Ifrs For Techn Com Closing The Gaap

ELECTRONI CS, SOFTWARE & SERVI CES
IFRS for Technology Companies:

Closing the GAAP
R&D Activities and Related Intangible Assets
KPMG LLP
2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International, a Swiss cooperative. All rights reserved. 080810
Contents
Executive Summary 1
What R&D Expenditures Should Be Recognized 4
As an Asset?
Definitions of Intangible Asset 4
Capitalization Criteria 6
Specific Application Issues 15
Subsequent Expenditures 20
Considerations for Subsequent Measurement 22
of Intangibles
Useful Life and Amortization 22
Impairment 25
Retirements and Disposals 26
First Time Adoption Considerations 27
Closing Comments 28
KPMG Can Help 29
Appendix A: Summary of Accounting for 30
Intangible Assets
Appendix B: Summary of IFRS Compared to 32
U.S. GAAP Expenditures for R&D and
Related Intangibles
Appendix C: IFRS Accounting Disclosures for 35
R&D and Related Intangible Assets
Appendix D: Technical References 36
Note: Throughout this document KPMG [we, our, and us] refers to KPMG International, a
Swiss cooperative, and/or to any one or more of the member firms of the KPMG network of inde-
pendent firms affiliated with KPMG International. KPMG International provides no client services.
Conversion to International Financial Reporting Standards
(IFRS) from U.S. generally accepted accounting principles
(U.S. GAAP) is more than just an accounting exercise.
For many technology companies it can significantly affect
the financial reporting for research and development
expenditures. Where IFRS is likely to have the biggest
impact is its requirement to capitalize development costs
that meet certain criteria. Executives in the sector need
an early understanding of the potential ways in which
conversion to IFRS may affect their accounting policies,
people, processes, information systems, and controls.
Executive Summary
Innovation is critical to the current and future success of most technology companies.
To stay competitive, many of those companies expend significant effort and resources
on research and development (R&D) for new or enhanced products, processes, and
services, and to protect and monetize intellectual property.
The financial reporting of R&D costs in the technology industry has been a focus of man-
agement, investors, regulators, analysts, valuation professionals, and auditors given the
pivotal importance of R&D to technology company valuations and the considerable costs
incurred to acquire or internally develop intellectual property. The debate has focused on
how to measure and account for R&D expenditures, including when to capitalize expen-
ditures as an asset and when to recognize capitalized costs as an expense.
The accounting for costs incurred to develop or obtain intangibles depends on how the
intangible was acquired, such as through a business combination, purchase or licens-
ing of individual assets or a group of assets from a third party, or internal develop-
ment. Under U.S. GAAP, in-process R&D (IPR&D) acquired in a business combination
accounted for in accordance with FASB Statement 141R, Business Combinations is
capitalized at fair value in the acquirers balance sheet and accounted for as an indefinite-
lived intangible until the project is completed or abandoned. The Emerging Issues Task
Force
1
(EITF) tentatively concluded at its March 2009 meeting that expenditures to
acquire IPR&D outside of a business combination (i.e., an asset acquisition) also should
be capitalized and accounted for in the same manner as an asset acquired in a busi-
ness combination. In contrast, internal expenditures for R&D, including post-acquisition
expenditures for IPR&D, are expensed as incurred under U.S. GAAP. Limited excep-
tions to the expense treatment are provided for software and website development
costs once a project meets specific capitalization criteria.
2
Therefore, for non-software
technology companies, most R&D costs are expensed as incurred under U.S. GAAP.
1
EITF 09-2, Research and Development Assets Acquired in an Asset Acquisition. For the current status of the tentative
consensus reached on EITF 09-2, see the FASB website at www.fasb.org.
2
The criteria depend on whether the software is being developed for internal use pursuant to Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, or developed for sale pursuant to
FASB Statement 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.
I F R S F O R T E C H N O L O G Y C O MP A N I E S : C L O S I N G T H E G A A P 2
Thought Leadership
from KPMG
International Financial Reporting Standards
(IFRS) as issued by the International
Accounting Standards Board (IASB) com-
prise a set of accounting standards now
used as the basis for financial reporting
by listed companies in more than 100
countries. Global use of a single set of
high-quality financial reporting standards
has the potential to facilitate greater
comparability of financial information
among international competitors, elimi-
nate dual reporting by subsidiaries in
foreign localities, allow easier expan-
sion into foreign markets, increase the
mobility of finance professionals, and
provide easier access to worldwide capi-
tal markets. Many notable economies
including Brazil, China, Japan, and India
have committed to adopting IFRS in the
coming years, and others are considering
adoption. The United States is currently
considering whether to adopt IFRS and, if
so, how best to do it.
R&D Activities and Related Intangible
Assets is the second
3
publication in the
KPMG thought leadership series IFRS
for Technology Companies: Closing the
GAAP. The series provides background
and updates on the unfolding IFRSU.S.
GAAP convergence efforts from a regu-
latory and standard setter perspective,
discusses how IFRS compares to U.S.
GAAP in key accounting areas for tech-
nology companies, and shares views
on how transition may affect business
processes, systems, and people. Our
primary focus here is on R&D and related
intangibles.
3
In IFRS for Technology Companies: Closing the GAAP?,
August 2008, KPMG provides a transition overview and
examines potential differences in the treatment of rev-
enue recognition issues.
Until such time as the U.S. commits to the adoption of IFRS (see SEC Roadmap to
IFRS sidebar), convergence efforts between the International Accounting Standards
Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) are aimed at
reducing IFRS U.S. GAAP differences.
Similarities and Differences
IFRS and U.S. GAAP accounting for R&D expenditures are similar in some respects and
different in others. For example, expenditures for research are expensed as incurred
under both. In practice, however, some companies that have transitioned to IFRS from
U.S. GAAP have encountered differences in the accounting for development costs,
resulting in differences in the accounting for internally developed intangibles. Another
difference is that IFRS contains general principles that apply to the recognition of all inter-
nally developed intangible assets. When the capitalization criteria are met, IFRS requires
capitalization of expenditures associated with development activities. In contrast,
under U.S. GAAP internally developed intangibles generally do not qualify for recognition
as an asset. The specific accounting, however, can depend, for instance, on whether:
(1) the internal development activities relate to software or non-software products and
solutions, and (2), if software, whether the software is intended for internal use or for sale.
As a result, industries such as the automotive sector and manufacturers of comput-
ers, software-enabled electronic devices, and other complex equipment where the
late stages of the product-development cycle are cost intensive, often find that under
IFRS significant product-development costs can or must be capitalized, whereas under
U.S. GAAP those amounts would be expensed. Conversely, companies developing
software for internal use may find that more costs are capitalized under U.S. GAAP
than under IFRS. Other IFRS vs. U.S. GAAP differences are more subtle, such as the
explicit definitions of research and development, which may affect a determination to
capitalize costs.
Given the differences between IFRS and U.S. GAAP, technology companies adopting
IFRS should include sufficient time and resources in their transition plan to permit a
comprehensive review of their R&D accounting practices. The plan should incorporate
accounting policy, people, process, and systems perspectives. Convergence activities
may include:
Training R&D personnel to delineate between research and development as defined
in IFRS
Identifying practical operational milestones within the R&D process to determine when
it is appropriate under IFRS to capitalize development costs if such costs could be
significant prior to general release of the product
Implementing time-tracking and costing systems and related processes at an R&D-
project level if needed to ensure that development costs to be capitalized can be
measured reliably
Establishing appropriate controls for approvals, accurate data input, and transfers
between R&D systems and the general ledger
3 R & D A C T I V I T I E S A N D R E L A T E D I N T A N G I B L E A S S E T S
Determining the appropriate level of detail and time period required for forecasts
used in asset-recoverability assessments and periodic estimated useful-life reviews
for recognized intangible assets
Ensuring consistent policies and processes, as appropriate, where multiple R&D
centers are used around the world
Evaluating the need for new or enhanced disclosures of company policies for
accounting for R&D expenditures
Determining the development costs that should be capitalized as of the date of
transition to IFRS.
Achieving the above may require new or modified systems and processes. Companies
may have to overcome cultural resistance in situations where R&D and engineering
teams: (1) have not previously tracked R&D time and costs at the project level (costs
often are tracked in no more detail than at the department level); and (2) now have to
implement a more formal process and internal controls including documenting project-
development stages and approvals. The change management issues for people,
processes, and systems in this area point to the need to gain an early understanding
of how IFRS may affect the accounting for R&D expenditures and whether the differ-
ences can be consequential to the companys financial statements. Experience in juris-
dictions that have adopted IFRS indicates that determining the IFRS opening balance
sheet capitalized amounts of historical R&D projects is facilitated if IFRS-compliant
information for R&D projects is accumulated prior to transition. That period could range
from under a year to several years, depending on the length of the product life cycle
and the magnitude of costs capitalized under IFRS.
Effects on Earnings
Although more costs associated with R&D and related intangible assets may be capi-
talized under IFRS than under U.S. GAAP, the corresponding effect on a technology
companys ongoing earnings is less clear and will depend on specific circumstances,
including whether:
Significant capitalizable costs are incurred between the dates when the R&D project
meets the capitalization criteria and when the results of the project become available
for its intended purposes.
The amount and timing of cost capitalization changes significantly from period to
period due to variability in capitalizable expenditures incurred on internal R&D proj-
ects or acquisitions of related intangible assets from third parties. For example, there
often is more predictability in costs capitalized under IFRS in mature industries where
the product-development roadmap is relatively stable and the product mix does not
change significantly over time.
The period and pattern of economic benefit to be obtained from capitalized intangible
assets and whether the amortization methodology over the assets useful life is
straight-line or some other attribution methodology.
Impairments or dispositions of intangible assets are frequent or intermittent.
SEC Roadmap to IFRS
In November 2008, the U.S. Securities and
Exchange Commission (SEC) issued for
public comment a proposed roadmap,
4

which if approved as proposed would
establish a process and timetable for the
potential three-year phase-in of mandatory
use of IFRS by U.S. public companies,
beginning with large accelerated filers for
years ending on or after December 15,
2014. The roadmap is conditional on
progress toward milestones that would
demonstrate improvements in both the
infrastructure of international standard set-
ting and the preparation of the U.S. financial
reporting community to prepare and use
IFRS financial statements. The proposed
roadmap contemplates that if the condi-
tional milestones are satisfactorily achieved
by 2011, the SEC could then consider rule-
making to phase in requirements for U.S.
public companies to use IFRS as issued by
the IASB in the preparation of their finan-
cial statements to be filed with the SEC.
Under the roadmap proposal, some large
U.S. public companies that operate within
an IFRS industry would be permitted to
begin using IFRS as soon as their financial
statements for periods ending on or after
December 15, 2009. At present, it appears
highly unlikely that such a proposal will be
adopted for 2009 reporting periods.
4
SEC Release No. 33-8982, Roadmap for the Potential
Use of Financial Statements Prepared in Accordance
with International Financial Reporting Standards by U.S.
Issuers, available at www.sec.gov. The public comment
period ended on April 20, 2009.
Other Considerations
By-product benefits of IFRS compliance, with its more-robust documentation and time/
cost reporting at the R&D project level, include an improved ability to assess the return
on investment for individual R&D projects. The increased documentation often needed
to support a position for capitalizing or expensing R&D costs also has the potential to
provide tax advisors and tax authorities with improved information with which to evalu-
ate the eligibility of expenditures for R&D-related tax credits.
While a variety of issues are relevant to the technology industry in accounting for
expenditures related to intangible assets, this publication of IFRS for Technology
Companies: Closing the GAAP focuses on R&D expenditures, which are particularly
key to the sector. Three significant questions that need to be addressed for R&D
expenditures are:
What costs should be capitalized rather than expensed as incurred?
For capitalized costs, when and how should the asset be amortized?
How should impairment be assessed?
What R&D Expenditures Should Be
Recognized As an Asset?
