In-depth Notes on Internally Generated Intangible Assets

Learning Outcomes

  • Explain what is meant by an Internally generated intangible asset.
  • Identify internally generated intangible assets that are always expensed.
  • Differentiate between research and development costs.
  • Explain the recognition criteria of the development phase.

Internally Generated Goodwill

  • Always expensed by the entity that creates it.
  • Contributes to successful business promotions (e.g., customer loyalty, efficient service) but cannot be separately identified.
  • Does not meet the definition and recognition criteria of an Intangible Asset (IA).
  • Purchased goodwill can be capitalized according to IFRS 3 Business Combinations.

Other Expensed Internally Generated Assets

  • Examples include:
    • Brands
    • Mastheads (title of a newspaper or magazine at the head of the first page)
    • Publishing titles
    • Customer lists.
  • These assets are expensed because their costs are not separately identifiable from the costs of developing a business.

Intangible Assets Classification

  • Publishing Title:
    • Treatment in financial statements depends on the reliability of valuation.
    • If it can be valued reliably, it is recognized at fair value; otherwise, it becomes part of goodwill.
  • License:
    • If purchased separately, it should be capitalized at cost.

Phases of Internally Generated Intangible Assets

Research Phase

  • Defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
  • Examples of research activities:
    • Obtaining new knowledge.
    • Evaluating and selecting research findings or other knowledge.
    • Searching for alternatives for materials, products, and processes.
    • Formulating and designing new or improved products and services.

Development Phase

  • Involves applying research findings to a tangible plan for production.
  • Examples of development activities:
    • Designing and testing prototypes.
    • Developing tools and technologies.
  • Development costs may include:
    • Personnel salaries.
    • Equipment depreciation.
    • Legal costs.
    • Raw materials.

Distinction Between Research and Development Phases

  • Research Phase:

    • Costs cannot prove future economic benefits.
    • All costs are expensed.

  • Development Phase:

    • Costs can demonstrate future economic benefits.
    • Costs can be capitalized if the recognition criteria are met.

  • If unsure, classify the cost as research cost.

Development Phase – Recognition Criteria

  • Capitalize costs if all the following criteria are met:
    1. Probable future economic benefits will flow to the entity (existence of market/use).
    2. Intention to complete the IA for use or sale.
    3. Adequate resources to complete development.
    4. Ability to use or sell the IA.
    5. Technical feasibility for completion of IA.
    6. Expenditures are reliably measurable.

Summary of Recognition of Research and Development Costs

  • Costs split between:
    • Research Phase:
    • Always expensed.
    • Development Phase:
    • Expense if any of the six criteria are not met.
    • Capitalize if all six criteria are met.

Capitalization of Costs Related to Internally Generated Intangible Assets

  • Only capitalize directly attributable costs:
    • Costs related to creating, producing, and preparing the asset for intended operations.

Examples of Directly Attributable Costs

  • Costs of materials, services, professional fees, and employee benefits necessary for creating the IA.
  • Amortization of patents/licenses used in creation.
  • Borrowing costs related to IA creation that meet recognition criteria.

Costs Excluded from Capitalization

  • Selling, administrative, and other general overhead costs due to inefficiencies before the asset reaches its planned performance level.
  • Initial operating losses.
  • Staff training costs.
  • Costs expensed in prior periods cannot be subsequently capitalized even if criteria are later met.

Next Steps

  • Review slides and read the relevant sections in Gripping GAAP.
  • Investigate website costs, subsequent measurement of IAs, and the presentation/disclosure of intangible assets.