How to classify and measure intangible assets under IFRS and US GAAP
- Graziano Stefanelli
- 9 hours ago
- 5 min read
Intangible assets represent non-physical resources that provide future economic benefits, such as patents, trademarks, software, and customer relationships. These assets play a central role in industries driven by innovation, intellectual property, or brand value. Both IFRS (IAS 38) and US GAAP (primarily ASC 350 and ASC 985) provide structured guidance for recognizing, classifying, and measuring intangibles, but they differ in important aspects, including development cost capitalization, revaluation, and impairment treatment. Understanding these distinctions is essential for accurate financial reporting and compliance across jurisdictions.
Intangible assets must be identifiable and provide future economic benefits.
Under both IFRS and US GAAP, an asset is considered intangible when it:
Is identifiable (either separable or arises from contractual/legal rights),
Lacks physical substance, and
Is expected to generate future economic benefits for the entity.
These assets may be internally generated (e.g., software, development costs) or acquired (through purchase, business combination, or government grant). However, internally generated goodwill and most research expenditures are not capitalized under either standard due to the difficulty of proving future benefits.
Examples of intangible assets:
Patents, licenses, copyrights
Trademarks and brand names
Internally developed software
Customer lists and relationships
Franchise agreements
The method of acquisition plays a crucial role in determining the initial recognition and subsequent accounting treatment.
IFRS allows capitalization of development costs under strict conditions.
IAS 38 differentiates between research and development phases of internal projects:
Research phase: All costs are expensed as incurred. This includes activities aimed at gaining new knowledge, evaluating alternatives, or identifying possible applications.
Development phase: Costs are capitalized if—and only if—all six of the following criteria are met:
Technical feasibility of completion,
Intention to complete the asset,
Ability to use or sell the asset,
Generation of probable future economic benefits,
Availability of resources to complete the project,
Reliable measurement of costs.
Once capitalized, development costs are amortized over the asset’s useful life and tested for impairment when indicators arise. Capitalization improves the balance sheet but requires careful documentation and ongoing monitoring.
US GAAP is more conservative with internally generated intangible assets.
Under ASC 350, most internally developed intangible assets must be expensed, including research and development (R&D) costs. Only a few categories, such as software development and website development, are eligible for capitalization, and even then, only in specific stages of development:
For software intended for internal use (ASC 350-40):
Costs during the preliminary project stage are expensed.
Costs during the application development stage (e.g., coding, testing) are capitalized.
Costs during the post-implementation stage (e.g., maintenance, training) are expensed.
For software to be sold or licensed (ASC 985-20):
Capitalization begins after technological feasibility is established and ends once the product is ready for general release.
Goodwill is not amortized but tested annually for impairment under ASC 350, while other indefinite-lived intangibles follow a similar impairment-only model.
Revaluation of intangible assets is permitted under IFRS but prohibited under US GAAP.
IFRS (IAS 38) permits the revaluation model for intangible assets only if an active market exists for the asset type. In practice, this is rare and applies mostly to certain licenses or emission rights. Under this model, assets are carried at fair value less accumulated amortization and impairment losses.
Revaluation increases are credited to other comprehensive income (OCI) and accumulated in equity.
Revaluation decreases are expensed, unless reversing previous OCI gains.
US GAAP does not allow revaluation of intangible assets. All assets are measured using the cost model, with adjustments only for impairment losses. This approach prioritizes objectivity and verifiability but may understate the value of brand-heavy or IP-driven businesses.
Amortization and useful lives differ depending on asset classification.
Under both frameworks, intangible assets are classified as:
Finite-lived (e.g., patents, software): subject to amortization over their useful life.
Indefinite-lived (e.g., trademarks with legal protection and no foreseeable end): not amortized, but subject to annual impairment testing.
Amortization (finite-lived):
Based on the straight-line method unless another method better reflects usage.
Reassess useful life, residual value, and amortization method at least annually (IFRS explicitly requires annual review).
Impairment:
IFRS (IAS 36): Compare carrying amount to recoverable amount (higher of fair value less costs to sell and value in use).
US GAAP (ASC 350): Indefinite-lived intangibles are tested annually; finite-lived intangibles are tested when indicators of impairment exist.
Impairment losses are recognized in profit or loss and cannot be reversed under US GAAP, while IFRS permits reversal if the asset’s value recovers.
Goodwill is never amortized but requires annual impairment testing.
Goodwill arises only in business combinations and represents the excess of purchase price over the fair value of identifiable net assets acquired.
IFRS (IFRS 3 + IAS 36):
Not amortized.
Impairment tested at the cash-generating unit (CGU) level annually or when indicators exist.
Impairment losses cannot be reversed.
US GAAP (ASC 350):
Not amortized.
Tested annually for impairment, either at the reporting unit level or using the qualitative ("Step 0") assessment.
If qualitative test fails, quantitative test is performed comparing carrying amount to fair value.
Entities can elect to amortize goodwill over 10 years under a private company accounting alternative.
These rules ensure that overpaid acquisitions do not inflate asset balances indefinitely without periodic reassessment.
Disclosure requirements help users understand the nature and valuation of intangibles.
Both frameworks require detailed disclosures about intangible assets in the financial statements:
Disclosure area | IFRS (IAS 38) | US GAAP (ASC 350) |
Nature and classification | Required | Required |
Gross carrying amount | Required | Required |
Accumulated amortization | Required | Required |
Useful lives and amortization | Required | Required |
Revaluation surplus | Required, if applicable | Not applicable |
Impairment losses and reversals | Disclose losses and reversals | Disclose losses only |
Internally generated assets | Separate disclosure for capitalized development | Separate disclosure for software, website |
Goodwill and impairment testing | Required, CGU-level testing | Required, reporting-unit testing |
These disclosures ensure transparency and allow analysts to understand how intangible value is derived, tested, and maintained on the balance sheet.
Key differences and practical reporting impacts.
Area | IFRS (IAS 38 / IAS 36) | US GAAP (ASC 350 / ASC 985) |
R&D cost treatment | Development costs capitalized if criteria met | Expensed, except certain software |
Revaluation | Permitted (rare, only if active market) | Prohibited |
Goodwill | No amortization, impairment required | No amortization, impairment required (with private co. option) |
Impairment reversals | Permitted for intangibles (not goodwill) | Prohibited |
Software development | Follows general IAS 38 rules | Separate rules for internal-use and for-sale |
Componentization | Required if applicable | Not explicitly required |
Companies must pay close attention to these differences, especially when reconciling dual reporting or making M&A decisions across jurisdictions. The treatment of intangible assets can materially impact earnings, asset values, and even market perception in sectors where intangible value dominates.
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