In the
modern economy, some of the most valuable assets a company possesses have no
physical form. A brand name built over decades, a patent protecting a
groundbreaking invention, a piece of software that automates thousands of tasks
— these are intangible assets. Unlike machinery or land, you cannot see them,
touch them, or move them. Yet they can be worth more than all of a company's
physical assets combined. Understanding how to account for these assets is one
of the most important and nuanced areas of financial reporting, governed in
Bangladesh by BFRS/IAS 38.
What Is an Intangible
Asset?
An
intangible asset is an identifiable, non-monetary asset without physical
substance. This definition contains three critical elements. First, the asset
must be IDENTIFIABLE — meaning it can be separated from the business and sold,
licensed, or transferred independently, OR it arises from a contractual or
legal right. Second, it must be NON-MONETARY — unlike cash or trade
receivables, it cannot be converted into a fixed amount of money. Third, it has
NO PHYSICAL SUBSTANCE — unlike machines or buildings, it exists as a right, a
concept, or a piece of knowledge. Examples include software licences,
trademarks, patents, copyrights, customer lists acquired in a business
acquisition, and franchise rights.
The Key Distinction:
Purchased vs Internally Created
The most
important rule in IAS 38 — and the one most frequently examined — is the
distinction between intangible assets that are PURCHASED from an external party
and those CREATED INTERNALLY within the company. When a company BUYS an
intangible asset, the cost is clearly measurable and the future economic
benefits are assumed probable — so the asset is recognised on the balance sheet
at cost. When a company CREATES an intangible asset internally, determining
cost is difficult because research costs blend across many projects, and it is
uncertain whether the project will succeed. IAS 38 therefore takes a highly
conservative approach to internally generated intangibles.
The Research and
Development Split
IAS 38
divides internal development work into two phases. The RESEARCH PHASE covers
original investigation to gain new knowledge. At this stage, there is no
certainty that anything commercially useful will emerge, so ALL research costs
are EXPENSED immediately to the income statement — no exceptions. The
DEVELOPMENT PHASE begins when the entity can demonstrate a specific product or
process it intends to bring to completion. Development costs may be CAPITALISED
as an intangible asset, but ONLY if ALL six criteria are simultaneously met:
(1) technical feasibility of completing the asset; (2) intention to complete
and use or sell it; (3) ability to use or sell it; (4) probable future economic
benefits; (5) adequate technical, financial, and other resources; and (6)
ability to reliably measure expenditure. If even one criterion is missing,
development costs must be expensed.
What Can Never Be
Recognised as an Intangible?
IAS 38
explicitly prohibits recognition of certain internally generated items
regardless of their commercial value: internally generated goodwill, internally
generated brand names, publishing titles, mastheads, and customer lists. These
items cannot be recognised because their cost cannot be reliably separated from
the cost of developing the business as a whole, and their value is too
subjective to measure. This creates an accounting paradox: Grameenphone's brand
may be worth billions of taka, yet it does not appear on the balance sheet
because it was internally developed. Only brands PURCHASED in a business
combination can be recognised.
Amortisation and
Impairment
Once
recognised, intangible assets are either amortised or tested for impairment.
Intangibles with a FINITE useful life are amortised systematically over that
life, reflecting the pattern in which future economic benefits are consumed.
Intangibles with an INDEFINITE useful life — such as certain acquired brand
names — are NOT amortised but must be tested for impairment annually under IAS
36. The choice of amortisation method, rate, and residual value must be
reviewed at each reporting date and revised if circumstances change.
Why This Matters for
Financial Analysis
The
different accounting treatment of purchased versus internally created
intangibles means that companies that grow organically appear to have fewer
intangible assets on their balance sheets than companies that grow by
acquisition. Two companies with identical economic value may report very
different balance sheet totals. Financial analysts adjust for this when
comparing companies, adding back estimated values for unrecognised internally
generated intangibles. Understanding IAS 38 is therefore essential not just for
preparing financial statements, but for interpreting them correctly.
At a Glance:
Intangible Asset: An identifiable, non-monetary asset without physical substance
expected to generate future economic benefits.
Research Phase: Original investigation for new knowledge — ALL costs expensed
immediately; capitalisation never permitted.
Development Phase: Application of research to a specific project — costs
capitalised only if all six IAS 38 criteria are simultaneously met.
Amortisation: Systematic allocation of the cost of a finite-life intangible
over its useful life.