Given the commercial importance of
innovation to technology companies,
the question of when to recognize R&D
expenditures as an asset is a significant
one. For start-up companies or compa-
nies that incur significant costs when
internally developing intellectual property,
knowing what expenditures related to
R&D should be recognized as an asset
rather than expensed as incurred can
have a significant impact on key financial
performance measures.
Although IFRS and U.S. GAAP define intan-
gible assets similarly, they differ in how
they define the terms research and devel-
opment; on the criteria they require to be
met to capitalize R&D costs; and on what
costs should be capitalized. These differ-
ences may affect the amount and timing of
cost recognition for expenditures on R&D
and can affect key financial metrics.
Definitions of Intangible Asset
International Accounting Standard (IAS)
38 Intangible Assets defines an intangible
asset as an identifiable non-monetary
asset without physical substance. To be
recognized as an intangible asset, the
item should lack physical substance, be
non-monetary, be identifiable, be con-
trolled by the entity, and provide probable
future economic benefits that will flow to
the entity.
Under U.S. GAAP, FAS 142, Goodwill and
Other Intangible Assets, an intangible
asset is defined as an asset (other than
financial assets and goodwill) that lacks
physical substance. The definition is
similar to that of IFRS.
Unlike U.S. GAAP, IFRS has one standard
that applies to all expenditures related to
intangible assets and therefore has one
model related to internally developed
intangible assets. In contrast, U.S. GAAP
has the general requirement that internally
developed intangible assets are not capital-
ized, but it then has a number of specific
standards that require capitalization of cer-
tain costs related to internal development
of intangible assets. Similar to U.S. GAAP,
IFRS has general concepts of identifiabil-
ity and control by the entity, which are
among the requirements for capitalization
of costs under IFRS (next page).
Identifiability
The quality of being identifiable is
required to distinguish an intangible
asset from internally generated or
acquired goodwill. An item is identifi-
able if it either:
Is separable, i.e., is capable of being
separated or divided from the entity
and sold, transferred, licensed, rented,
or exchanged, either individually or
together with a related contract, iden-
tifiable asset, or liability, regardless of
whether the entity intends to do so, or
Arises from contractual or other legal
rights, regardless of whether those rights
are transferable or separable from the
entity or from other rights and obligations.
The identifiability criterion is key to
determining whether identifiable intan-
gible assets have been acquired in a
business combination. IFRS 3 (2008)
Business Combinations provides illustra-
tive examples of items that generally
meet the definition of an intangible asset
and qualify for recognition as separate
intangibles in a business combination.
Those examples are generally consistent
with similar examples provided under
FAS 141R and include intangibles such as
acquired IPR&D (see page 18), patents,
and other protection for intellectual prop-
erty. Unpatented technology that does
not arise from contractual or legal rights
can qualify for recognition as an intangible
asset in a business combination provided
it is separable.
Control by the Entity to Which
Probable Future Economic Benefits
Will Flow
Here are examples of the characteristics
of control and probable future economic
benefits:
Control: An entity has the power to
obtain future economic benefits from
the underlying resource and can restrict
the access of others to those benefits.
The entitys ability to control future
economic benefits from the intangible
asset normally would stem from legal
rights enforceable in a court of law. For
example, technical knowledge may pro-
vide an entity the ability to control future
economic benefits if the entity develops
customized software for which a patent
or copyright is registered.
In the absence of legal rights, it is
more difficult to demonstrate control.
However, legal enforceability of a right
is not a necessary condition for con-
trol, because an entity may be able
to control future economic benefits in
another way. Control also could be sup-
ported where: (1) there is a legal duty
of employees to maintain confidentiality
for unpatented software development
results, and (2) the entity believes that
its right to proprietary intellectual prop-
erty could be legally defended if chal-
lenged. The know-how of employees
who operate the software, however,
does not meet the control criteria, as
staff can leave at any time.
Probable future economic benefits will
flow to the entity: Economic benefits
can arise in a number of different ways.
When assessing how an intangible
asset will generate probable future eco-
nomic benefits, the entity should dem-
onstrate the existence of a potential
market for the intangible assets output
or for the intangible asset itself; or, if it
is to be used internally, the intangible
assets usefulness in support of other
operations or administrative activities.
Economic benefits obtained from the
market can include income from the
sale, rental, or licensing of products
and services and intellectual property.
Economic benefits from internal use
include cost savings from efficiency
gains or other benefits derived from
the companys use of the intangible
asset. For example, intellectual property
used in a manufacturing process might
reduce future production costs rather
than increase future revenues.
An entity should base its expectation of
probable future economic benefits on
reasonable and supportable assump-
tions that represent managements best
estimate of the economic conditions
5
Refer to KPMGs publication, Accounting for Business Combinations 141R (May 2009) for considerations in valuing
acquired intangible assets under U.S. GAAP.
that will exist over the useful life of the
asset. The entity uses judgment based
on evidence available at the time of ini-
tial recognition to assess the probability
attached to the flow of future economic
benefits attributable to the use of the
asset, giving greater weight to external
evidence.
Capitalization Criteria
Under IAS 38, an item meeting the defini-
tion of an intangible asset is recognized,
initially at cost, if the future economic
benefits are probable and the costs of the
asset can be measured reliably.
Intangible assets can be obtained through:
(1) a business combination; (2) an asset
acquisition; or (3) internal development.
Although not discussed in this paper, intan-
gible assets also can be acquired through
a non-monetary exchange of assets or via
a government grant. While the definition of
an intangible asset does not depend on the
manner of acquisition, how an intangible
item is obtained will affect how it is initially
recognized and measured. IAS 38 contains
additional capitalization hurdles that apply
to internally generated intangibles.
Intangible Assets Acquired from
Third Parties
Technology companies frequently acquire
businesses or purchase the rights to
own or use intellectual property, such as
IPR&D projects or patents for the out-
come of R&D. When acquired either in a
business combination or an asset acquisi-
tion, an intangible asset is recognized if it
meets either the contractual/legal or the
separability criteria.
The cost of an intangible asset acquired
in a business combination is its fair value
at the acquisition date excluding transac-
tion costs. There is an assumption the fair
value of such intangible assets can always
be measured reliably. The acquirees
original cost or acquisition-date carrying
amount of the intangible asset (such as
for a perpetual software license or patent)
may not be a meaningful indicator of its
current fair value. Valuation techniques
may need to be applied if no active market
benchmarks exist for the asset.
5

The cost of an intangible asset acquired
in an asset acquisition is its purchase
price which includes any transaction costs.
If an intangible asset is acquired with a
group of assets in a transaction that is not
a business combination, then its cost will
be measured on a relative fair value basis.
Intangible Assets Acquired in a Separate
Asset Acquisition Considerations
When acquiring an intangible asset from
third parties, there are specific application
considerations and practice issues that
can arise.
IPR&D: Under IFRS, IPR&D would be
recognized whether the IPR&D was
acquired in a business combination or
an asset acquisition. Under U.S. GAAP
currently, IPR&D acquired in an asset
acquisition would be expensed unless it
had an alternative future use. However,
the EITF has reached a tentative con-
clusion on Issue 09-2 that, if finalized,
would revise U.S. GAAP to require
capitalization of IPR&D in an asset
acquisition as well as in a business
combination.
Advance payments to third parties: If
advance payments are made to third par-
ties for services such as outsourced R&D
prior to when the costs would qualify
for capitalization under IAS 38, the costs
would be recorded as a prepaid asset
(rather than an intangible asset) if prob-
able economic benefits are expected
to flow to the entity. Once the related
services are performed, the costs are re-
evaluated for capitalization under IAS 38.
This is consistent with U.S. GAAP guid-
ance under EITF 07-3, Accounting for
Nonrefundable Advance Payments for
Goods or Services Received for Use
in Future Research and Development
Activities.
Extended or variable payment terms:
IAS 38 requires the cost of the asset
to be measured at its cash equivalent
amount. Therefore when payments
to acquire an intangible are deferred
the cost is measured as the present
value of the future payments. The dif-
ference between this amount and the
total payments is recognized as interest
expense over the period of the effective
financing, unless it meets the criteria
for capitalization in accordance with IAS
23 Borrowing Costs.
The measurement of cost is more
complicated when the consideration
to be paid for an intangible asset is
wholly or partly variable, a payment
structure not uncommon in technol-
ogy industry arrangements to license
or purchase intellectual property from
others. Consider the following scenario
under IFRS:
ABC Ltd. obtained a five-year license
that allowed it to embed encryption
software technology owned by XYZ Inc.
into its own original equipment manu-
facturer (OEM) product. ABC agrees to
pay a minimum of $2 million, 25 percent
of which is due at the outset of the
licensing arrangement, and the remain-
ing 75 percent of which is due one
year later. In addition to this minimum
payment, ABC also agrees to pay to
XYZ 10 percent of the future revenues
generated by the licensed technology.
ABC estimates the revenues generated
by the technology at $30 million for
each of the following five years. In our
view, under IAS 38 the cost of ABCs
intangible asset (the license) should be
determined on the basis of the agreed
minimum payments, i.e., $500,000
plus the present value of $1.5 million.
The revenue-based payments are
treated in the same way as contin-
gent rent under IAS 17 Leases and
therefore are not included in the cost
of the license. Instead, any additional
payments would be expensed as the
related sales occur.
Under U.S. GAAP, a separately acquired
intangible is measured at fair value rather
than at cost. Because a market partici-
pant may incorporate into the estimate of
future cash flows the possibility of having
to make future revenue-based variable
payments, the U.S. GAAP measurement
of the intangible asset could differ from
the IFRS amount.
Internally Generated Intangible Assets
Internally generated intangibles are sub-
ject to additional capitalization criteria
in IAS 38 that expand on the general
recognition criteria for intangible assets.
These additional criteria are used to
assess whether costs associated with
the development of internally generated
intangibles have resulted in an identifi-
able asset expected to generate future
economic benefits, and whether the cost
of that asset can be distinguished from
the entitys expenditures to maintain or
enhance internally generated goodwill
related to the ongoing operations.
For internally generated intangibles,
expenditures are eligible for capitalization
only if they occur during the develop-
ment phase of a project. Similar to U.S.
GAAP, IFRS requires all costs incurred
during the research phase of a project to
be expensed as incurred, on the premise
that probable economic benefits cannot
be demonstrated during this phase. It
is thus important under IFRS to distin-
guish between activities constituting
research and development.
8
IFRS U.S. GAAP
Research IAS 38 defines research as original and
planned investigation undertaken with the
prospect of gaining new scientific or
technical knowledge and understanding.
(IAS 38, par. 8)
Research activities include:
Activities aimed at obtaining new knowledge
The search for, evaluation of, and final
selection of, applications of research
findings or other knowledge
The search for alternatives for materials,
devices, products, processes, systems, or
services
The formulation, design, evaluation and
final selection of possible alternatives for
new or improved materials, devices, prod-
ucts, processes, systems, or services.
FAS 2, Accounting for Research and
Development Costs, defines research as
a planned search or critical investigation
aimed at discovery of new knowledge with
the hope that such knowledge will be use-
ful in developing a new product or service
(hereinafter product) or new process
or technique (hereinafter process) or in
bringing about a significant improvement to
an existing product or process.
(FAS 2, par. 8)
Because FAS 2 does not distinguish
between the accounting for research and
the accounting for development, it does not
provide examples of research separate from
examples of development.
Development IAS 38 defines development as the applica-
tion of research findings or other knowledge
to a plan or design for the production of
new or substantially improved materials,
devices, products, processes, systems or
services before the start of commercial pro-
duction or use. (IAS 38, par. 8)
Development activities include:
The design, construction, and testing of
pre-production or pre-use prototypes and
models
The design of tools, jigs, molds, and dies
involving new technology
The design, construction, and operation of
a pilot plant that is not of a scale economi-
cally feasible for commercial production
The design, construction, and testing of
a chosen alternative for new or improved
materials, devices, products, processes,
systems, or services.
