Intangible non-current asset and amortisation
Intangible non-current assets may be invisible, but their value is undeniable. From software and patents to brand names and licences, businesses increasingly rely on assets you can’t physically touch. This chapter explains how to identify, measure, and account for these assets in line with IFRS. It also explains the difference between research and development costs and shows how amortisation spreads an asset’s cost over time.
Learning objectives
By the end of this chapter, you should be able to:
- Compare the difference between tangible and intangible non-current assets.
- Identify types of intangible assets.
- Identify the definition and treatment of “research” and “development” in accordance with IFRS Accounting Standards.
- Calculate and account for amounts to be capitalised as development expenditure or to be recognised as an expense from given information.
- Explain the purpose of amortisation.
- Calculate and account for amortisation.
Tangible and intangible non-current assets
Unlike tangible assets, intangible non-current assets have no physical form, but they still provide economic value. Common examples include patent rights, brand names, licences, copyrights, computer software, goodwill, and trademarks.
Some intangible assets are created internally through research and development activities. IAS 38 Intangible Assets explains how to account for the costs of these activities.
Research and development cost
The accounting treatment of intangible assets is governed by IAS 38: Intangible Assets. The creation of an intangible asset usually happens in two phases:
- The research stage
- The development stage
In the research stage, the entity investigates and acquires new scientific or technical knowledge. In the development stage, the entity applies research findings to create a product or service that can become commercially viable.
A key issue is uncertainty: many research projects never reach development, or they fail because they are technically unfeasible or commercially unviable.
Because the level of certainty differs between the two stages, IAS 38 sets different rules for how to account for expenditure incurred in each phase.
Key distinction: Research costs are always expensed immediately, while development costs are capitalised if recognition criteria are met. This reflects greater certainty of future economic benefits in the development phase.
Illustration: Capitalisation of development cost
Innovate Pharmaceuticals Ltd embarked on Project Alpha during 2024. Research activities from January to June incurred:
- $180,000 on laboratory investigations
- $120,000 on feasibility studies
- $45,000 on literature reviews and patent searches
From July to December, development activities included:
- Clinical trials costing $320,000
- Manufacturing process development costing $200,000
- Market research costing $80,000
- Legal fees for patent registration of $25,000
Management confirmed technical feasibility, availability of resources, intention to complete, and probable future economic benefits. All costs were reliably measurable. Required:
- Classify each expenditure as research or development.
- Calculate total capitalised development cost.
- Determine the amount to be expensed.
- Prepare relevant journal entries. Suggested Solution:
- List the research activities. What is the total amount?
Based on the scenario, all expenses incurred between January and June 2024, as well as the market research, are related to research activities.
| Research expenses | $ |
|---|---|
| Laboratory investigations | 180,000 |
| Feasibility studies | 120,000 |
| Literature review | 45,000 |
| Market research | 80,000 |
| Total research expenses | 425,000 |
- List the development activities. What is the total amount?
| Development expenses | $ |
|---|---|
| Clinical trials | 320,000 |
| Manufacturing costs | 200,000 |
| Legal fees (patent registration) | 25,000 |
| Total development cost | 545,000 |
- What is the journal entry for the research-related expenses? How will it be treated?
| Debit ($) | Credit ($) | |
|---|---|---|
| Research expenses | 425,000 | |
| Cash / Payables | 425,000 |
Being research expenses expensed in profit or loss.
The research expenses will be expensed in the profit or loss statement in the year it was incurred.
- What is the journal entry for the development-related expenses? How will it be treated?
| Debit ($) | Credit ($) | |
|---|---|---|
| Intangible asset | 545,000 | |
| Cash / Payables | 545,000 |
Being development costs capitalised as an intangible asset.
The development expense is capitalized as an intangible non-current asset. This will be amortized annually or periodically.
Amortisation of intangible non-current asset
When development costs are capitalised, they are spread over the asset’s estimated useful life.
Development costs that have been capitalised are amortised over their estimated useful lives using the straight-line method, except for intangible assets with indefinite useful lives, which are not amortised.
Thus, amortization of a definite useful life intangible non-current asset is given as:
Illustration: Amortisation
A software company purchased a software licence on 1 January 2023 for $60,000. The licence has a useful life of 5 years and no residual value. Required:
- Calculate and prepare the journal entry for the annual amortization expense.
- Show the carrying amount of the software license on December 31, 2023. Suggested Solution:
- What is the annual amortization expense?
- What is the journal entry for the annual depreciation charge?
| Debit ($) | Credit ($) | |
|---|---|---|
| Amortisation expense | 12,000 | |
| Accumulated amortisation | 12,000 |
Being the annual amortisation expense for 2023.
Note: At the end of the year, the amortization expense ledger will be closed into the statement of profit or loss.
- What is the carrying amount at year ends 1, 2, 3, 4, and 5?
Computation of the carrying amount to be presented on the statement of financial position.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
|---|---|---|---|---|---|
| Cost | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 |
| Accumulated amortisation | (12,000) | (24,000) | (36,000) | (48,000) | (60,000) |
| Carrying amount | 48,000 | 36,000 | 24,000 | 12,000 | 0 |