IAS 38 intangible assets: what your software, brand, and ideas are really worth on the books

IAS 38 intangible assets are the valuable things your business owns that you cannot touch: software you bought, a patent, a licence, a trademark, or the cost of developing a product. They do not sit on a shelf like stock, nor wear out like a delivery van — but they can be worth real money, and they belong on your balance sheet when the rules allow it. This standard decides which invisible assets get recognised, and which never do.

IAS 38 intangible assets: the basic test

Under IAS 38, an intangible asset is an identifiable, non-monetary asset without physical substance. That definition hides three tests, and an item must pass all three:

1. Identifiable. It can be separated and sold, rented, or licensed on its own, or it arises from a contract or legal right. A saleable customer list qualifies in principle; a good reputation does not, because you cannot separate it from the business.
2. Control. Your business must be able to get the future benefits and stop others from doing so — usually through legal rights, like a patent or licence.
3. Future economic benefits. It must probably bring in revenue or save costs, and its cost must be measurable reliably.

If any test fails, the spending stays in profit or loss as an expense — the standard protecting your accounts from carrying assets that may never pay back.

IAS 38 intangible assets you buy vs. ones you build

The rules split sharply depending on where the asset came from.

Bought separately. If you buy software, a licence, or a patent, you generally recognise it at cost — the purchase price plus costs needed to get it ready for use. This is the straightforward case: a known amount for a known right.

Bought as part of a business. When you buy another business, intangible assets acquired in that deal are recognised at fair value, separately from goodwill. Goodwill itself is the leftover — what you paid above the fair value of everything identifiable — dealt with under IFRS 3, not IAS 38, and not amortised.

Built internally. Here the standard is strict. You cannot put a value on your own brand, mastheads, or customer lists if you built them yourself — IAS 38 prohibits recognising them, because their cost cannot be separated reliably from the cost of running the business. Internally generated goodwill is likewise never recognised.

IAS 38 intangible assets: research vs. development

For a business building its own product, IAS 38 draws a hard line between two phases:

Research is always expensed. Research is the search for new knowledge: exploring ideas and testing whether something might work. No matter how promising it feels, research costs go to profit or loss as incurred — and cannot be capitalised later, even if the project succeeds.

Development can be capitalised, but only when all six conditions are met. Development applies research findings to a plan for a new or improved product or process, before production or use. You may capitalise development costs only when you can demonstrate: technical feasibility, intention to complete it, ability to use or sell it, probable future benefits, adequate resources to finish it, and reliably measurable costs.

Miss even one, and the costs stay expensed. Dated records of when each condition was met make that judgement defensible.

IAS 38 intangible assets: how they are carried afterwards

Once recognised, an intangible asset is usually carried at cost less accumulated amortisation and any impairment losses — the cost model. IAS 38 allows a revaluation model, but only when fair value can be measured from an active market, and such markets barely exist for most intangibles. In practice, small businesses use the cost model.

The useful life then decides what happens next:

• Finite useful life. The asset is amortised over its useful life, starting when it is available for use. A five-year software licence is amortised over five years. Straight-line is common when no better pattern is clear, and the life and method are reviewed at least every year-end.
• Indefinite useful life. Some assets, like trademarks renewable indefinitely at little cost, have no foreseeable end to their benefit. These are not amortised; instead they are tested for impairment every year under IAS 36, and the indefinite-life assessment is reviewed annually.

Impairment matters in both cases: if an asset's recoverable amount falls below its carrying amount — the software is superseded, the patent loses its market — the difference is an impairment loss.

IAS 38 intangible assets: a plain example

Imagine a firm buys a stock-management system, then pays to customise it. The licence is recognised at cost. Customisation joins the asset only if needed to bring it to working condition; staff training is expensed — it builds skills, not an asset you control.

Meanwhile, the firm's own brand — built over years of good service — stays off the balance sheet entirely, however valuable it feels. That asymmetry is the point: IAS 38 only lets you carry what you can measure and control, not what you hope the business is worth.

Why this matters for a small business owner

Getting IAS 38 intangible assets right changes your profit in the year you spend — capitalising spreads the cost over future years, expensing hits profit immediately — and what your balance sheet honestly shows a lender: real, measurable assets, not a hopeful brand valuation.

The practical habit is simple: when you spend on something invisible, ask — is it identifiable, do you control it, can you measure its cost? Then ask whether you bought it or built it, and if you built it, whether it is research or development.

If you want software that keeps these distinctions clear instead of burying them in spreadsheets, take a look at what we are building at Tetra M Labs — join the waitlist and we will let you know when Point is ready to try.