This free, guided checker walks your finance team through the key decision points for IAS 38 Research and Development Cost Capitalization. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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IAS 38 applies to expenditure on an identifiable intangible asset such as a product, process, formulation, or internally generated software, not to routine maintenance, training, advertising, relocation, or general overhead. Identify a specific project with a defined output before applying the research-versus-development analysis; ongoing programmes without a distinct asset outcome are expensed as incurred (IAS 38.68-69). The trap is treating a whole R&D department's spend as one capitalizable project rather than testing each identifiable project separately.
Expense the cost when incurred under IAS 38.68 unless another standard requires it to be included in the cost of an asset.
Official guidance: IFRS issued standards
Reliable attribution requires a defined project whose costs are captured separately, typically through project codes, time-recording, and vendor coding, so the expenditure on the asset can be measured directly (IAS 38.51-52). Where costs sit in a blended R&D pool that cannot be split by project, the IAS 38.57(f) reliable-measurement criterion fails and the costs are expensed. The trap is allocating a pooled cost to a project after the fact using a broad percentage; the standard expects contemporaneous, project-level cost capture.
Expense all related costs because the expenditure cannot be reliably attributed to a distinguishable project (IAS 38.51).
Official guidance: IFRS issued standards
Classify the expenditure by phase: research is original and planned investigation undertaken to gain new scientific or technical knowledge and understanding, and includes the search for alternatives and feasibility studies before technical feasibility is demonstrated (IAS 38.54-56). All research-phase cost is expensed as incurred and can never be reinstated, even if the project later succeeds (IAS 38.54; IAS 38.71). The trap is capitalizing early exploratory work by labelling it development before the point at which all six IAS 38.57 criteria are actually met.
Expense research-phase costs under IAS 38.54; they cannot be capitalized even if the project later succeeds.
Official guidance: IFRS issued standards
Technical feasibility means the entity can demonstrate it is able to complete the asset so that it will be available for use or sale, evidenced by a working prototype, a successful pilot or test, or a documented and validated design or architecture (IAS 38.57(a)). Weigh objective test results, not management optimism or a project plan alone. The trap is treating budget approval or an internal roadmap as feasibility; capitalization starts only from the date completion is demonstrably achievable.
Continue expensing until technical feasibility is demonstrated and document the capitalization trigger date (IAS 38.57(a)).
Official guidance: IFRS issued standards
Intent to complete the asset and use or sell it is evidenced by an approved project plan, a committed budget, and the absence of any decision to abandon or suspend the project (IAS 38.57(b)). For an asset intended for sale, there should be evidence of a market or an identified route to sale. The trap is inferring intent from continued spending; assess whether management has genuinely committed to completion, particularly where funding is discretionary or the project is under review.
Expense development costs because intent to complete and use or sell the asset is not supportable (IAS 38.57(b)).
Official guidance: IFRS issued standards
Ability to use or sell the asset turns on having the technical, legal, and market means in place: required regulatory approvals or clearances, legal rights or licences, and, for an asset to be sold, access to a market (IAS 38.57(c)). For regulated products such as pharmaceuticals or medical devices, this criterion is often not met until a specific approval milestone is reached. The trap is capitalizing while a mandatory approval or legal right that could still be refused remains outstanding.
Expense costs until the ability to use or sell the asset is demonstrated (IAS 38.57(c)).
Official guidance: IFRS issued standards
Probable future economic benefits must be supported by evidence that a market exists for the output or, for an asset used internally, that the asset will be useful, typically shown through market studies, signed contracts, an internal rate-of-return or business-case analysis, or the performance of comparable products (IAS 38.57(d); IAS 38.60). Probability is assessed using reasonable and supportable assumptions over the asset's life. The trap is relying on an optimistic sales forecast unsupported by market or contractual evidence.
Expense development costs because probable future economic benefits are not supportable (IAS 38.57(d)).
Official guidance: IFRS issued standards
The entity must show it has, or can obtain, the technical, financial, and other resources needed to complete development and to use or sell the asset, evidenced by a business plan, a board-approved budget, secured financing, or a lender's or supplier's stated willingness to fund (IAS 38.57(e); IAS 38.61). Weigh funding commitments and staffing capacity against the remaining cost to complete. The trap is capitalizing when funding or key resources are not yet secured, so completion is genuinely at risk.
Expense costs until the availability of resources to complete development is documented (IAS 38.57(e)).
Official guidance: IFRS issued standards
Reliable measurement requires the expenditure attributable to the asset to be captured contemporaneously through time records, vendor invoices, and defined payroll-allocation rules keyed to the project from the capitalization date (IAS 38.57(f)). Estimates or after-the-fact allocations without an underlying tracking system do not meet the criterion. The trap is beginning capitalization before the cost-capture mechanism exists, which leaves the opening capitalized amount unsupportable.
Expense costs because the expenditure attributable to the asset cannot be measured reliably (IAS 38.57(f)).
Official guidance: IFRS issued standards
IAS 38.66 permits only directly attributable costs such as materials, services, and directly allocated labour, capitalized from the date all six criteria are met. IAS 38.67 specifically excludes selling and administrative overhead, identified inefficiencies and initial operating losses, and staff training costs. Costs recognized as an expense before the criteria were met cannot be reinstated into the asset (IAS 38.71).
Remove the non-qualifying costs from the asset and expense them in the current or prior period as appropriate (IAS 38.67).
Official guidance: IFRS issued standards
Amortization begins only when the intangible asset is available for use and is charged over the supportable useful life, which reflects legal limits, obsolescence, and product cycles (IAS 38.97). An intangible asset not yet available for use must be tested for impairment at least annually under IAS 38.111 and IAS 36.10, and any asset is tested whenever an impairment indicator arises. Do not begin amortizing before the asset is ready or omit the annual test while it is in development.
Capitalize qualifying development costs and begin systematic amortization over the supportable useful life (IAS 38.97). Continue accumulating qualifying costs but defer amortization until the asset is available for use; test for impairment at least annually (IAS 38.97; IAS 38.111).
Official guidance: IFRS issued standards
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