FAS 2 defines development as the transla-
tion of research findings or other knowledge
into a plan or design for a new product or
process or for a significant improvement to an
existing product or process whether intended
for sale or use. It includes the conceptual
formulation, design, and testing of product
alternatives, construction of prototypes, and
operation of pilot plants. It does not include
routine or periodic alterations to existing
products, production lines, manufacturing
processes, and other ongoing operations
even though those alterations may represent
improvements and it does not include market
research or market testing activities.
(FAS 2, par. 8)
The table at left compares definitions of
research and development under IFRS
and U.S. GAAP
While the definitions of research and
development are similar under IFRS and
U.S. GAAP, the precise language differs.
It is therefore possible that differences
may arise in practice in how companies
categorize expenditures between the
research and development phases of
internal projects. Companies transition-
ing to IFRS may need to train R&D and
finance personnel in how to delineate
between research and development
activities using IFRS definitions, to ensure
that activities are classified consistently
across projects.
Under both IFRS and U.S. GAAP, expen-
ditures incurred during the research phase
of a project are expensed as incurred.
Under IFRS, during the development phase
of a project, costs are capitalized from the
date the entity can demonstrate that all of
the following criteria have been met:
Technical feasibility:
The entity can demonstrate the technical
feasibility of completing the intangible
asset so that it will be available for use
or sale.
Commercial feasibility:
The entity has the intention to complete
the intangible asset and use it or sell it.
The entity has the ability to use or sell
the intangible asset.
The entity can demonstrate how the
intangible asset will generate probable
future economic benefits. Among other
things, the entity can demonstrate the
existence of a market for the output of
the intangible asset or the intangible
asset itself or, if it is to be used internally,
the usefulness of the intangible asset.
The entity has available adequate tech-
nical, financial, and other resources to
complete development and use or sell
the intangible asset.
Measurability of development costs:
The entity has the ability to measure
reliably the expenditures attributable to
the intangible asset during its develop-
ment phase.
These criteria cumulatively identify
instances where the advanced stage of
development activities support, through
consideration of technical and commercial
feasibility, an assertion that the intangible
will generate probable future economic
benefits. Once this occurs, provided that
directly attributable costs can be mea-
sured reliably, costs are capitalized until
the intangible is ready for its intended use
or the project no longer meets the capital-
ization criteria.
The following diagram summarizes the accounting for internally generated R&D costs:
Development
phase
Research
phase
Not determinable
Capitalization criteria
fulfilled?
Capitalize as
intangible asset
Expense as incurred
No Yes
Application of Technical
Feasibility Criterion
For many technology companies, estab-
lishing the technical feasibility of com-
pleting the intangible so that it will be
available for use often will be the key mile-
stone for assessing when the capitalization
criteria are met. Although IAS 38 uses the
term technical feasibility, it neither defines
the term nor expresses how the criterion
is satisfied. Because technical feasibility
is not defined in IAS 38 or elsewhere in
IFRS, differences may arise in practice
(both across industries and for companies
within an industry sector) with respect to
how the technical feasibility criterion is
evaluated. However, based on the activi-
ties IAS 38 describes as research and
development, technical feasibility is
likely to be subsequent to (1) the comple-
tion of all significant planning activities
(including details of the intended design of
the product/process), and (2), where sig-
nificant high risk development issues exist
that call into question whether the prod-
uct/process can be completed to meet its
planned design, when the project develop-
ment has reached the point of establishing
product/process specifications and related
testing to support that these issues have
been resolved. However, unlike FASB
Statement 86, Accounting for the Costs of
Computer Software to Be Sold, Leased,
or Otherwise Marketed, it would not nec-
essarily require completion of a working
model or detailed program design.
Identifying operational milestones that
demonstrate technical feasibility often
requires judgment and the input of the
product R&D team and engineers. In
practice, evidence of the point during
the development cycle when technical
feasibility is established for a specific
project may depend on the uniqueness
or complexity of the product or process.
For example, technical feasibility may be
established earlier in the development
cycle of a new product generated through
adding new features or functionality to an
existing core product or product family.
Product or process development involv-
ing new innovation or sophistication may
require more extensive work to integrate
with existing products and platforms,
pushing back the point in the develop-
ment cycle when technical feasibility is
established.
To ensure consistency in application,
documentation of the stages in the devel-
opment cycle and internal company policy
guidelines that specify when technical
feasibility is established are particularly
important when R&D is performed across
separate teams or where R&D centers
exist in multiple jurisdictions.
Application of Other Commercial
FeasibilityRelated Criteria
In assessing whether an intangible asset
will generate probable future economic
benefits, the company should dem-
onstrate the existence of a market for
the intangible asset or its output if it is
intended to generate or be used in a
marketable product or process; or, if it
is to be used internally, the usefulness
of the intangible asset to the company.
When carrying out such an assessment,
IAS 38 points to the principles of IAS 36
Impairment of Assets. If the asset will
generate economic benefits only in con-
junction with other assets, the concept of
cash-generating units should be used in
the assessment. While IAS 36 is beyond
the scope of this document, companies
evaluating probable economic benefits
should be familiar with its guidance on
the identification of cash-generating units.
Although probable is not defined in rela-
tion to intangibles, it does not mean that
a project must be certain of success
prior to capitalization of development
costs. For example, a developer of cel-
lular phones should not expense all
development costs as incurred because
there is a possibility that new software
intended for the new phone might not be
approved for sale by relevant authorities
such as the U.S. Federal Communications
Commission. An assessment of the
process or products likelihood of suc-
cess should support a conclusion about
whether a positive outcome is or is not
probable. If so, the company should con-
clude that this criterion for capitalization
of the related development costs is met.
The financial, technical, and other resources
essential to complete the development
need not be secured at the onset of
the project. Companies may be able
to demonstrate their ability to secure
such resources through business plans
and external financing plans for which
potential customers, investors, and lend-
ers have expressed interest. Market
research studies and budgets also may
serve to demonstrate that capitalization
criteria are met. The existence of plans
showing the availability of resources to
complete a project is especially impor-
tant where: (1) an early-stage technology
company does not have sufficient inter-
nal resources or financing at inception,
(2) unique skill sets may be needed to
work on the project, or (3) emerging
markets may need to be penetrated.
Ability to Reliably Measure Costs
Associated with Development
The final capitalization criterion for an
internally generated intangible is the abil-
ity to reliably measure the costs incurred
during its development. This does not
mean that project costs must be captured
throughout the entire project, only once
the other criteria for capitalization for
development costs are met. Also, being
able to reliably measure development
costs does not mean an entity has to
be able to estimate what the total costs
of the project will be. It would be highly
unlikely that when all other capitalization
criteria are met the inability to measure
costs reliably would preclude capitaliza-
tion, as companies would be expected
to have processes in place that would
capture relevant costs. See next page for
a discussion of types of costs required to
be measured and related practical opera-
tional issues.
Summary of Capitalization
Considerations
The general IFRS principles for capi-
talization of expenditures for internally
generated intangibles apply to all inter-
nally developed intangibles, including
intellectual property developed for sale
and other technology developed for sale
and internal use. However, IAS 38 does
preclude capitalization of internally gener-
ated brands, mastheads, publishing titles,
customer lists, and similar items. It also
precludes capitalization of advertising and
promotional costs.
Little specific implementation guidance
exists under IFRS about when capitaliza-
tion of development costs should occur,
particularly for technical feasibility. The
determination depends very much on the
industry sector and the specific facts and
circumstances of the reporting entity.
Managers and executives responsible
for R&D and other development projects
typically require an evaluation of the
probability of success and the potential
economic outcomes at various points
(or gates) during the project life cycle.
At each gate, business decisions may
be made about whether to continue the
project. These reviews may be useful for
assessing whether technical and com-
mercial feasibility have been established.
Some industries, such as the automotive
sector, may have a large amount of their
annual product development expenditures
capitalized under IAS 38 in late-stage devel-
opment areas (for example, construction
of prototypes, customer testing, and pilot
plants, which are cost-intensive). Other
industries, such as the technology sector,
often find it is not until relatively late in
developing a product, process, or service
that the recognition criteria for internally
generated intangibles are met, resulting in
only a small amount of total invested proj-
ect expenditures being capitalized.
6
U.S. GAAP allows for capitalization of certain costs associated with direct-response advertising,
which is not permitted under IFRS.
Which costs of developing internally
generated intangible assets are
capitalized?
Once the criteria for capitalization of
internally generated intangibles are met,
the next question is what expenditures
should be capitalized. Under IAS 38, the
cost of an internally generated intangible
asset comprises all directly attributable
costs necessary to create, produce, and
prepare the asset to be capable of operat-
ing in the manner intended by manage-
ment. These principles are consistent
with the IFRS treatment of property,
plant, and equipment. The capitalized cost
is the sum of these expenditures from
the date when the intangible asset first
meets the recognition criteria through
the date the asset becomes available
for its intended use. The costs need not
be external or incremental in order to be
directly attributable.
Examples of directly attributable costs
specifically identified in IAS 38 are:
Costs of materials and services used or
consumed in generating the intangible
asset
Costs of employee benefits, including
share-based payments, arising from the
generation of the intangible asset
Fees to register a legal right
Amortization of patents and licenses
that are used to generate the intangible
asset.
Directly attributable overhead costs are
capitalized as part of an intangible asset
as well. Examples of these are the alloca-
tion of overhead costs (for example, facili-
ties and utilities) directly related to R&D
activities. IAS 23 also specifies criteria
for the capitalization of interest as an ele-
ment of the cost of an internally gener-
ated asset.
IAS 38 also identifies certain costs that
are not considered directly attributable to
the creation of the intangible asset:
Selling, administrative, and other gen-
eral overhead expenditure, unless this
expenditure can be directly attributed to
preparing the asset for use
Identified inefficiencies and initial oper-
ating losses incurred before the asset
achieves planned performance
Expenditure on training staff to operate
the asset.
Other costs that are not included in the
cost of an intangible asset (whether it
was generated internally or acquired
separately) include:
Costs incurred after an intangible asset
is capable of operating in the manner
intended by management even though
it has not yet been put into use
Start-up costs, unless they qualify for
recognition as part of property, plant,
and equipment
Advertising and promotional costs, even
if they directly relate to the introduction
of new products or services
6
Costs associated with market research
and feasibility studies for the project
Costs associated with relocating, reor-
ganizing, or redeploying assets.
In general, FAS 142 prohibits capitaliza-
tion of costs for internally developed
intangibles. However, U.S. GAAP con-
tains specific requirements for capitaliza-
tion of costs related to certain intangibles
(see page 15). Because R&D costs are
expensed as incurred under U.S. GAAP
unless the costs fall within the scope of
other specific literature, many companies
reporting under U.S. GAAP will not have
existing policies, information systems,
and processes for determining when
the IAS 38 capitalization criteria are met
and for reliably accumulating the directly
attributable costs in an IAS 38-compliant
manner. For many companies, R&D costs
can be identified at a department level
but systems may not be in place to track
and measure these costs at a project
level. Implementing time-tracking and
costing systems and related processes
at the project level to accumulate devel-
opment costs eligible for capitalization
can be exacting. Project cost-tracking
systems and processes should be robust
enough to:
Identify operational milestones within
the R&D process to confirm trig-
ger events requiring capitalization of
development costs under IFRS on a
timely basis if the subsequent directly
attributable costs could be more than
insignificant prior to the available-for-
general-release/internal-use dates of
the intangible asset
Allow for separate identification of
expenditures incurred before and after
the trigger date for capitalization
Distinguish between costs for activities
meeting the definition of development
activities from those related to research
and other activities where these activi-
ties could overlap once the criteria for
capitalization of development costs
have been met
Capture expenditures related to intan-
gibles qualifying for capitalization sepa-
rately from those that do not once the
capitalization criteria have been met.
Appropriate controls should be estab-
lished for the approval and accuracy of
information inputs, including time by proj-
ect and personnel for project activities,
allocation rates used for personnel-related
costs and directly attributable overhead,
operational project milestone attainment,
and transfers between the R&D systems
and the general ledger. Because these
functions may involve training personnel
on new or modified systems and pro-
cesses, the change management effort
may be significant, especially if the R&D/
engineering group is not accustomed to
internal controls and related documenta-
tion of activities. By-product benefits of
improved ability to track the return on
investment in R&D projects and claim
R&D tax credits in the appropriate juris-
diction may help motivation, although
ultimately ensuring IFRS compliance is a
corporate necessity.
