History of business is littered with cases of companies that have collapsed as a result of over indulgence in research and development on products that have proved totally unprofitable. Unfortunately most of these could not have been easily seen from the preceding financial statements. A lot of companies simply capitalized research and auditors made little attempt to find out whether the values attributed to this asset were realistic.

Research is a necessary expense in earning revenue and can justifiably be matched against it. However, when research and development expenditure is incurred now, there is no telling when and if the associated revenue will materialise. The concept of prudence would dictate that such expenditure be written off as it is incurred.

The authoritative document on research and development is International Accounting Standard No.38 Intangible Assets.

IAS 38 Intangible Assets was issued in March 2004 and is applied to the accounting for intangible assets acquired in business combinations after 31 March 2004, and to all other intangible assets for annual periods beginning on or after 31 March 2004.

IAS 38 prescribes the accounting treatment for intangible assets, except:

  1. Intangible assets that are within the scope of another Standard. For example, IAS 2 Inventories applies to intangible assets held for sale in the ordinary course of business;
  2. Mineral rights and expenditure on exploration for, or development and extraction of non-regenerative resources.

An intangible asset is initially recognized at cost if all of the following criteria are met:

  1. The asset meets the definition of an intangible asset i.e. it is identifiable and controlled by the entity;
  2. It is probable that future economic benefits that are attributable to the asset will flow to the entity; and
  3. The cost of the asset can be measured reliably.

Internally generated goodwill, brands, mastheads, publishing titles, customer lists and similar items are not recognized as assets. Expenditure on research is recognized as an expense. There is no recognition of an intangible asset arising from research. An intangible asset arising from development is recognized only if specified criteria are met.

If an intangible item des not meet the criteria for recognition as an asset, the expenditure is recognised as an expense when incurred. Expenditure that was initially recognised as an expense is not included in the cost of an intangible asset at a later date.

Subsequent to initial recognition, an intangible asset is carried at:

  1. Cost, less any accumulated amortization and any accumulated impairment losses;


  1. Revalued amount, less any subsequent accumulated amortization and any accumulated impairment losses. The revalued amount is fair value at the date of revaluation and is determined by reference to an active market.

An intangible asset can only be carried at revalued amount if there is an active market for the asset. Any revaluation increase is credited directly to equity as revaluation surplus, unless it reverses a revaluation decrease of the same asset previously recognised in profit or loss. Any revaluation decrease is recognised in profit or loss. However, the decrease is debited directly to the revaluation surplus in equity to the extent of any credit balance in revaluation surplus in respect of that asset.

An entity assesses whether the useful life of an intangible asset is finite or indefinite; the useful life is indefinite if there is no foreseeable limit to the period over which the asset is expected to generate net cash flows. The depreciable amount of an intangible asset with a finite life is amortised on a systematic basis over its useful life.

An intangible asset with an indefinite useful life is not amortized, but is tested for impairment at least annually. Impairment of intangible assets is recognised in accordance with IAS 36 Impairment of Assets.

The gain or loss on derecognizing of an intangible asset is the difference between the net disposal proceeds, if any, and the carrying amount of the item. The gain or loss is recognised in profit or loss.