Ind AS 38 requires an intangible asset to be recognised only if it's identifiable, controlled by the entity, probable future economic benefits will flow from it, and its cost can be reliably measured — a bar that, for internally generated intangibles specifically, splits spending into research (always expensed as incurred) and development (capitalised only once six specific criteria are ALL met). Internally generated brands, customer lists, and goodwill are explicitly prohibited from recognition entirely, regardless of how valuable they might genuinely be to the business — a deliberate rule, not an oversight, because their cost cannot be reliably distinguished from the cost of developing the business as a whole.
The six conditions for capitalising development costs — all required
- Technical feasibility of completing the intangible asset so it will be available for use or sale.
- Intention to complete the asset and use or sell it.
- Ability to use or sell the asset.
- How the asset will generate probable future economic benefits — demonstrated, for instance, by the existence of a market for its output.
- Availability of adequate technical, financial and other resources to complete the development and use or sell the asset.
- Ability to reliably measure the expenditure attributable to the asset during its development.
Regulatory requirement
All six conditions have to be met before capitalisation begins — not a majority, not the most important ones. Where an entity can't distinguish the research phase from the development phase of an internal project, Ind AS 38 requires treating the entire expenditure as research, and therefore expensing it, as the default position in the absence of that distinction.
What's explicitly excluded from recognition, regardless of value
| Item | Why |
|---|---|
| Internally generated goodwill | Not an identifiable resource controlled by the entity that can be reliably measured separately from the business as a whole |
| Internally generated brands, mastheads, publishing titles, customer lists | Explicitly prohibited — their cost cannot be distinguished from the cost of developing the business generally |
| Start-up costs, training costs, advertising and promotional costs | Expensed as incurred, even where management genuinely expects future benefit from them |
A purchased or acquired intangible asset (a customer list bought in a business combination, a brand acquired from another company) IS recognised separately, because its cost and value have, by virtue of the transaction, been reliably and independently established — the prohibition is specifically on internally generated versions of the same items, not on the category of asset itself.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Fixed assets & capexInd AS 16: property, plant and equipment — recognition, componentization and derecognitionA single asset with parts that wear out on different schedules isn't one depreciation calculation — Ind AS 16 requires splitting it, and a lot of fixed asset registers still don't.
- Fixed assets & capexCapex vs revenue expenditure: the audit testThe capitalisation criteria, the repairs-versus-improvement judgement calls that actually come up, and how to sample repairs and maintenance for misclassified capex.
- Audit workflow & automationSA 540: auditing accounting estimates, where judgment replaces a verifiable numberAn estimate can't be vouched to a source document the way an invoice can. SA 540 is about what replaces vouching when there's no single right answer to check against.
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