(Posted November 2025)
Accounting for intangible assets tends to be a commonly tested topic on the Common Final Examination (CFE). This blog will focus on the key technical considerations relating to the recognition of intangible assets and how to measure them on the financial statements.
It is important to note that ASPE and IFRS® Standards are very similar in their application for intangible assets relating to recognition and measurement. The guidance below focuses on the application of IFRS Standards, with ASPE differences explained afterwards.
Acquired Versus Internally Generated
An important distinction that guides the approach to take in assessing the recognition and measurement of an intangible is whether the intangible asset has been acquired or is internally generated. Acquired intangibles include items that are purchased from another entity or individual, such as patents, brand names, trademarks, customer lists, and copyrights. Internally generated intangibles typically relate to a product or process developed by a company in-house. Both types of intangibles must meet the definition and recognition criteria to be recognized as an asset; however, internally generated intangibles must also meet each of the development cost criteria before asset recognition can occur.
Recognition
An expenditure may be recognized as an intangible asset if it meets both the definition and recognition criteria, which include:
Definition:
- The asset is identifiable – either separable and can be transferred, sold, licensed, rented, or exchanged to another entity, or it arises from contractual or other legal rights
- The entity controls the future economic benefits of the asset – has the power to obtain the future economic benefits and to restrict the access of others to those benefits
- The asset is expected to generate future economic benefits – revenue or cost savings
Recognition:
- It is probable that the expected future economic benefits of the asset will flow to the entity
- The asset cost can be reliably measured
If any of the above criteria are not met, the expenditure cannot be capitalized as an intangible asset and must be expensed.
In addition to the above criteria, if the intangible is internally generated, the entity must also demonstrate each of the following (referred to as the “development cost criteria”) for the costs to be recognized as an asset:
- The technical feasibility of completing the asset for use or sale
- Intention to complete the asset for use or sale
- The ability to use or sell the asset
- How the asset will generate probable future economic benefits
- The availability of adequate technical, financial, and other resources to complete the development for use or sale
- The ability to reliably measure the expenditures attributable to the asset during its development
If any one of the above development cost criteria are not met, the expenditures cannot be capitalized and must be expensed, even if the definition and recognition criteria have all been met.
For internally generated intangible assets, the research versus development phases must be distinguished.
- The research phase is typically characterized by preliminary investigation and exploration of alternatives to gain new scientific or technical knowledge and understanding for a product or process. Any costs incurred relating to research must be expensed.
- The development phase of a project is further advanced than the research phase, with activities that include designing, constructing, and testing items such as prototypes, new technology, processes, systems, or services. Only costs incurred in the development phase are eligible for capitalization.
It is important to note that certain internally generated items cannot be recognized as intangible assets. These include internally generated brands, mastheads, publishing titles, and customer lists.
Initial Measurement
Intangibles that meet each of the criteria noted above are initially measured at cost. For acquired intangibles, this includes the purchase price, direct costs such as legal fees incurred, and any directly attributable costs incurred to establish the intended use of the asset.
For internally generated intangibles, it is important to determine at what point the development cost criteria have been met, since all costs incurred prior to that date must be expensed as research costs. Expenditures that are incurred after the research stage, and which have met each of the development cost criteria, can be capitalized as an intangible asset. The total cost to capitalize includes all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management, including:
- Materials and services used or consumed to generate the asset
- Costs of employee benefits (i.e., salaries/wages) arising from the generation of the asset
- Fees to register a legal right
- Amortization of patents/licenses that are used to generate the asset
The following are not considered directly attributable costs and must be expensed:
- Selling, administrative and other general overhead unless directly attributable to preparing the asset for use
- Identified inefficiencies and initial operating losses incurred before the asset achieves planned performance
- Expenditures on staff training relating to operating the asset
Subsequent Measurement
Most intangible assets will be subsequently measured using the cost model, with the assets carried at historical cost less accumulated amortization and impairment losses. The revaluation model is permitted, but only for intangible assets that have an active market.
Whether an intangible asset has a finite or indefinite useful life determines whether it will be amortized. An intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity and will not be amortized. If an intangible asset has a finite life, it will be amortized over its useful life, based on expected usage by the entity.
Intangible assets with a finite life will also be assessed for indicators of impairment at the end of each reporting period to determine whether impairment testing is required. Intangible assets with an indefinite useful life are tested for impairment on an annual basis, regardless of whether indicators of impairment exist.
How to Write on the CFE
While you must adapt to the issue and case facts presented to you, there is an approach that can often be taken to develop sufficient depth in your analysis.
Step 1: Determine whether the intangible has been acquired or is internally generated
This is important since the development cost criteria only relate to internally generated intangible expenditures and should not be considered for acquired intangibles.
Step 2: Assess the relevant criteria using case facts
Based on the type of intangible, assess the relevant criteria using case facts. In addition to the definition and recognition criteria, the development cost criteria must also be met for internally generated intangibles. Evaluate the time you have available to write your response. For internally generated intangibles, start with the development cost criteria and only address the definition and recognition criteria as time permits.
Step 3: Consider the nature and timing of expenditures (for internally generated intangibles)
For internally generated intangibles, assess the facts to determine if any amounts provided relate to the research stage and to differentiate these from amounts incurred in the development phase. Also, assess the facts to determine at what date the development phase commenced, since only costs incurred after this may be eligible for capitalization. This specific timing may not be explicitly provided and will need to be determined based on the facts presented.
Step 4: Conclude on recognition
Conclude whether an intangible asset can be recognized. If the asset is internally generated, also conclude on which costs are research in nature and need to be expensed. It is a best practice to quantify the amount to be capitalized and to differentiate this from the research cost amount to be expensed. If specific information on the nature of the expenditures in the development phase is provided, it is important to assess whether they can be capitalized or not and quantify the impact.
Step 5: Consider subsequent measurement
It may be relevant to assess the subsequent measurement of the capitalized intangible asset, as time permits. This includes determining whether the intangible asset has a finite or indefinite life, and quantifying any amortization impacts.
Tips for Writing:
- Use a “bullet-point” structure when formatting your response, in which the relevant criteria are listed out, and case facts are applied beside each, along with a clear conclusion as to whether the criteria are “met” or “not met”. Try to use a diverse range of facts for support, especially for the development cost criteria, rather than repeating the same fact for multiple criteria. The concept of “future economic benefits” applies for both the definition and recognition criteria. Ensure that this is acknowledged and assessed accordingly in both areas, and not just once on an overall basis.
- Assess each criterion in a given area and not just one or some of them. For example, even if you believe that one of the development cost criteria has not been met, and that capitalization is not possible, it is important to analyze each of them using facts before concluding.
ASPE Differences
The primary difference from the above IFRS Standards is that, under ASPE, a policy choice exists to either capitalize or expense development costs that have met the development cost criteria. Therefore, while it is mandatory under IFRS Standards to capitalize the development costs if each of the development cost criteria are met, an entity can choose to expense them under ASPE. In addition, the revaluation model is not available under ASPE for subsequent measurement.