7
The guidance in SIC-32 does not apply to costs to develop or operate a website or related software for sale to another
company, costs to purchase or develop hardware to support the website, or costs to determine the initial recognition of a
leased website asset.
Specific Application Issues
This section discusses certain topics
where U.S. GAAP contains guidance
on intangibles relevant to the technol-
ogy sector. Guidance under U.S. GAAP
may be a useful reference point where it
does not conflict with IFRS. We encour-
age technology companies to evaluate
whether continued use of U.S. GAAP
policies would be IFRS-compliant and
appropriate for them.
Internal-Use Software
Under IAS 38, outlays for software devel-
oped for use internally by the company are
accounted for under the general principles
for internally generated intangible assets
or, for purchased software, the general
requirements for separately acquired intan-
gible assets discussed earlier. Unlike IFRS,
U.S. GAAP contains specific requirements
for the accounting for the development of
internal-use software. Under SOP 98-1,
Accounting for the Costs of Computer
Software Developed or Obtained for
Internal Use, certain costs incurred for
internal-use software that is acquired, inter-
nally developed, or modified solely to meet
the companys needs are capitalized during
the application development stage.
The three stages of software develop-
ment under SOP 98-1 are the preliminary
project stage, application development
stage, and post-implementation/operation
stage. Costs during the preliminary proj-
ect stage and the post-implementation
stage are expensed as incurred. Certain
costs incurred during the application
development stage are capitalized under
U.S. GAAP, and that stage may occur
sooner in the cycle than when the capital-
ization criteria under IAS 38 are met. For
example, IFRS limits capitalization only to
development-related activities, and then
only after specific capitalization criteria
are satisfied (see page 9). Consequently
capitalization for internal-use software
projects may begin earlier under U.S.
GAAP compared to IFRS.
Additionally, SOP 98-1 specifies the capital-
ization of: (1) external direct costs of mate-
rials and services consumed in developing
or obtaining internal-use software, (2) pay-
roll and payroll-related costs for employees
who devote time to the internal-use soft-
ware development, and (3) interest cost
in accordance with FASB Statement 34,
Capitalization of Interest Cost. Accordingly,
technology companies transitioning to IFRS
from U.S. GAAP may need to update their
internal policies for the capitalization of
internal-use software to reflect IFRS defini-
tions, capitalization criteria, and allowed
directly attributable costs to ensure IAS 38
compliance.
Website Development Costs
Accounting for website development costs
is one area of intangibles for which IFRS
provides specific guidance in SIC-32
Intangible Assets Web Site Costs. SIC-32
indicates that a companys own website
7

that arises from internal development and
is for internal or external use is an internally
generated intangible asset subject to IAS
38 (provided the website is not used solely
or primarily for advertising or promotional
purposes). Accordingly, the cost of an inter-
nally developed website used by the com-
pany in its business would be capitalized as
an intangible asset if it satisfies the IAS 38
capitalization criteria. SIC-32 describes dis-
tinct phases of website creation and how
IFRS would apply to the costs incurred dur-
ing these phases.
Website Development Costs
Stage/nature of expenditure Accounting treatment
Planning
Undertaking feasibility studies
Defning objectives and specifcations
Evaluating alternative products and suppliers
Selecting preferences
Recognize as an expense when incurred.
Application and infrastructure
development
Purchasing or developing hardware
Obtaining a domain name
Purchasing or developing operating software
(for example, operating system and server
software)
Developing code for the application
Installing developed applications on the
web server
Stress testing
Apply the requirements of IAS 16.
Capitalize if the criteria for capitalizing devel-
opment costs are met; this applies equally
to internal and external costs. The costs of
developing content for advertising or promo-
tional purposes are expensed as incurred.
Graphical design development
Designing the appearance (for example,
layout and color) of web pages
Content development
Creating, purchasing, preparing (for ex-
ample, creating links and identifying tags),
and uploading information, either textual
or graphical in nature, on the website
before the completion of the websites
development. Examples of content include
information about an entity, products or
services offered for sale, and topics that
subscribers access
Operating
Updating graphics and revising content
Adding new functions, features, and content
Registering the website with search
engines
Backing up data
Reviewing security access
Analyzing usage of the website
Assess whether it meets the defnition of an
intangible asset and the recognition criteria,
in which case the expenditure is recognized
in the carrying amount of the website asset
(also consider guidance on subsequent
measurement).
Other
Selling, administrative, and other general
overhead expenditure that is not directly
attributable to preparing the website for
use to operate in the manner intended by
management
Clearly identifed ineffciencies and initial
operating losses incurred before the web-
site achieves planned performance [e.g.
false start testing]
Training employees to operate the website
Recognize as an expense when incurred.
R & D A C T I V I T I E S A N D R E L A T E D I N T A N G I B L E A S S E T S 17
Internal Use Software
Type of Expenditure Stage of Project Accounting Treatment
Identify need/beneft of the new software technology. Research Recognize expense as incurred.
Gain technical knowledge (i.e. investigate technologies in
market; determine whether project is feasible).
Research Recognize expense as incurred.
Conceptual formulation and possible technology alternatives. Research Recognize expense as incurred.
Design of alternatives and determine technical feasibility of
software.
Development Recognize expense as incurred, since not all criteria
will have been met.
8
Management prepares presentation to Board for fnal selec-
tions of new technology, including budget.
Development Recognize expense as incurred.
Board approves one alternative for the new technology and
approves the budget.
Development Recognize expense as incurred. Criteria (a), (b), (c),
(d) & (e) have been met since technology and budget
has been approved by the board. However, assume
criterion (f), the ability to measure costs reliably, has
not been met at this stage.
8
Develop the software and acquire the hardware necessary
to operate the software.
Development Capitalize directly attributable software development
costs. All the criteria have been met at this stage.
8

Capitalize hardware costs in accordance with IAS 16.
Test the new software. Development Capitalize directly attributable costs.
Train manufacturing facility staff on how to use the software. Production Recognize expense as incurred since does not meet
the defnition of an intangible asset.
Debug the software and improve functionality. Production Recognize expense as incurred since does not meet
Ongoing management the minor functionality improvements
of the software.
Production Recognize expense as incurred since does not meet
8
Company would capitalize costs in the development stage if all the following criteria are met: (a) technical feasibility, (b) intention to complete the intangible asset and use or sell it, (c) ability
to use or sell the intangible asset exists, (d) how the intangible asset will generate probable future economic benefits is known, (e) there is availability of adequate technical, financial and other
resources to complete the development and to use or sell the intangible, and (f) ability to measure reliably the expenditure attributable to the intangible asset during the development exists.
Also see page 9.
Under U.S. GAAP, EITF 00-2, Accounting for Website Development Costs, provides
specific accounting guidance on the application of SOP 98-1 to website development
costs. Classification of the stages of website development and operation under EITF
00-2 roughly correlate to those in SIC-32. Costs incurred during the planning and oper-
ating stages are expensed as incurred. For websites developed for the companys
own internal or external use, the website development costs are subject to the same
capitalization criteria as internal-use software in SOP 98-1. Therefore, costs incurred in
the application and infrastructure development stage are capitalized. EITF 00-2 provides
more detailed guidance on the activities deemed to be within the application develop-
ment stage so differences in practice from IFRS may occur.
Companies transitioning to IFRS from U.S. GAAP should review their policies for
accounting for website costs to understand the differences in definitions and capi-
talization criteria to ensure that their approach to the accounting for website costs is
adjusted as appropriate to comply with IFRS.
Software Developed for Sale
Under IAS 38, costs of software developed for sale are accounted for following
the general principles for all internally generated intangible assets. U.S. GAAP con-
tains specific requirements for software developed to be sold, leased, or otherwise
marketed. Under FAS 86, costs incurred internally in creating a computer software
product to be sold, leased, or otherwise
marketed as a separate product or as part
of a product or process are considered
R&D costs that are expensed as incurred
until technological feasibility has been
established. Technological feasibility is
established upon completion of a detailed
program and product design or in the
absence of the former completion of a
working model whose consistency with
the product design has been confirmed
through testing. Thereafter, all software
development/production costs incurred
up to the point that the product is avail-
able for general release to customers
are capitalized.
Establishing technical feasibility for
completing a project for use under IFRS
may be similar to but is not necessarily the
same as the requirements that establish
technological feasibility for software to
be sold under FAS 86. IFRS does not con-
tain guidance for what constitutes tech-
nical feasibility, and some technology
companies under IFRS in particular soft-
ware companies that previously reported
under U.S. GAAP have looked to FAS 86
and related implementation guidance as a
useful starting point to assess when tech-
nical feasibility has been reached under
IFRS. For example, consider a product
with multiple modules that are not sepa-
rately saleable. The U.S. GAAP implemen-
tation guidance says that technological
feasibility would need to be demonstrated
for the entire product (all modules linked
together not on a module by module
basis) prior to capitalization.
In practice under U.S. GAAP, many soft-
ware companies have concluded that
technological feasibility under the FAS
86 criteria occurs so late in the product
development life cycle that costs incurred
between the point of technological fea-
sibility and the general release of the
software are not significant. Because
IFRS does not require a detailed program
design or working model to be completed
prior to establishing technical feasibility,
companies may find that development
costs should be capitalized sooner under
IFRS. Non-software technology com-
panies reporting under IFRS may have
significant amounts of capitalized devel-
opment costs. In practice, IFRS-reporting
entities have identified milestones within
their R&D processes to indicate when
technical feasibility has been achieved.
Judgment is required to assess whether
technical feasibility exists because the
IFRS criteria apply to all development
costs for internally generated intangibles
rather than just to software developed
for sale, which means differences from
U.S. GAAP may arise. Each entity should
evaluate the criteria against its internal
processes and circumstances to define
the appropriate policy.
Intangibles Including IPR&D Acquired
in a Business Combination
Under IAS 38 and IFRS 3 as well as
FAS 141R, an acquirer recognizes an
intangible asset at the acquisition date
if such assets meet either the legal/
contractual or separability criteria dis-
cussed earlier. Intangibles recognized in
a business combination are measured
at fair value in the acquisition account-
ing. Acquired IPR&D projects of the
acquiree, irrespective of whether the
acquiree had recognized the asset
before the business combination, also
are recognized as separately identifiable
intangible assets if they are identifi-
able. At the acquisition date the asset is
capitalized as an intangible asset not yet
ready for use (IFRS) or indefinite-lived
intangible (U.S. GAAP) and is amortized
when it is available for use (when it is in
the location and condition necessary to
be capable of operating in the manner
intended by management).
Determining whether IPR&D qualifies
for recognition as part of the acquisition
accounting calls for consideration of sev-
eral factors discussed below. If the proj-
ect does not qualify as IPR&D, another
identifiable intangible asset could exist
that requires recognition (such as an R&D
project that is complete).
Factors to consider in determining
whether an IPR&D asset exists are:
Is the IPR&D project incomplete? For
a specific IPR&D project of an acquired
company to give rise to an IPR&D
asset, the project should be incomplete,
and the acquirers interest must include
control over the probable future eco-
nomic benefits. At some point before
commercialization and possibly before
the end of development or the pre-
production stage, the R&D project will
no longer be considered incomplete.
The evaluation of incompleteness
applies to the entire IPR&D project and
related individual subprojects. Software
under development that is to be sold or
leased is not considered incomplete if
the project has reached technological
feasibility as of the acquisition date. An
incomplete project may be indicated
if: (1) more than de minimus future
costs are expected to be incurred, and
(2) additional steps (or milestones) are
required to overcome the remaining
risks or to obtain regulatory approvals.
