1. What IND AS 38 Covers — Definition and Recognition Criteria
IND AS 38 governs intangible assets — identifiable non-monetary assets without physical substance, such as patents, licences, brands acquired from a third party, customer lists acquired in a business combination, and capitalised software. An intangible asset is recognised only if all of the following are met:
- It is identifiable — separable (capable of being sold, transferred or licensed on its own or with a related contract) or arising from contractual or other legal rights.
- The entity controls the resource — has the power to obtain the future economic benefits and restrict others' access to them.
- Future economic benefits attributable to the asset are probable.
- The cost of the asset can be measured reliably.
Identifiability is what separates an intangible asset from goodwill. Goodwill represents future economic benefits from assets that are not individually identified and separately recognised — it isn't itself an intangible asset under IND AS 38's definition, and is instead governed by IND AS 103 (recognition) and tested for impairment under IND AS 36.
2. Separately Acquired and Business-Combination Intangibles
An intangible asset acquired separately is measured at cost — its purchase price plus directly attributable costs of preparing it for use, similar in principle to IND AS 16 for PP&E. The probable-future-benefits recognition criterion is always considered satisfied for separately purchased intangibles, since the price paid reflects the market's expectation of the benefits flowing from it.
An intangible asset acquired in a business combination is recognised separately from goodwill and measured at its acquisition-date fair value — again, the probability criterion is always treated as satisfied. This is precisely why a business combination often triggers recognition of intangibles (customer relationships, order backlogs, non-compete agreements, in-process R&D) that the acquiree itself was never able to recognise internally.
3. Internally Generated Intangibles — Research vs Development
Internally generated intangible assets are the hardest area of IND AS 38 in practice, because an entity's own R&D process must be split into two phases with completely different accounting outcomes:
Research phase — always expensed
Original and planned investigation to gain new scientific or technical knowledge and understanding. At this stage, the entity cannot demonstrate that a resulting intangible asset exists that will generate probable future economic benefits, so all research expenditure is expensed as incurred.
Development phase — capitalised only if six criteria are met
The application of research findings to a plan or design for a new or substantially improved product or process, prior to commercial production or use.
Development costs are capitalised only when an entity can demonstrate all six of these:
| # | Criterion |
|---|---|
| 1 | The technical feasibility of completing the intangible asset so that it will be available for use or sale |
| 2 | Its intention to complete the asset and use or sell it |
| 3 | Its ability to use or sell the asset |
| 4 | How the asset will generate probable future economic benefits — including the existence of a market, or its usefulness if for internal use |
| 5 | The availability of adequate technical, financial and other resources to complete development and to use or sell the asset |
| 6 | Its ability to reliably measure the expenditure attributable to the asset during its development |
If an entity cannot distinguish the research phase from the development phase of an internal project, all expenditure is treated as research and expensed. This is a deliberately conservative default — the burden of proof sits with the entity to demonstrate development-phase status, not the other way around.
4. Internally Generated Goodwill and Brands — Never Recognised
Internally generated goodwill, brands, mastheads, publishing titles, customer lists, and items similar in substance are never recognised as intangible assets. The expenditure incurred to internally build these items cannot be distinguished from the cost of developing the business as a whole, and they are not identifiable resources controlled by the entity that can be measured reliably at cost — this is true no matter how valuable the brand or customer base has genuinely become.
Similarly, expenditure on start-up activities, training, advertising and promotional activities, and relocating or reorganising part or all of an entity is always expensed as incurred, even where a longer-term benefit is expected — the link between the spend and any future identifiable asset simply isn't reliable or separable enough.
5. Useful Life — Finite vs Indefinite
Every intangible asset is assessed as having either a finite useful life or an indefinite useful life:
| Useful life | Meaning | Accounting treatment |
|---|---|---|
| Finite | A determinable limit to the period over which the asset is expected to generate net cash inflows (e.g. a patent with a fixed legal term, a licence for a specified period) | Amortised over that useful life |
| Indefinite | No foreseeable limit to the period the asset is expected to generate net cash inflows — "indefinite" does not mean "infinite" or "permanent" | Not amortised; tested for impairment at least annually under IND AS 36 |
The indefinite-life assessment is reviewed every period to confirm the facts still support it — if events change (e.g. a competitor product emerges, or a licence acquires a fixed renewal limit), the asset is reassessed as finite-life and amortised prospectively from that point.
