Gavin Hinks, journalist


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Software development, databases, exploration for oil, gas and minerals, research and development (R&D) in general – these intangible resources have become increasingly central to business models in recent years. They have also been a source of debate among accountants. The key question, however, is whether their value is properly reflected on balance sheets.

It’s an issue made increasingly thorny given that the key accounting standard for intangibles, IAS 38, Intangible Assets, dates back to 1978. As such, it may be providing more hindrance than help to business models that have intangible resources at their core.

Capitalisation of software offers lessons on how capitalising R&D might be done

‘If R&D carried out by companies does not end up capitalised as intangible assets and is expensed instead, it would appear as if companies are just burning cash,’ says Aaron Saw, ACCA’s senior subject manager – corporate reporting. ‘We want to see if some of those expenses can be placed among intangible assets, indicating they will generate future economic benefit.’


In April next year, ACCA will launch a new report investigating R&D disclosures by companies around the world that currently leave intangible assets unrecognised. The review will build on three earlier research projects that have already reached significant conclusions: many companies do not capitalise their R&D due to a slew of obstacles; software development costs (SDCs), meanwhile, have shown high capitalisation rates and offer lessons on how capitalising R&D might be done.

ACCA’s 2019 report, the Capitalisation debate: R&D expenditure, disclosure content and quantity, and stakeholder views, reveals that more than 60% of 6,125 companies reviewed did not capitalise R&D – they expensed all their R&D costs.

ACCA would like to see a review of the criteria for capitalising R&D expenditure

This led to a verdict that there are significant obstacles to capitalising R&D costs. First, finance leaders tend to be conservative, applying ‘prudence’ to their decision-making. In a conservative accounting culture, capitalising a lot of R&D could look ‘aggressive’.

Next, there are worries about capitalising R&D costs that turn out to be fruitless or produce short-lived benefits. Finance professionals do not have crystal balls – an asset capitalised now may cause large impairment charges in years to come.

Lastly, IAS 38 has six criteria to be met before expenditure can be capitalised. Finance professionals might doubt they can all be satisfied and err on the side of caution, expensing most or all development costs instead.

The 2019 report concludes that ‘current criteria in IAS 38 would seem largely to militate against capitalisation’.


There are, however, occasions where accounting for R&D expenditure seems to present companies with fewer concerns. A second ACCA review, The capitalisation of intangibles debate: software development costs, reveals that companies that invest in software have much more confidence when it comes to capitalising software-related R&D expenditure, with 62.2% of these companies capitalising at least some SDCs.

Despite several iterations since the late 1970s, IAS 38 is due a comprehensive review

However, the relatively small sums capitalised don’t discourage companies from capitalising SDCs and disclosing them separately. This suggests companies want to capitalise R&D expenditure and reinforces the call to review the capitalisation criteria in IAS 38.

There were other insights from the software research. An anticipated rise in capitalisation among companies after the implementation of IFRS 3 (Revised), Business combinations, did not influence a company’s decision to capitalise SDCs or the extent of SDC capitalisation, pointing once again to IAS 38 as an obstacle. The review also found ‘good disclosure practice’, though there was a lack of detail on whether these intangible assets were developed internally or externally.


A third ACCA report, Accounting for exploration and evaluation expenditure in extractive activities, looked at accounting for spending on exploration and evaluation (E&E) in extractive industries (mining, oil and gas). Unlike other industries, the extractives industry has a dedicated albeit interim standard, IFRS 6, to help judge what E&E expenditure to capitalise.

And it appears to be working well. Around 75% of 1,096 companies reviewed have E&E assets on their balance sheet, while 66% capitalised internally generated E&E assets.

In short, IFRS 6, Exploration for and Evaluation of Mineral Resources, seems to have proved its worth and suggests that any revision or amendment of IFRS 6 should not lead to the prevalence of expensing E&E expenditure as is the case under the current IAS 38 for other internally generated intangible assets.

Instead, IFRS 6 could be bolstered with the addition of clear definitions for permitted accounting policies to aid comparability across jurisdictions and more disclosure requirements.

Integrated thinking could be use to explain how value is created – including environmental or social impact

IAS 38

That leaves a question about IAS 38. Despite several iterations since the late 1970s, the standard is due a comprehensive review by the IASB, possibly in collaboration with the International Sustainability Standards Board.

Integrated thinking could be leveraged in explaining how value is created – beyond financial performance and position and extending into environmental or social impact. This crucially includes intangibles not recognised on the balance sheet, such as innovative processes, know-how and corporate culture underpinning companies’ business models.

ACCA would like to see a review of the criteria for capitalising R&D expenditure, as simplifying or reducing the number could be a way forward. There is also a case for ironing out inconsistencies between IAS 38 and other standards, such as accounting for purchased R&D in business combinations under IFRS 3.

Another option for amending IAS 38 is to improve the disclosure of R&D activities that would allow users to understand the nature of this expenditure and associated amounts, as well as the key judgments or assumptions made in deciding on capitalising or expensing development costs.

This may include disaggregating development costs capitalised during a year to different categories such as ‘new’ or ‘improvements’ to existing projects; disaggregating R&D expense into pure research and costs for projects that failed to meet one or more capitalisation criteria; and cumulative costs to the point a project begins capitalisation. 

The world has changed; intangible resources are now central to many business activities and accounting standards need to keep up.

More information

See Adam Deller’s short explanation of IAS 38 in this video and other videos in his financial reporting insights series