Does the IPR&D project have sub-
stance? An IPR&D asset must have
substance, meaning that the acquiree
performed a more than insignificant
effort that: (1) meets the definition of
R&D, and (2) results in the creation
of value. There are four phases of a
projects life cycle that might be help-
ful in determining when a project has
substance or whether it has been
completed. In the earlier phases,
substance evolves and is deemed
to exist when it can be demonstrated,
while in the later phases the project
gradually reaches the point when it is
no longer considered incomplete. The
four phases of a projects life cycle that
have been applied in practice are:
(1) Conceptualization. This phase entails
coming up with an idea, thought, new
knowledge, or plan for a new product,
service, or process, or for a significant
improvement to an existing product, ser-
vice, or process. It may represent a deci-
sion by a company to focus its research
activities within certain core competen-
cies. Management might make an initial
assessment of the potential market,
cost, and technical issues for ideas,
thoughts, or plans to determine whether
the ideas can be developed to produce
an economic benefit.
(2) Applied research. This phase rep-
resents a planned search or critical
investigation aimed at the discovery of
additional knowledge in hopes that it
will be useful in defining a new product,
service, or process that will yield eco-
nomic benefits, or significantly improve
an existing product, service, or process
that will yield economic benefits. Work
during this phase assesses the feasibil-
ity of successfully completing the proj-
ect and the commercial viability of the
resulting product, service, or process.
(3) Development. This phase represents
the translation of research findings or
other knowledge into a detailed plan or
design for a new product, service, or
process, or for a significant improve-
ment to an existing product, service, or
process, and carrying out development
efforts pursuant to the plan.
(4) Pre-production. This phase repre-
sents the business activities necessary
to commercialize the asset resulting
from R&D activities for the enterprises
economic benefit.
We believe that identification of these
stages frames a threshold for asserting
that sufficient work has been done for
IPR&D to be separately identified. If the
threshold is not met (i.e., no more than
insignificant efforts have occurred to this
point), the value otherwise attributable to
IPR&D would be subsumed into goodwill
unless it meets the general recognition
criteria for intangible assets. For example,
if at the date of the acquisition an R&D
project had been only conceptualized
and the acquiree had not expended a
more than insignificant effort in R&D
activities to advance existing knowledge
and technology toward the project objec-
tive, the project would be deemed to lack
substance and would not be recognized
as an IPR&D asset. Alternatively, if the
acquirees IPR&D project has reached
a stage where it would be expected to
have value to a market participant, it most
likely would meet the definition of an
asset and therefore qualify for recogni-
tion by the acquirer at the acquisition
date. We would not expect differences in
this area to arise between IFRS and U.S.
GAAP in the initial capitalization of IPR&D
acquired in a business combination.
Subsequent Expenditures
Subsequent expenditures are expendi-
tures incurred after: (1) the initial recogni-
tion of an acquired intangible asset, or (2)
after an internally generated intangible
asset is available for its intended use.
Subsequent expenditures that add to,
replace part of, or service an intangible
asset are recognized as part of the intan-
gible asset if an entity can demonstrate
the item meets both (a) the definition of
an intangible asset and (b) the general
recognition criteria for intangible assets.
Subsequent costs that may be capitaliz-
able under IAS 38 are limited to only
those related to development activities
for projects that substantially improve
existing materials, devices, products, pro-
cesses, systems, or services.
The general recognition criteria for
internally generated intangible assets
also apply to subsequent expenditures
on IPR&D projects and other intangible
assets acquired separately or as part
of a business combination. Whereas
capitalization after acquisition is limited
to development costs that meet all
criteria applicable to internally generated
intangibles, the initially capitalized cost
of the related IPR&D acquired in a busi-
ness combination is based on its fair
value at the acquisition date.
Typically, a subsequent expenditure would
be recognized in the carrying amount of
an existing intangible asset only in rela-
tion to the development aspect of an
acquired IPR&D asset. This is because it
is difficult to definitively attribute subse-
quent expenditures directly to a particular
intangible asset rather than to the business
as a whole. Most subsequent expenditures
on intangibles other than acquired IPR&D
are more likely the cost to maintain the
expected future economic benefits embod-
ied in the existing intangible asset rather
than expenditures that meet the definition
of an intangible asset and the initial capital-
ization criteria (for example, by increasing
the expected future economic benefits
embodied in the existing intangible asset).
Exceptions to the general presumption
that subsequent expenditures are related
to maintaining economic benefits include:
Acquired IPR&D projects where the
company is continuing the development
work associated with the IPR&D project
and the subsequent expenditures meet
the capitalization criteria in IAS 38
Subsequent expenditures for software
or hardware upgrades that give rise to
an asset in their own right. This might
be the case, for example, when expen-
ditures appreciably improve an existing
product or service through significantly
enhancing its features and functionality.
U.S. GAAP provides specific guidance on
the accounting for subsequent expendi-
tures where intangible assets have been
recognized in the areas of internal-use
software and software to be sold or mar-
keted to others:
SOP 98-1 indicates that if internal-use
software is modified for internal use
only and provides additional functional-
ity, the modifications are considered
a separate project. Eligible costs
incurred during the application develop-
ment stage are capitalized, and other
costs are expensed. Whether these
costs would be capitalized under IFRS
depends on whether an entity can dem-
onstrate that costs incurred during the
application development phase under
SOP 98-1 meet all the IAS 38 capitaliza-
tion criteria (i.e., technical feasibility,
probable future benefits, costs are mea-
sured reliably).
If the subsequent expenditure is a soft-
ware product enhancement for the mar-
ketplace, U.S. GAAP requires that costs
incurred be charged to R&D expense
until the technological feasibility of the
enhancement is established. The defini-
tion of product enhancement under
FAS 86 speaks to measures expected
to significantly improve the market-
ability of software product or extend its
life. The glossary in AICPA Statement
of Position 97-2, Software Revenue
Recognition (SOP 97-2) contains similar
guidance in its definition of upgrade/
enhancement. These definitions con-
trast with activities to improve existing
products through routine maintenance
and minor enhancement or warranty
activities, such as right-of-dot soft-
ware updates and patches to keep
system software current with related
hardware or to fix bugs.
In different segments of the technology
industry, however, the terms product
update/upgrade/enhancement may con-
note different levels of packaging or
improvement and therefore entity-specific
facts and circumstances should be
considered. The development of prod-
uct enhancements (as defined under
FAS 86) or upgrade/enhancements (as
defined under SOP 97-2) may be an area
where subsequent expenditures could
meet the intangible asset recognition
criteria under IFRS providing all IFRS
recognition criteria for internally gener-
ated intangibles have been met.
The implementation guidance to FAS 86
also suggests that technological feasi-
bility may be more readily established
for a significant enhancement to an
existing product than it would be for a
new product, for example where: (1) an
enhancement adds only one function
to a successful product and requires
only minor modification to the original
products detailed program design to
establish technological feasibility, and
(2) software is being ported (made avail-
able to a different piece of hardware)
and may not require a new detailed pro-
gram design. In that case, technological
feasibility of the enhancement could
be established once high-risk develop-
ment issues have been resolved. These
examples may be a useful starting
point in helping entities reporting under
IFRS to assess when technical feasibil-
ity has been reached. Irrespective of
complexity, entities will want to assess
whether the enhancements do, in fact,
significantly increase the functionality of
the existing product/process in order to
qualify for capitalization.
Because of such potential differences,
companies would be well-advised to
review and update their policies and pro-
cedures regarding subsequent expendi-
tures on intangible assets if required.
9
Intangible assets may be revalued only in situations where there is an active market for the intangible asset. This situation
occurs only rarely in practice, so this measurement alternative is not addressed in this publication.
Considerations for
Subsequent Measurement of Intangibles
Under both IFRS and U.S. GAAP, an intan-
gible asset, after its initial recognition and
measurement, is subsequently recorded
at cost less accumulated amortization and
impairment charges, except in the infre-
quent situations where IFRS allows for an
intangible asset to be revalued.
9
Similar
to U.S. GAAP, a number of issues arise
subsequent to the initial recognition of the
intangible asset including determining:
Whether the intangible asset has a
finite or indefinite useful life
For intangible assets with a finite use-
ful life, the amortization period and the
appropriate amortization methodology
For all intangible assets, whether an
impairment exists and the accounting
for retirements and disposals.
Useful Life and Amortization
Finite- or indefinite-lived intangible
asset: Under IFRS, an intangible asset is
an indefinite-lived asset when analysis
of all relevant factors suggests there
is no foreseeable limit to the period in
which the asset is expected to generate
net cash inflows to the entity. Like U.S.
GAAP, intangible assets with indefinite
useful lives are not amortized and are
subject to impairment testing at least
annually.
R & D A C T I V I T I E S A N D R E L A T E D I N T A N G I B L E A S S E T S
23
IFRS
Many factors are considered in
determining the useful life of an
intangible asset, including:
The expected usage of the asset
by the entity and whether the
asset could be managed efficiently
by another management team
Typical product life cycles for the
asset and public information on
estimates of useful lives of similar
assets that are used in a similar way
Technical, technological, commer-
cial, or other type of obsolescence
The stability of the industry in which
the asset operates and changes in
the market demand for the products
or services output from the asset
Expected actions by competitors or
potential competitors
The level of maintenance expendi-
ture required to obtain the expected
future economic benefits from the
asset and the entitys ability and
intention to reach such a level
The period of control over the
asset and legal or similar limits on
the use of the asset, such as the
expiry dates of related leases
Whether the useful life of the asset
is dependent on the useful lives of
other assets of the entity.
(IAS 38, par. 90)
U.S. GAAP
The estimate of the useful life of
an intangible asset to an entity shall
be based on all pertinent factors,
including:
The expected use of the asset by
the entity
The expected useful life of another
asset or a group of assets to which
the useful life of the intangible
asset may relate
Any legal, regulatory, or contrac-
tual provisions that may limit the
useful life
The entitys own historical experi-
ence in renewing or extending simi-
lar arrangements (consistent with
the intended use of the asset by
the entity), regardless of whether
those arrangements have explicit
renewal or extension provisions. In
the absence of that experience, the
entity should consider the assump-
tions that market participants would
use about renewal or extension
(consistent with the highest and
best use of the asset by market
participants), adjusted for entity-
specific factors
The effects of obsolescence,
demand, competition, and other
economic factors (such as the
stability of the industry, known
technological advances, legislative
action that results in an uncertain
or changing regulatory environ-
ment, and expected changes in
distribution channels)
The level of maintenance expendi-
tures required to obtain the expected
future cash flows from the asset (for
example, a material level of required
maintenance in relation to the car-
rying amount of the asset may sug-
gest a very limited useful life).
(FAS 142, par. 11 as modified by FSP FAS 142-3,
Determination of the Useful Life of Intangible Assets)
Considerations in assessing the useful life
of intangible assets: IFRS and U.S. GAAP
require that various factors be considered
when assessing the useful life of an
intangible asset (a comparison of these
factors is shown in the table at right).

The factors under IFRS and U.S. GAAP
are similar but not identical, so it is pos-
sible to reach different conclusions about
whether an intangible asset is indefinite-
lived. However, it would be unusual for a
technology-based intangible asset to have
an indefinite useful life under IFRS given
evolving technologies and/or limitations on
contractual or legal rights (as with patents,
for example). A potential non-technology-
based intangible asset that could have an
indefinite useful life, however, would be
a long-established brand name in a stable
market with significant barriers to entry,
where the company expects to have avail-
able resources to continue maintaining the
brand. Consistent with U.S. GAAP, IFRS
requires an annual review of indefinite-
lived intangibles to determine whether
the classification of an intangible asset as
finite- or indefinite-lived is appropriate over
time, as circumstances related to the clas-
sification may change.
Method and Period of Amortization
for Intangible Assets with Finite
Useful Lives
IFRS and U.S. GAAP require that intan-
gible assets with finite useful lives be
amortized on a systematic basis over
their useful lives and that the method
of amortization reflect the pattern of
consumption of economic benefits.
