This is from the “Accounting Makes Cents” podcast episode #88 released on Monday, 5 May 2025.

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As part of the series I started before the CIMA case study sessions began, we’ve been looking at consolidated group accounts and the relevant accounting standards that come into play when dealing with group structures. This is the fourth episode in that series. Now, while today’s topic isn’t directly about group accounts, it ties in closely — especially when you’re valuing companies for investments, mergers, or acquisitions. That’s because intangible assets often appear in those calculations. You’ve probably heard of goodwill, which is one type of intangible asset.

So, today, we’re diving into intangible assets more broadly. These are things in a business that don’t have a physical form — you can’t touch them, but they still contribute real value and generate income. To make this more relatable, we’ll use a simple example: imagine we run a cupcake business. We bake, produce, and sell cupcakes. Yes — cupcakes. Hopefully I don’t make you too hungry, but they’ll help us explain IAS 38 in an easier, more practical way.

So what gives a business value beyond its tangible assets? In our cupcake shop, the tangible bits are the ovens, the storefront, the mixers. But what about the secret recipe? The brand we’ve built? The loyal customers who visit every week? IAS 38 helps us think about how to recognise, measure, and account for these invisible — yet valuable — parts of a business.

Jump to show notes.

What is IAS 38?

IAS 38 governs how businesses recognise and measure intangible assets — non-physical assets that bring future economic benefits. Think trademarks, patents, or proprietary technology. Under IAS 38, an intangible asset must be identifiable, controlled by the entity, and expected to generate future economic benefits. But here’s the kicker — many valuable things in business don’t meet these recognition criteria.

Let’s imagine we have a thriving local cupcake bakery. It’s not just popular for its red velvet cupcakes — it’s got a distinctive brand, a loyal customer base, a killer Instagram following, and a secret family recipe.

​And you may ask, how much of the business’ value shows up on its balance sheet? Spoiler alert: it’s not nearly as much as you’d expect.

Recognition

IAS 38 says we can only recognise an intangible asset on the balance sheet if it ticks a few key boxes. First, it has to be identifiable — meaning either it can be separated from the business and sold, or it comes from some kind of legal or contractual right. Second, we have to control it. And third, it needs to be likely to bring in future economic benefits — basically, it should help the business make money.

Let’s go back to our cupcake shop for a minute. Our secret cupcake recipe? That could potentially meet all those conditions. It’s clearly separable, we keep it under wraps, we control it, and it brings in loyal customers — so it’s helping drive revenue. 

But what about our regular customers themselves? We love them, they’re a huge part of our success, but unfortunately we can’t recognise them as assets. Why? Because we don’t have any legal control over them, and they’re not something we can sell or separate from the business. So even though they’re valuable, they don’t qualify under IAS 38.

Measurement

Once an intangible asset meets the recognition criteria, IAS 38 says we need to measure it at cost to begin with. If we’ve bought the asset — like a patent or a trademark — that’s pretty straightforward: it’s the purchase price plus any directly related costs. But if we’ve created the asset ourselves, things get a bit more complicated. 

IAS 38 splits internally generated intangibles into two stages: research and development. Any spending in the research phase — like experimenting with new cupcake flavours just to see what works — has to be written off as an expense. But if we move into the development phase — say we’re launching a new product line and it has real commercial potential — then we might be able to capitalise those costs. That is, if we meet six specific conditions, like proving the project is technically feasible, that we plan to finish it, that we can use or sell it, that it’ll bring in future economic benefits, and that we can reliably measure the costs involved. If all those boxes are ticked, then those development costs can go on the balance sheet.

Conditions

Let’s talk about these conditions more.

First, we need to show the project is technically feasible — in other words, we can actually finish what we’ve started. So, if we’re working on a new vegan cupcake line, we need to show it’s possible to develop a recipe that works.

Second, we have to intend to complete it and use or sell it — we’re not just experimenting for fun; there’s a real business goal at the end of this, that is, you do plan to sell this.

Third, we need the ability to use or sell it, meaning we have the resources — like skilled bakers, kitchen space, and maybe marketing support — to get this new line to customers.

Fourth, the project needs to be able to generate probable future economic benefits. Maybe we’ve tested the new recipe at a few locations and seen strong customer demand — that helps prove it’s likely to be profitable.

Fifth, we have to demonstrate our intention and ability to complete development. That means we’re not going to abandon the project halfway through — and we can show a proper plan and timeline.

And sixth, we need to be able to measure the costs reliably. That might mean tracking time spent, ingredients used, and other direct expenses related to the new product line.

Only if all six of those are clearly met can we start putting development costs onto the balance sheet as an intangible asset. If even one of them isn’t satisfied, it all stays as an expense in the profit and loss account.

Impairment and revaluation

Once an intangible asset is recognised, we have two options for how to measure it going forward. The first option is the cost model, which is the most common approach. With this method, we track the asset at its original cost, minus any amortisation and impairment over time. This is the typical way to handle most intangible assets.

The second option is the revaluation model, but this can only be used if there’s an active market for the asset. This is fairly rare for intangibles, especially for something like our cupcake recipe, since there’s no active market where recipes are bought and sold.

For our cupcake recipe, we’d definitely stick with the cost model because there’s no active market for it. This means we’d measure its value based on the original costs incurred, adjusting for amortisation and any impairment if the recipe’s performance starts to fall short. Speaking of impairment, we’d need to assess the value of the recipe regularly, particularly if sales drop or if the recipe starts to lose its appeal. If the recipe’s performance declines and it’s no longer generating expected revenue, we’d need to recognise the impairment and adjust its value accordingly

Amortisation

Talking about value, there is another piece to this standard which talks about amortisation. Just like with physical assets, intangible assets lose value over time as they’re used or as they age. Amortisation helps us spread the cost of these assets across their useful life. 

For example, let’s say we invest in a new product design and we expect this design to remain popular for the next 3 years. Instead of counting the entire cost of the design upfront, we spread it out over the 3 years. This way, each year’s profit reflects the contribution of the product design to the business, rather than having a big hit to profits in year one.

Without amortisation, we’d show higher profits in the first year when we’ve made the sale, but we wouldn’t account for the asset’s decreasing value over time. This could mislead us into thinking the business is doing better than it actually is. By amortising, we’re keeping the financial statements accurate and making sure that the cost of the product design is matched to the revenue it helps generate each year.

Conclusion

I hope this episode has helped you get to grips with IAS 38 and made it a bit easier to understand how intangible assets are accounted for. Whether it’s knowing when to expense or capitalise costs, recognising the differences between purchased and internally generated assets, or grasping the basics of impairment and revaluation, this standard covers a lot of ground. The key takeaway is to carefully consider the nature and stage of each asset to ensure you’re accounting for it properly. For students, this should give you a solid foundation in how intangible assets work and how to apply IAS 38 in different situations.

Show notes simplified

In this episode, MJ the tutor simplifies the complexities of IAS 38, making it easier to understand how to account for these unseen treasures. Listen to this episode as she guides you through the key concepts of intangible assets and how they impact your financial statements.