11.2.2: Internally Developed Intangible Assets
- Page ID
- 100523
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)All company activities to create new products or substantially improve existing products are to be separated into a research phase and a development phase for the various costs incurred. Below is a summary of the two phases and their accounting treatment (IFRS, 2014; IAS 38 Intangible Assets):
| Research Phase: | Development Phase: | |
|---|---|---|
| All original and planned investigation activities including evaluating and selecting products or processes from several possible alternatives. If there is any uncertainty about which phase is appropriate for an activity, then the research phase is used. | This is where the application of research findings before commercial production begins. It includes designing, testing and constructing prototypes, models, pilot plants chosen from the alternatives identified in the research phase, as well as costs for any new tools, templates, or castings. | |
| All costs are expensed as incurred because the activities do not relate to an identifiable product or process. | IAS 38: the six criteria must ALL be met to be capitalized, otherwise costs are expensed as incurred. | 1) Technical feasibility of completing the intangible asset must be proven. |
| 2) Management intention exists to complete it for use or for sale. | ||
| 3) The entity must be able to use or sell it. | ||
| 4) Adequate resources to complete the development and to use or sell the intangible asset are available. | ||
| 5) Probability of future economic benefits is clearly established and are reasonably certain, such as the existence of a market or the usefulness of the intangible asset to the entity. | ||
| 6) Costs can be reliably measured | ||
| Costs that are initially expensed because they do not meet the six criteria above cannot be capitalized later. | ||
| Typical ineligible costs for capitalization: | Business start-up costs, training, advertising and promotion, relocation, reorganization costs or any costs after the asset is ready for use/sale. Internally generated branding or customer lists are also excluded from capitalization because they are indistinguishable from other business costs. | |
| Once the six criteria are met, direct costs that are eligible: | Any external or internal costs directly attributable to the specific asset such as direct materials and direct labour (i.e., salaries and benefits), as well as other direct costs such as engineering costs, and any directly attributable overhead costs. | |
| Once the intangible asset is ready for its intended use, then any subsequent costs are expensed and no longer capitalized. | ||
For ASPE, CPA Handbook, Sec. 3064, Goodwill and Intangible Assets (CPA Canada, 2016), allows a choice between expensing the costs for internally developed intangibles or recognizing the intangible asset when certain criteria (similar to the criteria above) are met.
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