price allocation under IFRS 3, requiring identification and fair value measurement of intangible assets that the target may never have recognised. Understanding what IAS 38 excludes from the target's balance sheet is essential for identifying where acquisition premiums truly reside. The better you understand the target's intangible asset composition, the stronger your negotiating position — whether you represent the buyer or the seller.
For PE Firms and Investors: IAS 38's recognition restrictions mean that the balance sheet is an unreliable guide to a company's true intangible asset base. Two companies with identical financials can have vastly different intangible profiles — and therefore vastly different risk and growth trajectories. Structured intangible asset assessment, using frameworks like the Opagio 12, fills the gap that IAS 38 leaves in your due diligence process.
For Accountants and Advisors: As IAS 38 evolves — and the IASB's current research project suggests it will — practitioners who understand both the standard's requirements and its limitations will be best positioned to advise clients. The shift from pure compliance to strategic intangible asset advisory is already underway, and it represents a significant growth opportunity for forward-thinking practices.
No. IAS 38.63 specifically prohibits the recognition of internally generated brands, mastheads, publishing titles, customer lists, and items similar in substance. The standard considers that the cost of these items cannot be distinguished from the cost of developing the business as a whole. Brands acquired in a business combination, however, are recognised at fair value under IFRS 3 — creating an asymmetry between acquired and internally generated assets.
Intangible assets with a finite useful life are amortised over that life using the method that best reflects the pattern of economic benefit consumption (straight-line if no better method can be determined). There is no maximum period prescribed by IAS 38, but the useful life must be reviewed at least annually. Intangible assets with an indefinite useful life are not amortised but must be tested for impairment annually under IAS 36.
IAS 38 governs the recognition and measurement of intangible assets in general. IFRS 3 (Business Combinations) governs how intangible assets are identified and measured when one company acquires another. The key difference: IFRS 3 requires the acquirer to recognise intangible assets that the target company could not recognise under IAS 38 — customer relationships, order backlogs, and non-compete agreements, for example. This is why acquisition often reveals intangible value that was invisible on the target's pre-acquisition balance sheet.
In principle, data assets that meet the three characteristics (identifiable, controlled, generate future economic benefits) qualify as intangible assets. In practice, recognition is rare because data assets are difficult to separate from the business, their future economic benefits are hard to measure reliably, and the cost of developing them is often commingled with other operational expenditure. The IASB's current research project is examining whether better guidance is needed for digital-era assets including data.
The IASB added intangible assets to its research agenda in April 2024. The project is exploring whether the standard should require expanded disclosure about intangible assets (even those not recognised on the balance sheet), whether the recognition criteria should be updated, and whether new guidance is needed for digital assets. No exposure draft has been published yet, and any changes are likely several years away. In the meantime, IAS 38 as written remains the authoritative standard.
No. FRS 102 Section 18 is the UK/Ireland standard for intangible assets (other than goodwill) that applies to entities not reporting under full IFRS. While Section 18 is broadly consistent with IAS 38, there are differences: FRS 102 has a simpler impairment model, permits amortisation of all intangible assets (including goodwill, under Section 19), and does not require annual reassessment of indefinite useful lives. UK companies reporting under full IFRS still follow IAS 38.
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