A variety of methods may be used,
including the straight-line method, the
diminishing-balance method, and the
units-of-production method. IAS 38 does
not specify a method of amortization,
and the straight-line method, diminish-
ing (or reducing) balance method, and
units-of-production method are cited as
possible approaches. If the pattern over
which economic benefits are expected
to be consumed cannot be determined
reliably, then the straight-line method is
used. Valuations performed to measure
the fair value of an intangible asset that
uses an income approach also may be
useful when assessing a pattern and/or
period of economic consumption, such
as where projected future cash flows are
used to value acquired IPR&D. Changes
in circumstances after the valuation date
need to be considered.
U.S. GAAP specifies an amortization
approach for certain types of intangible
assets. For example, FAS 86 requires
that capitalized software development
costs (after technological feasibility is
established) be amortized using the
greater of (1) straight-line over the
remaining economic life of the prod-
uct or (2) proportionate to revenues.
Because IFRS requires consideration of
the pattern of benefits in determining
the amortization method, companies
should not automatically assume that
application of the U.S. GAAP require-
ments would be appropriate under IFRS.
Under IAS 38 amortization commences
when the intangible asset is available for
use, i.e., when it is in the location and
condition necessary to be capable of
operating in the manner intended by man-
agement. Amortization ceases when the
asset is derecognized or when it is clas-
sified as held for sale in accordance with
IFRS 5 Non-current Assets Held For Sale
and Discontinued Operations.
Classification of Amortization
Under IFRS, the classification of amor-
tization charges for intangible assets
with a finite useful life is based on the
intended purpose of the asset. If the
intangible is used in the production of
another asset (for example, inventory),
the amortization charge is included in the
cost of that asset. Otherwise, amortiza-
tion is recognized as an expense. For
internal-use intangibles, amortization of
capitalized development costs is classi-
fied according to the expense category
(nature or function) that benefits from
the related intangible asset.
U.S. GAAP is similar to IFRS with respect
to classification of amortization charges, but
provides additional guidance. U.S. GAAP
requires that amortization related to devel-
opment costs for software to be sold or
marketed to others be classified within cost
of sales or a similar expense category.
For technology companies that capitalize
product development costs under IFRS
that previously were expensed within
R&D under U.S. GAAP, differences in the
timing and classification (such as cost of
sales in some cases) of cost recognition
may affect key performance indicators
such as gross margin. It is important to
consider the impact on budgeting/fore-
casting, external reporting, and perfor-
mance metrics.
Impairment
Technology-related intangible assets are
particularly susceptible to changing mar-
ket forces that can affect the recoverabil-
ity of capitalized amounts. The guidance
in IAS 36 Impairment of Assets explains
when and how an IFRS entity reviews
the carrying amount of its assets, how
it determines the recoverable amount
of the asset, and when it recognizes or
reverses an impairment loss.
IAS 36 requires that indefinite-lived
intangible assets and intangible assets
not yet available for use be tested for
impairment whenever there is an indi-
cation that the related assets may be
impaired, and irrespective of such indica-
tion, at least annually. Intangible assets
being amortized are tested for impair-
ment only when there is an indication of
impairment (a trigger event). These trig-
ger events are similar to U.S. GAAP.
In-service intangible assets often dont
generate independent cash inflows but
instead are used with other assets of the
entity within a larger cash-generating unit.
Under IFRS, this lowest independently
cash-generating category of assets is
called a cash-generating unit (CGU), a
concept broadly similar but not identical
to that of an asset group under FAS
144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Because
FAS 144 uses undiscounted cash flows
as a screen to determine whether an
impairment exists, entities may find they
have an impairment sooner under IAS 36.
Under IAS 36, at each reporting date an
entity assesses whether an indication
exists that a previously recognized impair-
ment loss has reversed. If such indication
exists and the recoverable amount of the
impaired asset or CGU has subsequently
increased, then generally the impairment
loss is reversed. The maximum amount
of the reversal is the lower of (1) the
amount necessary to bring the carrying
amount of the asset up to its recoverable
amount and (2) the amount necessary
to restore the assets of the CGU to their
pre-impairment carrying amounts less
subsequent amortization that would have
been recognized. Therefore, entities will
need to track not only the recognized
amount of the intangible asset (net of
accumulated amortization and impairment)
but also what the carrying amount would
have been had the impairment not been
recognized so as to limit the recovery to
that amount.
IFRS requires that indefinite-lived intan-
gibles be evaluated for impairment annu-
ally, but generally within the CGU. U.S.
GAAP requires that such assets be evalu-
ated independently each year to deter-
mine whether they are impaired. As a
consequence, acquired IPR&D assets and
other capitalized internal development
costs for incomplete projects not yet
available for use may end up with differ-
ent impairment conclusions under IFRS.
Retirements and Disposals
Under IFRS, when an intangible asset
is either (1) disposed of, or (2) no future
economic benefit is expected from its
use or disposal, the asset is derecognized
and the resulting gain or loss is the differ-
ence between the proceeds and the car-
rying amount of the intangible asset.
If an intangible asset is disposed of, the
IAS 18 Revenue criteria for recognizing
revenue from the sale of goods should
be applied to determine the date of
disposal. Consideration received for the
disposal is initially recorded at fair value,
which may involve discounting deferred
payments. If so, interest expense would
subsequently be recorded to reflect the
effective interest yield on the receivable.
Amortization of an intangible asset with a
finite useful life does not cease when the
intangible asset is no longer used unless
the asset has been fully amortized, has
been derecognized, or is classified as
held for sale. Non-current assets held for
sale are presented separately from other
assets in the balance sheet and are not
amortized or depreciated.
An intangible asset is only derecognized
prior to disposal when no future economic
benefits are expected from either its future
use or disposal. A reduction in expected
economic benefits is dealt with through
impairment assessments and write-downs
without derecognizing the asset. This dif-
ferentiation is important given that under
IFRS impairment charges can be later
reversed in some cases, whereas costs of
a derecognized intangible expensed would
not be reinstated regardless of changed
circumstances since the asset is deemed
to no longer exist.
Scenario 1: Company A is developing
proprietary data-warehouse software
for internal use through 20X7 with
expenditures totaling $500,000 capital-
ized during the development phase.
In 20X8, prior to completion of the
software, the company purchases and
implements a new enterprise resource
planning system that contains data-
warehousing functionality equivalent
to the in-process proprietary software.
The proprietary database is determined
to have no future economic benefits
(no sales value and no alternative use).
Therefore, in 20X8, the capitalized
software-development intangible asset
should be derecognized with a loss of
$500,000 recognized in profit or loss.
Scenario 2: Consider the same fact set
as Scenario 1, above, except that the
company estimates that the fair value
of the in-process database is $100,000.
Also, for purposes of this illustration,
assume the criteria for a held for sale
classification are not met, the company
does not plan to sell the database,
and there are no cash inflows directly
attributable to the database. Under this
approach, the intangible asset would be
tested for impairment at the CGU level
and any impairment loss would be rec-
ognized in accordance with IAS 36.
Assuming the initially capitalized costs also
were eligible for capitalization under SOP
98-1, the concepts and calculations above
are consistent with U.S. GAAP except that
in Scenario 2, the impairment test pursuant
to FAS 144 would use an undiscounted
cash flow screen, rather than a recoverable
amount as required under IAS 36.
First Time Adoption Considerations
IFRS contains a specific standard, IFRS 1
First-time Adoption of International
Accounting Standards that sets out
requirements on the first time adop-
tion of IFRS. IFRS 1 contains a general
requirement that all existing IFRS be
adopted through retrospective applica-
tion. However, IFRS 1 has certain man-
datory and elective reliefs from that
requirement. For multinational technology
companies with subsidiaries that have
transitioned to IFRS for local statutory
reporting, each entity that prepares finan-
cial statements (each reporting entity)
is a first time adopter in its separate or
sub-consolidated financial statements.
Therefore the accounting policies adopted
in the parents consolidated financial
statements are not constrained by IFRS
policies adopted by subsidiaries that have
previously transitioned to IFRS. However,
because IFRS generally requires that
accounting policies be applied consis-
tently throughout the organization, com-
panies will want to be cognizant of locally
set precedents to ensure consistent
application of policies at the consolidated
group level. To reduce the number of
consolidation entries, early in the transi-
tion process the group-level IFRS project
team may want to inventory the IFRS
policies adopted locally by subsidiaries
and consider driving more consistent
policies for subsidiaries that have not yet
adopted IFRS for statutory purposes.
KPMGs Insights into IFRS
10
publication
contains detailed practical guidance on
first-time IFRS adoption issues.
First time adoption issues related to R&D
and other intangibles include:
IPR&D: Where an entity under U.S.
GAAP recognized an IPR&D asset and
immediately expensed it for business
combinations prior to the effective date
of FAS 141R
11
and for asset acquisi-
tions, the entity would reverse this
write-off and recognize an intangible
asset unless the intangible asset will
have been fully amortized or aban-
doned under IFRS at the date of the
opening IFRS balance sheet. Any
adjustments are recognized to retained
earnings at the date of transition.
Intangible assets acquired separately:
Retrospective application of IAS 38 is
required for intangible assets acquired
separately outside of a business combi-
nation, for example patents or licenses.
In particular, companies will need to
consider whether the same conclusion
would be reached about whether the
asset is finite- or indefinite-lived and if
finite-lived, the useful life and amortiza-
tion method.
10
Insights into IFRS emphasizes the application of IFRS in practice and explains conclusions weve reached on interpretative
issues. The guide includes illustrative examples to elaborate on or clarify the practical application of the standards. Insights
into IFRS is available online to subscribers to KPMGs Accounting Research Online (www.aro.kpmg.com).
11
This applies in a business combination consummated prior to the adoption of FAS 141R and where the entity has elected
not to restate the business combination in its first-time adoption of IFRS.
Internally-generated intangible assets:
A first time adopter is required to recog-
nize in its opening IFRS balance sheet
all internally generated intangible assets
that qualify for recognition under IFRS.
However, IFRS 1 prohibits the use of
hindsight when determining whether to
recognize an asset and, if recognized,
its measurement upon first-time adop-
tion of IFRS. In our view, the constraint
on the use of hindsight coupled with
the requirements for first-time adoption
should be interpreted as requiring either
of the following:
Contemporaneous evidence that
all recognition requirements of
IAS 38 were considered at the
time the expenditure was incurred.
Expenditures should be capitalized
only from the date that it can be
demonstrated that this information
was available. Supporting historical
information could include timely docu-
mentation and approvals surrounding
product development milestone
attainment.
The existence of a process or control
system to ensure that no expenditure
of this nature is incurred without all
recognition requirements having been
considered (such as where the entity
had a well-managed product devel-
opment program that considered all
recognition criteria) and there is no
reason to believe that the normal
process or control systems were not
followed. Technology companies that
have extensive product development
management programs often have
control procedures and systems in
place that periodically assess the
probability of future economic ben-
efits. In our view, if an entity has
such a monitoring system and costs
incurred were captured contempo-
raneously, then this data likely will
satisfy the requirements for contem-
poraneous assessment of the prob-
ability of future economic benefits.
Closing Comments
The business environment continues to
change at unprecedented speed, and
all companies face greater risks in this
volatile period. In challenging economic
times, there is a business imperative for
robust R&D portfolio management to
enable enhanced R&D resource alloca-
tion decisions and ensure that return on
investment in R&D is maximized. Gaining
an early understanding of IFRSU.S.
GAAP similarities and differences can be
an important step in a successful transi-
tion to IFRS from U.S. GAAP.
We have highlighted some topics of par-
ticular relevance to the technology sector
in this publication. Contemplated changes
in R&D systems/processes and internal
controls should factor in requirements
under IFRS, such as ensuring that prog-
ress toward attainment of capitalization
criteria is monitored and costs can be
captured. In many cases, the impact will
vary by entity.
Future Developments
The IASB has on its agenda a research proj-
ect to address accounting issues related
to the initial and subsequent accounting
for identifiable intangible assets other
than those acquired in a business combi-
nation. The development of this project
is intended to be a joint project with the
FASB. The expected timing and initial type
of document to be published are yet to
be determined by the IASB, and we do not
expect any such decisions in the near term.
