Intangible assets: IAS 38 vs FRS 102

Q: What mistakes come up most often?

Treating IFRS capitalisation as optional. Once the IAS 38 criteria are met, an IFRS reporter must capitalise. Carrying an indefinite life under FRS 102. Every intangible and all goodwill must be amortised. Skipping the annual test under IFRS. Goodwill, indefinite life intangibles and assets not yet in use all need one each year. Omitting the override note under FRS 101. Non amortisation of goodwill in Companies Act accounts needs particulars, reasons and effect. Forgetting section 844. Capitalised development costs reduce distributable profits unless the special circumstances note is given. Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Three differences account for most of the gap between IAS 38 and FRS 102 Section 18. IAS 38 requires development costs to be capitalised once its criteria are met, while FRS 102 lets an entity choose to expense them. IAS 38 allows an intangible asset to have an indefinite useful life and go unamortised, while FRS 102 treats every intangible as finite. And under IFRS goodwill is not amortised but tested for impairment every year, while FRS 102 amortises goodwill, using a maximum of 10 years where its life cannot be reliably estimated.

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Do development costs have to be capitalised?

Both standards split an internal project into a research phase and a development phase. Research is always expensed (IAS 38 paragraph 54, FRS 102 paragraph 18.8E). Both list the same six things an entity must demonstrate before development spending can become an asset: technical feasibility, intention to complete, ability to use or sell, how the asset will generate probable future economic benefits, adequate resources to complete, and the ability to measure the expenditure reliably.

The difference is the verb. IAS 38 paragraph 57 says a development intangible shall be recognised if, and only if, all six are demonstrated. FRS 102 paragraph 18.8H says an entity may recognise it, and paragraph 18.8K says that if it adopts a capitalisation policy it must apply it consistently to all qualifying expenditure. So an FRS 102 company can expense all development costs as a policy, but an IFRS reporter cannot once the criteria are met. Our guide to capitalising development costs covers the criteria in practice.

Company law adds the same overlay to both. Paragraph 21 of Schedule 1 to SI 2008/410 allows development costs in the balance sheet where generally accepted accounting practice permits, and requires the accounting policies note in Companies Act accounts to give the write off period and the reasons for capitalising. Section 844 of the Companies Act 2006 treats capitalised development costs as a realised loss when working out distributable profits, unless there are special circumstances and the note explains them. That rule covers both Companies Act and IAS accounts.

Can an intangible asset have an indefinite useful life?

Under IAS 38 paragraph 88 an intangible has an indefinite useful life when there is no foreseeable limit to the period over which it is expected to generate net cash inflows. Paragraph 107 says such an asset shall not be amortised. Instead paragraph 108, with IAS 36 paragraph 10(a), requires an impairment test every year and whenever there is an indication of impairment. Paragraph 109 requires the indefinite life assessment to be reviewed each period, and paragraph 122(a) requires the carrying amount and the reasons supporting an indefinite life to be disclosed.

FRS 102 paragraph 18.19 says all intangible assets shall be considered to have a finite useful life. Where, in exceptional cases, the life cannot be reliably estimated, paragraph 18.20 caps it at 10 years. Company law points the same way for Companies Act accounts: Schedule 1 paragraph 22 requires intangible assets to be written off over their useful economic life, with a period of no more than 10 years chosen by the directors where the life cannot be reliably estimated, and the period and reasons disclosed. Both standards limit the life of an asset based on legal rights to the period of those rights, including renewals only where renewal is supported without significant cost (IAS 38 paragraph 94, FRS 102 paragraph 18.19).

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How is goodwill treated?

Under IFRS, goodwill acquired in a business combination is measured at cost less accumulated impairment losses (IFRS 3 paragraph B63(a)). IAS 36 paragraph 10(b) requires it to be tested for impairment annually, whether or not there is any indication of impairment. See the IAS 36 goodwill impairment test.

FRS 102 paragraph 19.23 requires goodwill to be measured at cost less accumulated amortisation and impairment, amortised on a systematic basis over its life, with the 10 year cap where the life cannot be reliably estimated. Impairment under Section 27 is only tested when there is an indication (paragraph 27.7). Both frameworks prohibit reversing a goodwill impairment (IAS 36 paragraph 124, FRS 102 paragraph 27.28). Choosing the life is covered in goodwill useful life and amortisation.

Illustration only. A group buys a business and recognises goodwill of 1,000. Under FRS 102, with a reliably estimated life of 8 years, it charges 125 a year and tests for impairment only if there are indicators. Under IFRS it charges nothing each year but carries out a full recoverable amount test annually. After four years with no impairment, the FRS 102 carrying amount is 500 and the IFRS carrying amount is 1,000, and the group’s reported profit has been 125 a year higher under IFRS.

What about intangibles not yet in use?

IAS 36 paragraph 10(a) also requires an annual impairment test for an intangible asset not yet available for use, such as capitalised development on a project still in progress. FRS 102 has no equivalent annual requirement; Section 27 testing depends on indicators. An IFRS group with FRS 102 subsidiaries capitalising development needs the subsidiary data to perform its own annual test.

Are acquired intangibles recognised the same way?

No. Under IAS 38 paragraph 12 an asset is identifiable if it is separable or arises from contractual or legal rights, and paragraph 34 says the acquirer recognises the acquiree’s intangibles separately from goodwill. FRS 102 paragraph 18.8 requires separate recognition only where the intangible arises from contractual or legal rights and is separable; recognising intangibles that meet only one of those tests is an option, applied by class and consistently to all business combinations. More of the purchase price can therefore end up in goodwill under FRS 102. See intangibles acquired in a business combination.

Is revaluation treated differently?

Very little. Both allow a revaluation model only where fair value can be measured by reference to an active market (IAS 38 paragraph 75, FRS 102 paragraph 18.18B), and both require the model to be applied to the whole class (IAS 38 paragraph 72, FRS 102 paragraph 18.18). In practice few intangibles have active markets under either framework.

What does this mean in a group?

An IFRS group with FRS 102 subsidiaries adjusts on consolidation for any development costs the subsidiary expensed, any goodwill or indefinite life intangible amortisation it charged, and any acquired intangibles it left in goodwill. These are recurring adjustments that build up over time.

A subsidiary on FRS 101 follows IAS 38 and IFRS 3, but its accounts are Companies Act accounts. FRS 101 paragraph A2.8 explains that not amortising goodwill will usually be a departure from Schedule 1 paragraph 22 under the true and fair override, requiring particulars, reasons and effect in the notes, and paragraph A2.8A says similar considerations may apply to intangibles with indefinite lives. The trade offs are set out in FRS 101 or FRS 102 for a subsidiary.

Disclosures overlap but differ in detail. FRS 102 paragraph 18.27(a) asks for the useful lives or rates and the reasons for choosing them; IAS 38 paragraph 118(a) asks whether lives are finite or indefinite and the lives or rates used. Both require the research and development expense for the period (IAS 38 paragraph 126, FRS 102 paragraph 18.29).

What mistakes come up most often?

Treating IFRS capitalisation as optional. Once the IAS 38 criteria are met, an IFRS reporter must capitalise.
Carrying an indefinite life under FRS 102. Every intangible and all goodwill must be amortised.
Skipping the annual test under IFRS. Goodwill, indefinite life intangibles and assets not yet in use all need one each year.
Omitting the override note under FRS 101. Non amortisation of goodwill in Companies Act accounts needs particulars, reasons and effect.
Forgetting section 844. Capitalised development costs reduce distributable profits unless the special circumstances note is given.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.