6. Amortization of Finite-Life Intangibles
The depreciable amount of a finite-life intangible (cost less residual value, generally assumed to be nil unless a third party commits to purchase it, or an active market exists for it) is amortised on a systematic basis over its useful life, using a method that reflects the pattern in which the asset's future economic benefits are expected to be consumed by the entity — straight-line is used by default where that pattern cannot be determined reliably. The amortisation period and method are reviewed at least at each financial year-end.
7. Subsequent Measurement — Cost Model vs Revaluation Model
As with IND AS 16, an entity may choose the cost model (cost less accumulated amortisation and impairment) or the revaluation model — but for intangible assets, the revaluation model can only be applied if fair value can be determined by reference to an active market, which is rare for most intangibles (patents and trademarks, being unique, typically don't trade in an active market) and in practice makes the revaluation model largely inapplicable outside a handful of cases such as certain licences or quotas.
8. Derecognition
An intangible asset is derecognised on disposal, or when no future economic benefits are expected from its use or disposal. The gain or loss — the difference between net disposal proceeds and carrying amount — is recognised in profit or loss, and is not classified as revenue, mirroring the treatment under IND AS 16.
9. Worked Example — R&D Project and Software Development
Scenario: Delta Biotech Ltd spends ₹40,00,000 investigating a new drug compound over Year 1 (research phase — no proven feasibility yet). In Year 2, the compound clears a technical feasibility milestone; management commits the ₹60,00,000 needed to complete clinical development and has an identified path to market. Development spend from that point is ₹90,00,000, of which ₹10,00,000 relates to unrelated exploratory work still in the research phase.
| Period / Item | Amount (₹) | Treatment |
|---|---|---|
| Year 1 — pre-feasibility research | 40,00,000 | Expensed (research phase) |
| Year 2 — qualifying development spend | 80,00,000 | Capitalised (all six criteria met) |
| Year 2 — unrelated exploratory spend | 10,00,000 | Expensed (still research phase) |
| Intangible asset recognised | 80,00,000 | |
Once the product receives regulatory approval and enters commercial production, the ₹80,00,000 capitalised asset is reclassified from "under development" to an amortisable intangible and amortised over its estimated useful commercial life — say 8 years, giving ₹10,00,000 of annual amortisation.
Explore Finosutra's IND AS tools
Free calculators for lease accounting, security deposits, ECL provisioning and financial statement generation — audit-ready workpapers in minutes.
Explore IND AS Tools →Software Development — the Same Test Applies
For internally developed software, costs during the planning/feasibility-study stage are expensed. Once technical feasibility is demonstrated and the six development criteria are met, coding, testing and preparing the software for its intended use are capitalised. Post-implementation costs — maintenance, minor bug fixes, and staff training on how to use the finished software — are expensed as incurred, since they don't create a new identifiable asset.
10. IND AS 38 vs Old IGAAP (AS 26) — Key Differences
| Aspect | Old IGAAP (AS 26) | IND AS 38 |
|---|---|---|
| Useful life | Rebuttable presumption that useful life does not exceed 10 years; every intangible amortised | Can have an indefinite useful life; such assets are not amortised, only impairment-tested |
| Business combination intangibles | Recognised only if reliably measurable, with less prescriptive guidance | Recognition and fair-value measurement always treated as satisfied on acquisition |
| Revaluation model | Not permitted | Permitted, but only where an active market exists — rare in practice |
| In-process R&D acquired in a business combination | Limited specific guidance | Recognised separately from goodwill at fair value if identifiable, even if the acquiree had expensed it internally |
| Disclosures | Limited — carrying amount and amortisation method | Extensive — reconciliation of carrying amount, indefinite-life assets and the reasons supporting that assessment, R&D expense recognised in the period |
11. Disclosures Required
For each class of intangible asset, IND AS 38 requires disclosure of whether useful lives are indefinite or finite (and if finite, the useful lives or amortisation rates and methods used), the gross carrying amount and accumulated amortisation at the beginning and end of the period, the line item(s) in which amortisation is included, and a full reconciliation of the carrying amount showing additions (separately identifying internally developed vs acquired), disposals, revaluations, impairment losses recognised and reversed, amortisation, and other movements. The aggregate amount of research and development expenditure recognised as an expense during the period must also be disclosed, along with the carrying amount and remaining amortisation period of any individually material intangible asset, and — for indefinite-life assets — the carrying amount and the reasons supporting the indefinite-life assessment.