KPMG Can Help
As a global network of member firms
with experience in more than 1,500 IFRS
convergence projects around the world,
we can help ensure the issues are identi-
fied early and leading practices to better
avoid pitfalls are shared. KPMG has
extensive experience in the technology
industry and the capabilities needed to
support you throughout the IFRS assess-
ment and conversion process. Our global
network of technology industry experts can
help manage the IFRS conversion process,
including training company personnel and
transitioning financial reporting processes.
Our approach comprises four key work-
streams:
Accounting and reporting
Business impact
Systems, processes, and controls
People.
This approach helps ensure that manage-
ment is in control of the conversion pro-
cess and has the necessary information
to make appropriate decisions throughout
the conversion process.
Global Delivery
KPMG has a dedicated group of profes-
sionals drawn from KPMG member
firms around the world. Our approach is
applied uniformly to deliver consistent,
high-quality services for our clients across
geographies.
Contact Us
For more information about this whitepaper and how IFRS may affect your company,
please contact one of these KPMG professionals:
Gary Matuszak
Global Chair, Information,
Communications & Entertainment
650-404-4858
gmatuszak@kpmg.com
Jana Barsten
Audit Sector Leader, Electronics,
Software & Services
650-404-4849
jbarsten@kpmg.com
Scott Decker
National IFRS Leader, Audit
817-339-1221
sldecker@kpmg.com
Tom Lamoureux
Global Advisory Sector Leader,
Electronics, Software & Services
650-404-5052
tlamoureux@kpmg.com
!
Appendix A: Summary of Accounting
for Intangible Assets
IDENTIFIABLE INTANGIBLES
ACQUIRED INTERNALLY GENERATED
R
E
C
O
G
N
I
T
I
O
N
Criteria Satisfy 4 elements:
identifable
1
controlled
future economic benefts probable
measured reliably
Satisfy 4 elements:
identifable
1

2
controlled
future economic benefts probable
measured reliably
Additional recognition criteria
Research phase costs are expensed
Development phase costs are capitalized if certain
criteria are met
M
E
A
S
U
R
E
M
E
N
T
Initial measurement At cost
Intangibles acquired in a business combination are
measured at fair value at acquisition date
3
At cost (i.e., sum of expenditure incurred from the
date when the intangible asset frst meets the
recognition criteria)
Subsequent measurement Cost less accumulated amortization and accumulated
impairment losses
4
Can revalue to fair value only where active market for
the asset exists
5
Cost less accumulated amortization and accumulated
impairment losses
4
Can revalue to fair value only where active market for
the asset exists
5
A
M
O
R
T
I
Z
A
T
I
O
N
Finite life
5
Amortize on a systematic basis over useful
liferefecting pattern of economic beneft
Review amortization period and method at least at
end of each reporting period
Consider residual value
7
Amortize on a systematic basis over useful
liferefecting pattern of economic beneft
Review amortization period and method at least at
end of each reporting period
Consider residual value
7
Indenite life
6
No amortization
Useful life reviewed at each reporting period
No amortization
Useful life reviewed at each reporting period
Not yet available for use N/A No amortization
I
M
P
A
I
R
M
E
N
T
Finite life Test for impairment whenever there is an indicator of
impairment
Test for impairment whenever there is an indicator of
impairment
Indenite life Test for impairment annually and whenever there is
an indicator of impairment present
Test for impairment annually and whenever there is
an indicator of impairment present
Not yet available for use N/A Annual impairment testing
Internally generated brands, mastheads, publishing titles, customer lists, and similar items CANNOT be recognized as intangible assets.
!
Source: IAS 38 Intangible Assets, IFRS 3 Business Combinations, IAS 36 Impairment of Assets.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such
information without appropriate professional advice after a thorough examination of the particular situation. Additional information may be obtained from our offices, 2009.
Source: IAS 38 Intangible Assets, IFRS 3 Business Combinations, IAS 36 Impairment of Assets.
FURTHER GUIDANCE ON INTERNALLY GENERATED INTANGIBLES
Research and development dened
Research Original and planned investigation undertaken with
the prospect of gaining new scientifc or technical
knowledge and understanding
Development Application of research fndings or other knowledge
to a plan or design for the production of new or
substantially improved materials, devices, products,
processes, systems, or services before the start of
commercial production or use
Refer to IAS 38 par. 56 and IAS 38 par. 59 for examples of research and
development activities respectively.
Development phase
Intangible asset arising from development shall only be recognized if
and only if the entity can demonstrate ALL of the following:
Technical feasibility of completing the intangible asset so that it will be
available for use or sale
Intention to complete the intangible asset and use or sell it
Ability to use or sell the intangible asset
How the intangible asset will generate probable future economic
benefts
The availability of adequate technical, fnancial and other resources to
complete the development and to use or sell the intangible asset
Its ability to measure reliably the expenditure attributable to the
intangible asset during its development
NB: If research phase cannot be distinguished from the development
phase, entity must treat the expenditure on that project as if it were
incurred in research phase only and expense.
Capitalize versus Expense
CAPITALIZE
Directly attributable costs
Costs of materials and
services used or consumed
Costs of employee benefts
Other directly related costs
Overheads that are necessary
to generate the asset
Borrowing costs in certain
cases (refer to IAS 23 for
guidance)
NB: An entity cannot reinstate
costs previously expensed.
EXPENSE
Selling, administrative, and
other general overhead costs
Ineffciencies and initial operating
losses
Expenditure on training staff to
operate the asset
Start-up costs (establishment,
pre-opening, pre-operating)
Advertising and promotional
activities
Costs of relocating, reorganizing,
and redeploying assets
FOOTNOTES
1
Intangible
asset
An identifable non-monetary asset without
physical substance
Must be identifable to distinguish it from
goodwill (if acquired in a business combination)
2
Identiability
criterion
Is separablecapable of being separated or divid-
ed from the entity and sold, transferred, licensed,
rented, or exchanged either individually or together
with a related contract, asset, or liability, OR
Arises from contractual or other legal rights,
regardless of whether those rights are transferable
or separable from the entity or from other rights
and obligations
3
Intangibles
acquired in a
business
combination
Refer to IAS 3 Illustrative Examples for examples
of identifable intangibles that can be brought to
account on acquisition.
Acquirer recognizes an intangible asset at
acquisition providing it meets recognition criteria
irrespective of whether the asset was previously
recognized by the acquiree.
4
Subsequent
expenditure
The nature of intangible asset is such that, in many
cases, there are no additions or replacements
of a part. Therefore, only rarely will subsequent
expenditurei.e., expenditure incurred after the
initial recognition of an intangible assetbe recog-
nized in the carrying amount of an asset.
NB: Subsequent expenditure on internally generated
brands, mastheads, etc. must always be expensed.
5
Active market A market in which all of the following conditions exist:
The items traded in the market are homogeneous
Willing buyers and sellers can normally be found
at any time
Prices are available to the public
6
Finite vs
indenite
useful life
When determining whether useful life is fnite or
indefnite consider such factors as:
Typical product life cycles
Period of control (renewable rights)
Technical, technological, and commercial
obsolescence
Changes in market demand
Refer to IAS 38 par. 88 - 90 and Illustrative
Examples for further guidance.
7
Residual value The depreciable amount of an intangible asset
with a fnite useful life is determined after
deducting its residual value.
The residual value of a fnite intangible asset will
be assumed to be zero except if certain criteria
are met (refer to IAS 38 par. 100).
Appendix B: Summary of IFRS Compared
to U.S. GAAP Expenditures for R&D and
Related Intangibles
The table below compares IFRS and U.S. GAAP for selected areas of accounting for
expenditures for research and development activities and related intangible assets.
12
IFRS U.S. GAAP
An intangible asset is an identifiable non-monetary asset with-
out physical substance. To meet the definition of an intangible
asset, an item must lack physical substance and must be:
Identifiable;
Non-monetary; and
Controlled by the entity and expected to provide future eco-
nomic benefits to the entity (i.e., it must meet the definition
of an asset).
Under U.S. GAAP an intangible asset is an asset (not including
a financial asset) that lacks physical substance. Although this
definition differs from IFRSs, generally we would not expect
differences in practice.
An intangible asset is recognized when:
1. It is probable that future economic benefits that are attribut-
able to the asset will flow to the entity; and
2. The cost of the asset can be measured reliably.
Under U.S. GAAP an acquired identifiable intangible asset is
recognized when:
1. It is probable that future economic benefits that are attribut-
able to the asset will flow to the entity, like IFRSs; however,
unlike IFRSs, this is part of the definition of asset rather than
a recognition criterion; and
2. Fair value can be measured with sufficient reliability.
An intangible asset is recognized initially at cost. The cost of an
intangible asset acquired in a separate transaction is the cash
paid or the fair value of any other consideration given. The cost
of an intangible asset acquired in a business combination is its
fair value. The cost of an internally generated intangible asset
includes the directly attributable expenditure of preparing the
asset for intended use. The principles discussed in respect of
property, plant, and equipment apply equally to the recognition
of intangible assets.
Generally an identifiable intangible is recognized initially at fair
value; however, generally we would not expect a difference
from IFRSs in practice. As an exception, internally developed
intangible assets (i.e., direct-response advertising, software
developed for internal use, and software developed for sale to
third parties only) are recognized initially by accumulating costs
incurred after the capitalization criteria (discussed below) are
met; however, the capitalization criteria differ for each category
and they differ from IFRSs (see below).
The cost of an intangible asset acquired in a separate transac-
tion is the fair value of any consideration given.
Unlike IFRSs, an identifiable intangible asset is measured initially
based on fair value. However, for an identifiable intangible asset
acquired in a separate transaction, fair value generally is measured
based on the fair value of any consideration given, like IFRSs.
Research is original and planned investigation undertaken with
the prospect of gaining new knowledge and understanding.
Development is the application of research findings or other
knowledge to a plan or design for the production of new or
substantially improved materials, products, processes etc.
Development does not include the maintenance or enhance-
ment of ongoing operations.
Research is planned search or critical investigation aimed at the
discovery of new knowledge with the hope that such knowl-
edge will be useful in developing a new product or service or
a new process or technique or in bringing about a significant
improvement to an existing product, service, process, or tech-
nique. Development is the translation of research findings or
other knowledge into a plan or design for a new product, ser-
vice, process, or technique whether intended for sale or use.
Because the precise language under U.S. GAAP differs from
IFRSs, it is possible that differences may arise in practice.
12
For more comparative information for intangible assets, refer to KPMGs publication IFRS Compared to U.S. GAAP,
KPMG LLP (U.S.) and KPMG IFRG Limited, a U.K. company, limited by guarantee, 2009.
IFRS U.S. GAAP
Research costs generally are expensed as incurred. Like IFRSs, research costs generally are expensed as incurred.
If an internally generated intangible asset arises from the devel-
opment phase of a project, then directly attributable expenditure
is capitalized from the date that the entity is able to demonstrate:
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 use or sell it;
Its ability to use or sell the intangible asset;
How the intangible asset will generate probable future eco-
nomic benefits; the entity must demonstrate the existence of
a market for the output of the intangible asset or the intangi-
ble asset itself or, if it is to be used internally, the usefulness
of the intangible asset;
The availability of adequate technical, financial and other
resources to complete the development of, and to use or sell,
the intangible asset; and
Its ability to measure reliably the expenditure attributable to
the intangible asset during its development.
Unlike IFRSs, with the exception of certain internally developed
computer software and direct-response advertising (see below),
all other internal development costs are expensed as incurred.
In-process research and development acquired in a business
combination is recognized initially at fair value. Subsequent to
initial recognition, the intangible asset is accounted for following
the general principles outlined in this Appendix.
Like IFRSs, in-process research and development acquired in a
business combination is recognized initially at fair value. Unlike
IFRSs, subsequent to initial recognition, the intangible asset
is classified as indefinite-lived (regardless of whether it has an
alternative future use) until the completion or abandonment of
the associated research and development efforts, and is subject
to annual impairment testing during the period these assets are
considered indefinite-lived. The costs incurred to complete the
project are expensed as incurred.
