Intangible assets under development are those non-physical resources that a company is still building or creating. These assets are not yet ready to use or sell. They include software, new product designs, or patents being filed. The answer to “intangible assets under development” is that they are resources that do not yet give benefits but will in the future when completed. These assets form a significant part of modern businesses and must follow proper accounting rules.
Understanding Intangible Assets in Financial Reporting
Intangible assets are non-physical things that bring value to a company. Financial reporting helps users of financial statements understand these values. Intangibles in accounting include patents, trademarks, copyrights, brand names, and software. These assets do not have a physical shape, but they are essential. Big companies may have many intangible assets, and reporting them is key.
Types of Intangible Assets
Intangible assets come in several forms, and each plays a unique role in enhancing a business’s financial strength and competitiveness. These assets are non-physical and bring long-term value. They are not like buildings or machines, but can be even more critical in today’s knowledge-driven economy.
1. Patents: Patents protect inventions and grant exclusive rights to use or sell a product or process. They prevent others from copying the invention for a fixed time, usually 20 years. Patents add value to firms through innovation and legal protection, especially in tech, biotech, and engineering industries.
2. Trademarks: Trademarks are signs, logos, or names that help people identify products or brands. They build customer trust and brand image. For example, a company’s logo helps users pick their products easily. Strong trademarks increase customer loyalty and market recognition.
3. Copyrights: Copyrights protect original content like books, songs, software, or movies. They give creators the right to use or sell their work. Copyrights are necessary in the media, publishing, and software industries. They stop others from copying or using the content without permission.
4. Software and Technology: Software built by a company is a significant intangible asset. It may be sold to customers or used internally to improve operations. These assets are very common in IT firms. They require high development costs but give great future benefits.
5. Customer Lists and Relationships: Customer data and contacts help companies market and sell better. These are often created over time and hold great value. Businesses can use this knowledge to keep loyal customers and attract new ones.
6. Brand Value and Goodwill: Brand value comes from customer trust and a company’s reputation. Goodwill arises when one company buys another for more than its net asset value. It shows the extra value the buyer sees in the brand and customer loyalty.
Key Characteristics:
- Lack of physical form: These assets cannot be touched or seen.
- Identifiability: They must be clearly defined and separate from goodwill unless bought in a business deal.
- Control: The company must have power over their use.
- Future Benefits: They must bring money or help the company in the future.
- Reliable Measurement: Companies must measure and record them using accurate data.
Each type requires careful documentation and financial proof before being recorded on the balance sheet. Accounting rules demand strong evidence that these assets will benefit the company. Legal documents, development logs, and expert reports help support this.
Intangible Assets vs Tangible Assets
Tangible assets have a physical form and are easy to touch, like machines or land. Intangible assets are different—they are ideas, rights, or creations with no physical shape. Tangibles are usually easier to value, and their costs are recorded by depreciation. Intangibles may be harder to price and are handled using amortisation. Despite their differences, both play key roles in a company’s growth and success.
| Feature | Tangible Assets | Intangible Assets |
| Physical Existence | Yes | No |
| Examples | Buildings, land, machines | Patents, trademarks, software |
| Depreciation/Amortisation | Depreciated | Amortized (if with a finite useful life) |
| Valuation Complexity | Easier to value | Harder to value due to no physical form |
| Balance Sheet Treatment | Under fixed assets | Under intangible assets |
Intangible Assets in Balance Sheet and Disclosure
Businesses must report intangible assets in the balance sheet under non-current assets. They are shown as intangible assets under development when they are still being built. Notes in the financial statements must explain the basis of value. This helps stakeholders know how intangibles affect the company’s strength. Clear disclosure improves trust and decision-making.
Accounting Treatment of Intangible Assets Under Development
The accounting treatment of intangible assets under development follows clear rules. Businesses need to track costs during the development phase and separate research costs. Accounting standards for intangible assets say that only some costs can become an asset.
Intangible Assets Journal Entry
When a cost is capitalised, the entry adds value to the asset. A journal entry like “Dr Intangible Asset and Cr Bank or Payable” is made. Later, amortisation is recorded as “Dr Amortisation Expense and Cr Accumulated Amortisation.” These entries help track and report changes correctly. The entries will look like the following in the books of accounts:-
1. Capitalisation Entry (When the cost is incurred)
This entry records the purchase of an intangible asset (e.g., software, license, patent):
| Intangible Asset A/c Dr ₹XX,XXX To Bank / Payables ₹XX, XXX |
This increases the value of assets on the balance sheet instead of immediately expensing the cost.
