1) The document discusses rules for recognizing intangible assets, research and development costs, and software development costs under international accounting standards. 2) For intangible assets to be recognized, they must be identifiable, provide probable future economic benefits, and the entity must control those benefits. Research costs cannot be capitalized as the benefits are uncertain, but development costs can be if certain criteria are met. 3) For software developed internally, costs in the application development stage can be capitalized but preliminary and post-implementation costs must be expensed. Capitalization ends when testing is complete and impairment tests are required if projects become improbable.

1. Rules for intangible asset
recognition, research and
development, software
development costs
Submitted To: Sir Yasir Nadeem

2. Presented By
• Wasif Ali Syed (18221554-001)
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3. Intangible Asset
Intangible Asset
• An intangible asset is an
asset that is not physical in
nature. Goodwill, brand
recognition and intellectual
property, such as patents,
trademarks, and copyrights,
are all intangible assets.
Intangible assets exist in
opposition to tangible assets,
which include land, vehicles,
equipment, and inventory.
Recognition and Cost of
Intangible Assets (IAS 38)
An intangible asset is
recognized when it meets all of
the criteria below (IAS
38.18,21):
• Identifiability
• Probability of future
economic benefits,
• Control over the future
economic benefits,
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4. Recognition and Cost of Intangible Assets (IAS 38)
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Control over the future economic benefits
• The general concept of control is discussed in the
Conceptual Framework for Financial Reporting. The
most common specific application of the control
criterion in intangible assets relates to training
expenditures and employees expertise, which normally
cannot be recognized as assets because of insufficient
control over the expected future economic benefits (IAS
38.15)
Identifiability
• An asset is identifiable if it either is separable or arises
from contractual or other legal rights (IAS 38.12).

5. Recognition and Cost of Intangible Assets (IAS 38)
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Probability of future economic benefits
• General concept of probability of future economic
benefits is discussed in the Conceptual Framework for
Financial Reporting. Paragraph IAS 38.25 states that the
probability recognition criterion is always considered to
be satisfied for separately acquired intangible assets.

6. What is Research & development?
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Development
• Development is the application of research findings or
other knowledge to a plan or design for the production of
new or substantially improved materials, devices,
products, processes, systems, or services, before the start
of commercial production or use.
• An example of development is a car
manufacturer undertaking the design, construction,
and testing of a pre-production model.
Research
• Research is original and planned investigation, undertaken
with the prospect of gaining new scientific or technical
knowledge and understanding.
• An example of research could be a company in the
pharmaceuticals industry undertaking activities or tests
aimed at obtaining new knowledge to develop a new
vaccine. The company is researching the unknown, and
therefore, at this early stage, no future economic benefit
can be expected to flow to the entity.

7. INTERNATIONAL TREATMENT OF R&D
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Research phase
• It is impossible to demonstrate whether or not a product
or service at the research stage will generate any
probable future economic benefit. As a result, IAS 38
states that all expenditure incurred at the research
stage should be written off to the income statement as an
expense when incurred, and will never be capitalized as
an intangible asset.
Recognition
IAS 38 states that an intangible asset is to be recognized if,
and only if, the following criteria are met:
• it is probable that future economic benefits from the
asset will flow to the entity
• the cost of the asset can be reliably measured.

8. INTERNATIONAL TREATMENT OF R&D
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Development phase
• existence of a market or, if to be used internally, the
usefulness of the asset
• availability of adequate technical, financial, and other
resources to complete the asset
• the cost of the asset can be measured reliably.
Development phase
Under IAS 38, an intangible asset arising from development
must be capitalized if an entity can demonstrate all of the
following criteria:
• the technical feasibility of completing the intangible asset
(so that it will be available for use or sale)
• intention to complete and use or sell the asset
• ability to use or sell the asset

9. Treatment of capitalized development costs
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Treatment of capitalized development costs
• Each development project must be reviewed at the end
of each accounting period to ensure that the recognition
criteria are still met. If the criteria are no longer met,
then the previously capitalized costs must be written
off to the income statement immediately.
Treatment of capitalized development costs
• once development costs have been capitalized, the asset
should be amortized in accordance with the accruals
concept over its finite life. Amortization must only
begin when commercial production has
commenced (hence matching the income and
expenditure to the period in which it relates).

10. Software Development Cost
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• Cash management tracking systems
• Membership tracking systems
• Production automation systems
Software Development Cost
• Software capitalization involves the recognition of
internally-developed software as fixed assets. Software
is considered to be for internal use when it has been
acquired or developed only for the internal needs of a
business. Examples of situations where software is
considered to be developed for internal use are:
• Accounting systems

11. Software Capitalization Accounting Rules
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Stage 2: Application development
Capitalize the costs incurred to develop internal-use
software, which may include coding, hardware installation,
and testing. Any costs related to data conversion, user
training, administration, and overhead should be charged to
expense as incurred.
Stage 1: Preliminary
• All costs incurred during the preliminary stage of a
development project should be charged to expense as
incurred. This stage is considered to include making
decisions about the allocation of resources, determining
performance requirements, conducting supplier
demonstrations, evaluating technology, and supplier
selection.

12. Software Capitalization Accounting Rules
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• The capitalization of costs should end when all substantial
testing has been completed. If it is no longer probable that a
project will be completed, stop capitalizing the costs
associated with it, and conduct impairment testing on the
costs already capitalized. The cost at which the asset should
then be carried is the lower of its carrying amount or fair
value (less costs to sell). Unless there is evidence to the
contrary, the usual assumption is that uncompleted software
has no fair value.
Stage 3: Post-implementation
• Charge all post-implementation costs to expense as
incurred. Samples of these costs are training and
maintenance costs.
• Any allowable capitalization of costs should begin after the
preliminary stage has been completed, management
commits to funding the project, it is probable that the
project will be completed, and the software will be used for
its intended function.