Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Four – Key issues in accounting and their treatment under IFRS
2. Development phase
The application of research findings or other knowledge to improve or
substantially develop company products, services or processes.
Development costs that meet the following conditions must be capitalised
otherwise they are written off as an expense.
• The project is technically feasible
• There is an intention to complete the intangible asset and use or sell it
• The enterprise has the ability to use or sell the asset
• It must be clear how the intangible can be used or how it could be sold
• The company has adequate resources to complete the project
• The expenditure associated with the intangible asset can be reliably
measured
Once an intangible asset has been capitalised then it should be initially
recognised at cost. Subsequent to initial measurement at cost the preferred IFRS
treatment is to show the asset at cost net of accumulated amortisation and
impairment charges. Theoretically IAS 38 does allow revaluations of intangibles
but this is only where there is an active market in the intangible. Given the unique
nature of many intangibles this is unlikely to be the case and so we very rarely
see revaluations of intangibles.
The amortisation period is assumed to be less than 20 years. However, in certain
industries a longer period may be acceptable. This might apply for example in the
aerospace industry where expenditure might be expected to generate benefits
over periods as long as 30 years although we doubt very much whether such
amortisation periods would be used in practice. The normal approach to
amortising an intangible is to use a straight-line depreciation method with a zero
residual value.
8.3 US GAAP Focus
There are two key areas of divergence between US GAAP and IFRS on
accounting for intangibles:
1. Research and development expenditure is generally expensed in the
US, although certain software and technology costs may qualify for
capitalisation. Under IFRS development must be capitalised
2. Intangibles can be revalued if they are traded in an active market (highly
unlikely for most intangibles). This is prohibited under US GAAP.
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