Development costs/intangible assets - help needed to understand

fairf

Hello

According to IAS 38 Intangible Assets, development costs can be capitalised as an intangible asset if the entity/business can demonstrate ALL of the following:

- the technical feasibility of completing the intangible asset so that it will be available for use or sale
- its intention to complete the intangible asset and to use or sell it
- its ability to use or sell the intangible asset
- the way in which the intangible asset will generate probable future economic benefits
- the availability of resources to complete the development and to use or sell the intangible asset
- its ability to measure the development expenditure reliably

I am finding this hard to understand. To me costs are just costs. How can they be sold or used or made more complete?

Or in this list of conditions is 'intangible asset' referring to something else rather than the development costs? Perhaps the development 'project'? the product being developed? (but if that was a car then that would be tangible rather than intangible!)

Separately is a chemical always a tangible asset? I can see that you can touch a solid or a liquid, but what about a gas? I guess the formula to produce a chemical would be an intangible asset as that is scientific knowledge/intellectual property.

Hope you can help as I am confused.

fairf

stevef

An intangible asset is a fixed asset that you can not touch, it has no physical existance and as you say would cover intellectual property but not a chemical. But like any other fixed asset it can purchased and sold, it can be improved so that its capital value increases or impaired.

The most common, and easiest to understand in this context, intangible asset is computer software. You can buy a piece of software and sell it, you can develop it to increase its capital value. As it gets older it will be worth less so needs to be depreciated, there may be a major change in processes so that its value becomes impaired.

fairf

Thanks stevef for your comments re the last part of my original post. So is a chemical in the form of a gas a tangible asset?

I would still welcome comments on the major part of my orignal post.

fairf

stevef

Sorry, I thought I had answered the first part of your post.

If you think about tangible assets first and then change the terminology it makes sense (sort of).

If you think about say a building, amongst other things, you can build it from scratch, or you can buy it. or if you already have one you can ehance it. This all scores as capital expenditure. With any building project, as long as the project is taken to completion so that it could be sold on, costs of feasability studies, planning applications, licences etc can all be capitalised.

So intangibles are treated in exactly the same way; a piece of software say, can be created inhouse from scratch. you could buy it from a software house or you could get your in house team to enhance existing software. The cost of creating or enhancing software is development costs. If it leads to a completed project, which is of use and identifiable enough to be sold on, the cost can be capitalised.

Its not about being able to sell the development costs but about creating or enhancing an intangible asset that could be sold on.

And yes gas is a tangible asset, but the know how to create the gas is intangible and the cost of developing the process to make that gas can be capitalised to form the an intangible asset.

fairf

stevef

Thank you for your additional comments (just read). The explanation has helped.

Fortunately, there was nothing on intangible assets or development costs in my Financial Statements exam yesterday.