2. Amortisation Entry (Recorded periodically)
This entry reflects the systematic allocation of the intangible asset’s cost over its useful life:
| Amortization Expense Dr ₹X, XXX To Accumulated Amortization ₹X, XXX |
This reduces the asset’s book value over time and appears on the income statement as an expense.
Development Phase Accounting
During the development phase, businesses work to complete the asset. Costs spent in this stage are only capitalised if the rules are met. Research phase costs are always treated as expenses. Proper records must show the link between the cost and future value. Without such proof, companies cannot capitalise on the amount. This helps prevent overstating asset value.
Internally Generated Intangible Assets
Many intangible assets are created inside the company. These are called internally generated intangible assets. Companies need proof of control, future benefits, and accurate costs to treat such assets correctly. If these points are unmet, the price must go as an expense. The rules keep financial reporting fair.
Impairment of Intangible Assets
Impairment of intangible assets means the asset has lost value. Companies test intangible assets yearly to ensure the value is not too high. If the market or use has dropped, the value must be lowered. This keeps the books true and avoids false reporting. Impairment ensures assets are reported fairly.
Recognition Criteria and Measurement of Intangibles
Recognising intangible assets requires meeting specific identifiability, control, and future economic benefits criteria. Once recognised, they are initially measured at cost and later assessed using the cost or revaluation model. These principles ensure accurate financial reporting and compliance with IAS 38. Recognising and measuring intangibles means deciding when and how to show them. Not every cost becomes an asset. Companies must follow strong rules to avoid errors.
Recognition of Intangible Assets
A company only shows intangible assets in the balance sheet if it expects future benefits, has control, and can measure the cost. These rules stop businesses from adding fake or unclear values. Following recognition rules also helps in international comparisons.
Valuation of Intangible Assets
Valuing intangible assets is hard because many lack market prices. Companies use three main ways: the cost method, the income method, and the market method. The cost method uses actual spending. The income method uses future cash flow estimates. The market method compares with similar sales. Each technique needs strong proof.
Amortisation of Intangible Assets
Amortisation of intangible assets spreads their cost across their useful life. This means the company incurs a part of the cost every year. Some assets, like goodwill, do not get amortised but must be tested yearly. Amortisation gives a clearer view of the yearly benefit from the asset.
Capitalisation vs Expensing in the Development Phase
In the development phase of an intangible asset, the key difference between capitalisation and expensing lies in how costs are treated in the financial statements. Capitalisation means the costs are added to the balance sheet as an asset because they are expected to generate future economic benefits, provided they meet the specific criteria under IAS 38 (e.g., technical feasibility, intent to complete, and ability to use or sell). On the other hand, expensing involves recording the costs immediately in the profit and loss account, reducing the current period’s profit. Expensing is typically applied to research phase costs or when development costs fail to meet the capitalisation criteria. Companies often face a choice. Should they capitalise or expense the cost? Capitalisation means adding cost to assets. Expensing means showing it in the profit and loss statement.
Software Development Intangible Asset
When a business builds software, it checks if the product will give value. If yes, it treats the cost as an intangible software development asset. This is only done when work is planned and expected to succeed. The cost is treated as an expense if the idea is unclear or risky.
| Criteria | Capitalization | Expensing |
| Accounting Treatment | Recorded as an asset | Recorded as an expense |
| Timing | Later stages of development | Early stages or during research |
| Financial Impact | Increases assets; defers expenses | Reduces profit immediately |
| Amortization | Yes, over the useful life | No |
| Standards Compliance | Requires strict conditions (e.g., IAS 38, US GAAP) | Freely allowed during the research phase |
Relevance to ACCA Syllabus
Intangible assets under development are highly relevant in the ACCA Financial Reporting (FR) and Strategic Business Reporting (SBR) papers. ACCA students must understand IAS 38 Intangible Assets, which covers the criteria for capitalising development costs. This concept is tested in both standalone intangible asset questions and broader case study-based scenarios. Mastering this helps in the qualification’s consolidation, analysis, and corporate reporting components.
Intangible Assets Under Development ACCA Questions
Q1. Under IAS 38, when can development costs be recognised as intangible assets?
A) When the product is commercially available
B) When research phase begins
C) When all recognition criteria under IAS 38 are met
D) When cost is incurred
Ans: C) When all recognition criteria under IAS 38 are met
Q2. Which of the following is not a criterion to capitalise development costs under IAS 38?
A) Ability to complete the intangible asset
B) Ability to generate future economic benefits
C) Cost must be unknown
D) Availability of adequate resources
Ans: C) Cost must be unknown
Q3. Development costs should be:
A) Written off in the year incurred
B) Capitalised only if incurred after the asset is completed
C) Expensed unless IAS 38 criteria are met
D) Always treated as capital expenditure
Ans: C) Expensed unless IAS 38 criteria are met
Q4. What is the difference between research and development under IAS 38?
