Cost of an internally generated intangible asset

Learning objectives

• Calculate the cost of an internally generated intangible asset from the directly attributable expenditure.L2, L3
• Identify the directly attributable expenditure and the expenditure to be excluded.L2
• Recognise the capitalisation of development costs.L2, L3

Normative references

• IAS 38 §65The cost of an internally generated asset is the sum of expenditure incurred from the date when it first meets the recognition criteria.
• IAS 38 §66The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare it to be capable of operating in the manner intended by management: for example, costs of materials and services used or consumed, costs of employee benefits arising from its generation, fees to register a legal right, amortisation of patents and licences used to generate it. The capitalisation of interest is dealt with in IAS 23.
• IAS 38 §67The following are not components of the cost of an internally generated intangible asset: (a) selling, administrative and other general overheads, unless directly attributable to preparing the asset for use; (b) identified inefficiencies and initial operating losses incurred before the asset reaches its planned performance; (c) expenditure on training staff to operate the asset. Other training expenditure is an expense under para. 69(b).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

32 questions

• A laboratory internally develops a patented process. Before the date on which the recognition criteria are first met, it incurred expenditure of {pre_criteria_costs}. From that date, it incurs {materials} of materials and services used, {staff_costs} of employee benefits for staff assigned to the project and {registration_fee} of fees to register the patent. A share of general administrative overheads of {general_overhead}, with no direct link to the project, is also allocated to it. What is the cost of the intangible asset?L2
• Last year, a video game publisher expensed {prior_year_costs} of development expenditure on a new graphics engine, as the capitalisation criteria were not met. This year, the criteria are met for the first time on 1 April. The project cost {pre_criteria_current_year} from January to March, then {post_criteria_costs} from April to December. Management wishes to reinstate all the project expenditure as an asset. What is the cost of the asset at the year-end?L3
• A manufacturer is developing a new sensor. On 1 May, it demonstrates for the first time all the capitalisation criteria for the development phase: a successful prototype, financing obtained, intention and ability to market the sensor, documented market outlets and reliable cost tracking. Development expenditure for the year, paid in cash, amounts to {costs_before_criteria} before that date and {costs_after_criteria} after it. Record the summary entry for the year.L3
• True or false? The initial cost of an internally generated intangible asset includes the expenditure incurred before the date on which it first met the recognition criteria.L2
• Quenvia is developing a pricing tool internally. The expenditure incurred from 1 January to 31 March 20X1, amounting to 30,000, was expensed. The project first meets all the recognition criteria on 1 April 20X1; the directly attributable expenditure incurred afterwards until the tool goes live amounts to 75,000. What is the initial cost of the asset?L2
• In 20X1, Melvane could not distinguish the phases of its project for a new industrial adhesive and recognised 250,000 as an expense. In early 20X2, it sets up tracking that clearly separates the two phases; on 1 March 20X2, it demonstrates for the first time all the recognition criteria of the development phase. The technical director asks for the 250,000 of 20X1 to be reclassified as an asset. Which answer is correct?L3
• In 20X1, Ramee incurs 90,000 of research expenditure, 60,000 of development expenditure before the date on which the recognition criteria are first met, and 40,000 of development expenditure after that date. What amount of research and development expenditure recognised as an expense must it disclose in its notes for 20X1?L2
• On 1 June 20X1, Kestra demonstrates all the development-phase criteria for its new management software. Out of prudence, its finance director is considering continuing to expense subsequent development expenditure. Which statement is correct?L2
• Arvea is developing energy management software and spends {monthly_cost} on it per month throughout 20X1. It demonstrates all the development-phase criteria for the first time on 1 August 20X1. The period from January to July covers {months_before} months and the period from August to December {months_after} months. Calculate the amount capitalised and the amount recognised as an expense in 20X1.L2
• The manufacturer Selko is developing a new control valve. In 20X2, its development expenditure amounts to {q1_costs} in the first quarter, {q2_costs} in the second, {q3_costs} in the third and {q4_costs} in the fourth. Technical feasibility is demonstrated in April, but the financing needed to complete the project is obtained only on 1 July 20X2; all the other criteria have been demonstrated since the beginning of the year. The project manager wants to capitalise the expenditure from April. Calculate the amount capitalised and the amount recognised as an expense in 20X2.L3
• Norlane entrusts a subcontractor with developing a diagnostic tool. On 1 October 20X1, it gathers for the first time all the evidence required for the development phase. The subcontractor's invoices, all unpaid at the year-end, total {costs_before} for work before that date and {costs_after} for work after it. Record the summary entry for 20X1.L2
• The Ombrelle studio is developing a 3D rendering engine internally. On 1 May 20X1, it demonstrates all the development-phase criteria for the first time. The salaries owed to the developers assigned to the project amount to {salaries_before} for the period before that date and {salaries_after} for the period after it. After 1 May 20X1, Ombrelle also buys for cash {materials_after} of components and services consumed by the project. Record the summary entry for 20X1.L3
• Daxio is developing, solely for its own needs, a tool for planning its maintenance, which it has no intention of selling. At 1 March 20X1, a prototype works in real conditions, the board has decided to complete and deploy the tool, the maintenance teams are ready to use it, a study documents the expected cost savings, the budget is funded and the project hours are tracked reliably. The finance director argues that no asset can be recognised because there is no market for the tool. What position do you take?L4