12. Common Mistakes CAs Make
Error 1 — Capitalising research-phase spend because management is "confident" the project will succeed. Confidence isn't the test — the six development criteria, especially demonstrated technical feasibility, must actually be met before a single rupee of development-phase spend can be capitalised.
Error 2 — Recognising internally generated brand value or customer relationships. No matter how valuable a self-built brand or customer base has become, it can never be recognised as an intangible asset — only such items acquired separately or in a business combination qualify.
Error 3 — Amortising an indefinite-life intangible "just to be conservative." If the indefinite-life criteria are genuinely met, amortising anyway is not a conservative alternative — it's a standard violation. The correct discipline for such assets is an annual impairment test, not amortisation.
Error 4 — Capitalising post-implementation software maintenance and training costs. Once software is ready for its intended use, ongoing maintenance, bug fixes and user training are period costs — capitalisation stops at the point the asset is available for use, just as under IND AS 16.
Error 5 — Treating all in-house R&D spend as a single undifferentiated pool. Where the research and development phases of an internal project cannot be distinguished, the whole amount must be expensed — a blended or partial capitalisation without a documented feasibility milestone is not supportable.
13. FAQs
What is the difference between the research phase and development phase under IND AS 38?
Research is original and planned investigation undertaken to gain new scientific or technical knowledge and understanding — its costs are always expensed as incurred, because at that stage the entity cannot demonstrate an intangible asset exists that will generate probable future economic benefits. Development is the application of research findings to a plan or design for a new or improved product or process before commercial production begins — its costs are capitalised only if all six specific IND AS 38 criteria (technical feasibility, intention, ability to use or sell, how it will generate future benefits, resources, and reliable measurement) are met.
Can internally generated goodwill be recognised as an intangible asset?
No. Internally generated goodwill is never recognised as an asset under IND AS 38, because it is not an identifiable resource controlled by the entity that can be measured reliably at cost — it is simply the difference between the value of the business as a whole and the sum of its identifiable net assets. The same prohibition applies to internally generated brands, mastheads, publishing titles, and customer lists, since the expenditure on these cannot be distinguished from the cost of developing the business as a whole.
What is an indefinite useful life intangible asset?
An intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which it is expected to generate net cash inflows for the entity — "indefinite" does not mean "infinite." Such assets are not amortised, but are instead tested for impairment at least annually under IND AS 36, and the indefinite-life assessment itself is reviewed each period to confirm it still holds.
Are software development costs capitalized under IND AS 38?
It depends on the stage. Costs incurred during the research or feasibility-study stage of software development are expensed. Once technical feasibility is established and the six development-phase criteria are met, costs of coding, testing and preparing the software for its intended use can be capitalised. Costs of maintaining existing software or of training staff to use it are expensed as incurred, not capitalised.
How is an intangible asset with a finite useful life amortized?
The depreciable amount (cost less residual value, which is usually assumed to be nil) is allocated on a systematic basis over its useful life, using a method that reflects the pattern in which the asset's economic benefits are consumed — straight-line is used where that pattern cannot be determined reliably. The amortisation period and method are reviewed at least at each financial year-end.
Is IND AS 38 the same as IAS 38?
IND AS 38 is India's converged version of IAS 38 and follows the same recognition criteria, the research/development distinction, and the indefinite vs finite useful life framework. It replaces the older Indian AS 26, which required a rebuttable presumption that useful life does not exceed 10 years and mandated amortisation of every intangible asset — a concept IND AS 38 removed by introducing indefinite useful life intangibles.