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 and trademarks.
Goodwill is different. It is presented with intangible assets in the statement of financial position, but it is not identifiable: it cannot be separated from the business, and it does not arise from contractual or legal rights. So it falls outside the IAS 38 definition. Goodwill is recognised only when purchased in a business combination (IFRS 3); internally generated goodwill is never recognised.
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.
Research: accounting treatment
Expenditure on research should be expensed when incurred (i.e., charged to the statement of profit or loss). This is because it is difficult to demonstrate whether a product or service at the research stage will generate probable future economic benefits.
Examples of research activities:
- Investigating new materials or processes
- Evaluating alternatives for new products
- Laboratory experiments to gain new knowledge
- Conceptual formulation and design studies
Development: accounting treatment
Development expenditure that meets all the following criteria is recognised as an intangible asset and shown as part of non-current assets in the statement of financial position. Development costs are capitalised if the entity demonstrates:
- Technical feasibility of completion
- Intention to complete the asset and use or sell it
- Ability to use or sell the asset
- Availability of resources to complete and market the asset
- Probable future economic benefits
- Ability to reliably measure expenditure attributable to the asset
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, ability to use or sell the product, 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?
The research activities (January to June) are investigations aimed at gaining new scientific or technical knowledge:
| Research expenses | $ |
|---|---|
| Laboratory investigations | 180,000 |
| Feasibility studies | 120,000 |
| Literature review | 45,000 |
| Total research expenses | 345,000 |
Market research of $80,000 is not research or development under IAS 38 - it doesn’t involve seeking new scientific or technical knowledge. It’s still expensed, but because it’s a marketing cost that isn’t directly attributable to developing the asset, not because it counts as “research.”
- 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 and other non-development expenses? How will they be treated?
| Debit ($) | Credit ($) | |
|---|---|---|
| Research and other expenses | 425,000 | |
| Cash / payables | 425,000 |
Being research costs ($345,000) and market research ($80,000) expensed in profit or loss.
Both amounts are expensed in the period incurred: research costs because probable future economic benefits can’t yet be demonstrated, and market research because it isn’t directly attributable to developing the asset.
- What is the journal entry for the development-related expenses? How will it be treated?
| Debit ($) | Credit ($) | |
|---|---|---|
| Intangible asset | 545,000 | |
| Cash / payables | 545,000 |
Being development costs capitalised as an intangible asset.
The development expenditure is capitalised as an intangible non-current asset. It will be amortised once the asset is available for use.
Amortisation of intangible non-current asset
When development costs are capitalised, they are spread over the asset’s estimated useful life. Amortisation begins when the asset is available for use (for development costs, typically when commercial production or sales begin) and is charged over its useful life - not from the date the costs were originally incurred.
Intangible assets with finite useful lives, including capitalised development costs, are amortised using a method that reflects the pattern in which the asset’s economic benefits are consumed, or the straight-line method if that pattern cannot be determined reliably. Intangible assets with indefinite useful lives are not amortised.
Thus, straight-line amortisation 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 $60,000. The licence has a useful life of 5 years and no residual value.
Required:
- Calculate the annual amortisation expense.
- Prepare the journal entry for the annual amortisation charge.
- Show the carrying amount at the end of each year of the licence’s useful life.
Suggested solution:
- What is the annual amortisation expense?
- What is the journal entry for the annual amortisation charge?
| Debit ($) | Credit ($) | |
|---|---|---|
| Amortisation expense | 12,000 | |
| Accumulated amortisation | 12,000 |
Being the annual amortisation expense for 2023.
Note: At the end of the year, the amortisation 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?
The carrying amount presented in the statement of financial position is cost less accumulated amortisation:
| 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 |
At the end of year 1 (31 December 2023), the software licence has a carrying amount of $48,000.