• Vernat is developing scheduling software intended for sale. At the end of 20X1, the prototype is working, financing is secured, costs are tracked by project and a market study is favourable. However, a competitor has just announced a similar product and the board of directors has not yet decided whether to continue or abandon the project; no decision is expected before the next strategy committee. The project manager wants to capitalise the expenditure of the second half-year, arguing that five of the six criteria are met. Write a position memo.L4
• Orbelis internally develops scheduling software; the recognition criteria have been met for several months. Which of the following expenditures, incurred after that date, is part of the cost of the intangible asset?L2
• Vectane, a laboratory, is developing a manufacturing process for a vaccine; the recognition criteria of the development phase are met. Which of the following expenditures must be excluded from the cost of the intangible asset?L2
• Which of the following expenditures, incurred after the date on which an internal project meets the recognition criteria, are part of the cost of the intangible asset? More than one answer may be correct.L2
• Lunastra, a media group, is developing a streaming platform. The controller prepares the list of project expenditures to be left out of the cost of the intangible asset. Which ones must be left out? More than one answer may be correct.L3
• Brevalis is developing diagnostic software that has met the recognition criteria since the beginning of the year. During the year, it incurs {materials_services} of materials and services consumed by the project, {developer_costs} of employee benefits for the assigned developers, {patent_amortisation} of amortisation of a patent used to design the software, {user_training} of training for future users and {sales_brochures} of sales brochures. What is the cost of the intangible asset at year end?L2
• Corvane, a chemicals company, is developing a synthesis process. Before the date on which the project first meets the recognition criteria, it incurs {pre_criteria_costs}. Afterwards, it incurs {materials} of materials consumed, {staff_costs} of employee benefits for assigned staff, {registration_fees} of patent registration fees, {licence_amortisation} of amortisation of a technology licence used by the team, {overhead} of overheads that are not directly attributable and {inefficiencies} of losses on failed trials caused by identified inefficiencies. What is the cost of the intangible asset?L3
• Ondira develops an online booking platform throughout 20X1. Each month, it incurs {monthly_staff} of employee benefits for staff assigned to the project and {monthly_services} of hosting services consumed by the development. The recognition criteria are first met on 1 September 20X1. In December 20X1, it also incurs {operator_training} to train the agents who will operate the platform. What is the cost of the intangible asset at 31 December 20X1?L3
• Stelmar, an engineering firm, develops simulation software in 20X2. The project's direct costs (assigned staff and services consumed) amount to {jan_mar_costs} from January to March, {apr_jun_costs} from April to June, {jul_sep_costs} from July to September and {oct_dec_costs} from October to December. The project first meets the recognition criteria on 1 July 20X2. In the second half-year, the team also uses a computing licence whose amortisation amounts to {licence_amortisation}, and management allocates {overhead} of head office costs that are not directly attributable to the project. What is the cost of the intangible asset at 31 December 20X2?L3
• Valtera is developing fleet management software for which the recognition criteria are met. For the quarter, it records {staff_costs} of employee benefits for staff assigned to the project (not yet paid), {external_services} of external services consumed by the development (paid), {licence_amortisation} of amortisation of a software licence already recognised as an asset and used by the team, and {training} of training (paid) for the managers who will operate the software. Record the summary entry for the quarter.L2
• Pharmelia, a laboratory, demonstrated on 1 March 20X3 all the recognition criteria for a purification process. From March to June 20X3, it consumes {materials} of materials (paid), records {staff_costs} of employee benefits for assigned staff (to be paid), pays {registration_fees} of patent registration fees and receives from its parent an invoice of {group_overhead} for general administrative costs with no direct link to the project. Record the summary entry for the period.L3
• Solvira is developing the control software for a dosing robot. The recognition criteria are first met on 1 March 20X4. Expenditure for 20X4: 30,000 in January and February; then, from March, 180,000 of employee benefits for the assigned engineers, 25,000 of consumables and testing services, 4,000 of patent registration fees, 8,000 of operator training, 14,000 for reworking a faulty module because of identified inefficiencies and 20,000 as a share of head office costs. The CFO asks you for the cost of the intangible asset at 31 December 20X4. Which amount do you retain?L3
• Which of these expenditures is recognised as an expense, with no possibility of being included in the cost of an intangible asset?L1
• Which of the following expenditures are recognised as an expense? More than one answer may be correct.L1
• Maraval, a retail chain, launches online sales. During the year, it incurs the expenditure below; the ordering module developed internally has met the recognition criteria since the beginning of the year. Which items are recognised as an expense? More than one answer may be correct.L2
• Velmora is designing software for medical devices. In 20X1, it recognised as an expense {research_20x1} of research and {development_20x1} of development. In 20X2, the project first meets the recognition criteria on 1 June: it cost {pre_criteria_20x2} from January to May, then {post_criteria_20x2} of directly attributable costs from June to December. In December 20X2, Velmora also incurs {user_training} to train hospital users. The CFO proposes to recognise as an asset all project expenditure since 20X1. What is the cost of the intangible asset at 31 December 20X2?L3
• Anselm is developing a machine translation tool for which the recognition criteria are first met on 1 May 20X3. At 31 December 20X3, the accountant prepares the entries below. Which one is wrong?L2
• The cost worksheet for a recycling process developed by Ferrance, prepared for the 20X4 year end, contains the lines below. Which one contains an error?L3
• After an internal process lasting several months, Pescarel has obtained a freely transferable production quota, traded in an active market. The expenditure incurred before the recognition criteria were met (30,000) was recognised as an expense; only the expenditure incurred afterwards (50,000) forms the cost of the asset. Pescarel applies the revaluation model to this class of assets. At the reporting date, the market price of the quota is 140,000. What may Pescarel do?L3