A) Research is capitalised; development is expensed
B) Research is expensed; development may be capitalised
C) Both are capitalised
D) Both are always expensed
Ans: B) Research is expensed; development may be capitalised
Q5. Which of the following best describes an “intangible asset under development”?
A) Tangible item not ready for use
B) Non-physical item still being constructed or created
C) Cash invested in intangible investments
D) Intangible asset held for sale
Ans: B) Non-physical item still being constructed or created
Relevance to US CMA Syllabus
The US CMA syllabus emphasises performance management and financial reporting. Understanding intangible assets under development helps candidates assess capitalisation of internally generated costs, a critical aspect of investment decisions and managerial accounting. This topic appears in Part 1 (Financial Planning, Performance, and Analytics) and Part 2 of the CMA (Strategic Financial Management).
Intangible Assets Under Development CMA Questions
Q1. In the US CMA context, the costs of internally developed software for internal use are:
A) Always capitalised
B) Capitalised after the preliminary project stage
C) Expensed throughout the project
D) Capitalised from the feasibility stage
Ans: B) Capitalised after the preliminary project stage
Q2. Which stage is typically not capitalised when developing internal-use software?
A) Application development
B) Post-implementation
C) Coding and installation
D) Design phase
Ans: B) Post-implementation
Q3. Under US GAAP, when can development costs for software be capitalised?
A) Once feasibility is established
B) From the date of board approval
C) From market launch
D) When coding begins
Ans: A) Once feasibility is established
Q4. Which principle supports capitalising development expenditure?
A) Matching principle
B) Conservatism
C) Realisation
D) Revenue recognition
Ans: A) Matching principle
Q5. What is a common impairment indicator for intangible assets under development?
A) Increase in sales
B) Extension of project deadlines
C) Availability of excess funds
D) Completion of development
Ans: B) Extension of project deadlines
Relevance to US CPA Syllabus
US CPA candidates must understand how intangible assets are reported under both US GAAP and IFRS. In FAR (Financial Accounting and Reporting), the development phase of accounting is covered in depth, especially software development costs. Knowing when to expense vs capitalise development costs is vital for public company reporting and audits.
Intangible Assets Under Development CPA Questions
Q1. Under US GAAP, software development costs incurred after technological feasibility are:
A) Expensed as incurred
B) Capitalised
C) Deferred until market launch
D) Treated as R&D costs
Ans: B) Capitalised
Q2. Costs of intangible assets under development must be:
A) Fully written off
B) Shown in equity
C) Capitalised if identifiable and measurable
D) Capitalised only after sale
Ans: C) Capitalised if identifiable and measurable
Q3. Which FASB standard governs internal-use software costs?
A) ASC 350
B) ASC 985
C) ASC 820
D) ASC 450
Ans: A) ASC 350
Q4. Under US GAAP, is it not required to capitalise software development?
A) Technological feasibility
B) Completion intent
C) Immediate product launch
D) Reliable cost estimation
Ans: C) Immediate product launch
Q5. Which of these is true regarding intangible asset impairment testing under development?
A) Done after every quarter
B) Done after feasibility only
C) Done annually or on an impairment trigger
D) Done at product launch
Ans: C) Done annually or on impairment trigger
Relevance to CFA Syllabus
The CFA curriculum (especially Level I and II) requires understanding the treatment of intangible assets under IFRS and US GAAP, including capitalisation, amortisation, and impairment. This topic supports valuation, earnings analysis, and financial statement adjustments — vital for equity research and portfolio management.
Intangible Assets Under Development CFA Questions
Q1. Under IFRS, development costs are capitalised when:
A) An expense is recorded
B) The product is launched
C) All six recognition criteria are met
D) Research phase ends
Ans: C) All six recognition criteria are met
Q2. Which statement is true regarding R&D under IFRS?
A) Research costs may be capitalised
B) Development costs are never capitalised
C) R&D is always expensed
D) Only development costs may be capitalised
Ans: D) Only development costs may be capitalised
Q3. Why must analysts adjust for capitalised development costs?
A) To reduce revenue
B) To compare across GAAP and IFRS
C) To hide earnings
D) To adjust tax liability
Ans: B) To compare across GAAP and IFRS
Q4. Which of the following best improves comparability in equity analysis?
A) Capital structure
B) Operating leases
C) Development cost treatment
D) Dividends
Ans: C) Development cost treatment
Q5. A firm capitalises development costs. What happens to ROA in early years?
A) Decreases
B) Increases
C) No impact
D) ROA not affected by intangibles
Ans: B) Increases