Subsequent expenditure to add to, replace part of, or service an
intangible asset is recognized as part of the cost of an intangible
asset if an entity can demonstrate that the item meets:
The definition of an intangible asset (see above); and
The general recognition criteria for intangible assets (see above).
The general recognition criteria for internally generated intangi-
ble assets are applied to subsequent expenditure on in-process
research and development projects acquired separately or in a
business combination. Therefore capitalization after initial recog-
nition is limited to development costs that meet the recognition
criteria (see above).
Under U.S. GAAP expenditure incurred subsequent to the
completion or acquisition of an intangible asset is not capitalized
unless it can be demonstrated that the expenditure increases
the utility of the asset. While this wording differs from IFRSs,
generally we would not expect differences in practice.
Unlike IFRSs, subsequent expenditure on internal-use software
(see below) that results in additional functionality is considered
to be a separate project and costs incurred during the applica-
tion development stage are capitalized. Unlike IFRSs, there are
more limits under U.S. GAAP regarding the types of costs that
are capitalized.
(Continued)
IFRS U.S. GAAP
Software developed for sale
There are no special requirements for software developed for sale.
Costs of software developed for sale are accounted for following
the general principles for internally generated intangible assets.
Software developed for sale
Unlike IFRSs, there are special requirements for software devel-
oped to be sold. Costs incurred internally in creating a computer
software product to be sold, leased, or otherwise marketed as a
separate product or as part of a product or process are research
and development costs that are expensed as incurred until
technological feasibility has been established for the product.
Technological feasibility is established upon completion of a
detailed program and product design, or in the absence of the
former, completion of a working model whose consistency
with the product design has been confirmed through testing.
Thereafter all software development costs incurred up to the
point of general release of the product to customers are capital-
ized and reported subsequently at the lower of amortized cost
and net realizable value. Although the technological feasibility
capitalization threshold is similar to the general recognition prin-
ciples for internally generated intangible assets under IFRSs,
because the precise language under U.S. GAAP differs from
IFRSs, it is possible that differences may arise in practice.
Internal-use software
There are no special requirements for the development of
internal-use software. The costs of internal-use software are
accounted for under the general principles for internally gener-
ated intangible assets or, in the case of purchased software,
following the general requirements for intangible assets.
Internal-use software
Unlike IFRSs, there are special requirements for the development
of internal-use software. Costs incurred for internal-use software
that is acquired, internally developed, or modified solely to meet
the entitys internal needs are capitalized depending on the stage
of development. The stages of software development are the
preliminary project stage, application development stage and
post-implementation/operation stage. Costs incurred during the
preliminary project stage and the post-implementation/operation
stage are expensed as incurred.
Costs incurred in the application development stage that are
capitalized include only:
External direct costs of materials and services consumed in
developing or obtaining internal-use software;
Payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-
use software project; and
Interest incurred during development.
General administrative and overhead costs are expensed as
incurred.
The application development stage, which is necessary to com-
mence capitalizing costs under U.S. GAAP, often will occur
sooner than the date that the criteria for capitalizing develop-
ment costs under IFRSs are met. Therefore both the timing of
commencing capitalization and the amounts capitalized are likely
to be different from IFRSs.
Website development costs
Costs associated with websites developed for advertising or pro-
motional purposes are expensed as incurred. For other websites,
expenditure incurred during the application and infrastructure
development stage, the graphical design stage and the content
development stage are capitalized if the criteria for capitalizing
development costs are met. The costs of developing content for
advertising or promotional purposes are expensed as incurred.
Website development costs
Unlike IFRSs, website development costs are subject to the same
general capitalization criteria as internal-use software. Therefore costs
incurred during the application development stage are capitalized.
U.S. GAAP provides detailed guidance on the activities deemed to be
within the application development stage for website development.
Unlike IFRSs, U.S. GAAP does not provide guidance on the account-
ing for the costs of developing content for websites, and therefore
differences from IFRSs may arise in practice.
Appendix C: IFRS Accounting Disclosures
for R&D and Related Intangible Assets
The extracts below illustrate examples of public company disclosures for R&D and related intangible assets.
In-process research and development
acquired in business combinations:
Alcatel-Lucent
2008 Annual Report [extract]
With regard to business combinations, a
portion of the purchase price is allocated to
in-process research and development projects
that may be signifcant. As part of the process
of analyzing these business combinations,
Alcatel-Lucent may make the decision to buy
technology that has not yet been commercial-
ized rather than develop the technology inter-
nally. Decisions of this nature consider existing
opportunities for Alcatel-Lucent to stay at the
forefront of rapid technological advances in the
telecommunications-data networking industry.
The fair value of in-process research and devel-
opment acquired in business combinations is
usually based on present value calculations
of income, an analysis of the projects accom-
plishments and an evaluation of the overall con-
tribution of the project, and the projects risks.
The revenue projection used to value in-
process research and development is based on
estimates of relevant market sizes and growth
factors, expected trends in technology, and the
nature and expected timing of new product in-
troductions by Alcatel-Lucent and its competi-
tors. Future net cash ows from such projects
are based on managements estimates of such
projects cost of sales, operating expenses and
income taxes.
The value assigned to purchased in-process
research and development is also adjusted to
reect the stage of completion, the complexity
of the work completed to date, the diffculty of
completing the remaining development, costs
already incurred, and the projected cost to
complete the projects.
Such value is determined by discounting the
net cash ows to their present value. The
selection of the discount rate is based on
Alcatel-Lucents weighted average cost of capi-
tal, adjusted upward to reect additional risks
inherent in the development lifecycle.
Capitalized development costs considered as
assets (either generated internally and capital-
ized or reected in the purchase price of a
business combination) are generally amortized
over 3 to 10 years.

Capitalization of internal or acquired
development costs:
Koninklijke Philips Electronics NV
The Company expenses all research costs
as incurred. Expenditure on development
activities, whereby research fndings are
applied to a plan or design for the production
of new or substantially improved products
and processes, is capitalized as an intangible
asset if the product or process is technically
and commercially feasible and the Company
has suffcient resources and the intention to
complete development.
The development expenditure capitalized
includes the cost of materials, direct labour
and an appropriate proportion of overheads.
Other development expenditures and expen-
ditures on research activities are recognized
in the income statement as an expense as
incurred. Capitalized development and ex-
penditure is stated at cost less accumulated
amortization and impairment losses. Amortiza-
tion of capitalized development expenditure
is charged to the income statement on a
straight-line basis over the estimated useful
lives of the intangible assets. The useful lives
for the intangible development assets are
from three to fve years.
Costs relating to the development and purchase
of software for both internal use and software
intended to be sold are capitalized and subse-
quently amortized over the estimated useful life
of three years.
Impairment assessments for capitalized
development costs:
Nokia Corp
During the development stage, manage-
ment must estimate the commercial and
technical feasibility of these projects as well
as their expected useful lives. Should a prod-
uct fail to substantiate its estimated feasibility
or life cycle, we may be required to write off
excess development costs in future periods.
Whenever there is an indicator that develop-
ment costs capitalized for a specifc project
may be impaired, the recoverable amount of
the asset is estimated. An asset is impaired
when the carrying amount of the asset ex-
ceeds its recoverable amount. The recoverable
amount is defned as the higher of an assets
net selling price and value in use. Value in use
is the present value of discounted estimated
future cash ows expected to arise from the
continuing use of an asset and from its dis-
posal at the end of its useful life. For projects
still in development, these estimates include
the future cash outows that are expected to
occur before the asset is ready for use
Impairment reviews are based upon our
projections of anticipated discounted future
cash fows. The most signifcant variables in
determining cash ows are discount rates,
terminal values, the number of years on
which to base the cash ow projections, as
well as the assumptions and estimates used
to determine the cash inows and outows.
Management determines discount rates to be
used based on the risk inherent in the related
activitys current business model and industry
comparisons.
Terminal values are based on the expected life
of products and forecasted life cycle and fore-
casted cash ows over that period. While we
believe that our assumptions are appropriate,
such amounts estimated could differ materi-
ally from what will actually occur in the future.
Appendix D: Technical References
U.S. GAAP References
Financial Accounting Standards Board
(FASB): FAS 2, Accounting for Research
and Development Costs
(FASB): FAS 34, Capitalization of
Interest Cost
(FASB): FAS 86, Accounting for the
Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed
Financial Accounting Standards
Board (FASB): FAS 141R, Business
Combinations
(FASB): FAS 142, Goodwill and Other
Intangible Assets
(FASB): FAS 144, Accounting for the
Impairment or Disposal of Long-Lived
Assets
(FASB): FAS Implementation Guide
Q&A 86, Computer Software Guidance
on Applying Statement 86
Financial Accounting Standards
Board Staff Position: FSP FAS 142-3,
Determination of the Useful Life of
Intangible Assets
AICPA Statement of Position (SOP)
97-2, Software Revenue Recognition
AICPA Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer
Software Developed or Obtained for
Internal Use
Emerging Issues Task Force (EITF) 00-2,
Accounting for Web Site Development
Costs
Accounting for Nonrefundable Advance
Payments for Goods or Services
Received for Use in Future Research
and Development Activities
Research and Development Assets
Acquired in an Asset Acquisition
IFRS References
International Accounting Standards
Board (IASB): IAS 16 Property, Plant
and Equipment
Board (IASB): IAS 17 Leases
Board (IASB): IAS 18 Revenue
Board (IASB): IAS 23 Borrowing Costs
Board (IASB): IAS 36 Impairment of
Assets
Board (IASB): IAS 38 Intangible Assets
Board (IASB): IFRS 1 First-time Adoption
of International Accounting Standards
Board (IASB): IFRS 3 (2008) Business
Combinations
Board (IASB): IFRS 5 Non-current
Assets Held For Sale and Discontinued
Operations
Standing Interpretations Committee:
SIC 32 Intangible AssetsWeb Site Costs
About the Authors
Gary Matuszak is KPMGs Global Chair Information, Communications & Entertainment
with additional responsibility for the Global Electronics, Software & Services practice. Gary
has devoted virtually his entire career to serving the needs of fast-growth multinational
technology companies. He is experienced with both structuring and executing due dili-
gence on mergers and acquisitions for global organizations. Gary has been instrumental in
developing industry positions on emerging issues that affect the software industry, and he
served as the Chairman of the AICPA Software Revenue Recognition Task Force. Gary is
also a frequent speaker on topics impacting the technology industry.
Jana Barsten is KPMGs Audit Sector Leader for the Electronics, Software & Services
practice. She has worked with global technology companies for more than twenty years,
with a primary focus on the software industry. Janas clients have included many of the
largest global software companies, and she has taught numerous courses on software
revenue recognition in the United States and internationally.
Dan Wilson is a partner in KPMG Canadas Electronics, Software & Services Audit
practice. He has focused on the technology industry for more than ten years, advising
leading global technology SEC registrants on complex accounting matters under U.S.
and Canadian GAAP, and more recently IFRS. Dan is particularly experienced in advis-
ing both audit and non-audit clients on revenue recognition, and he provides training
internationally on this subject.
Margaret Gonzales is a U.S. partner currently on secondment in KPMGs Mannheim,
Germany office. Her clients have included many of the worlds leading technology
companies. Prior to her secondment, she was a member of KPMGs Department
of Professional Practice (DPP) assisting engagement teams and clients on complex
IFRS and U.S. GAAP accounting matters. Margaret co-authored KPMG publications
Share-Based Payment, An Analysis of Statement No. 123R and Software Revenue
Recognition. In addition, she instructs IFRS technical trainings for internal and external
audiences and has contributed to KPMG IFRS publications such as IFRS Compared
to U.S. GAAP.
Contributors
We acknowledge the significant contribution of the following individuals, who assisted
in developing this publication:
Tom Adkins
Brian Allen
Steve Douglas
Phil Dowad
Michael Hayes
Charles Lynch
Paul Munter
Patricia Rios
38
KPMG LLP, the audit, tax, and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG
International. KPMG Internationals member firms have 137,000 professionals, including more than
7,600 partners, in 144 countries.
The information contained herein is of a general nature and is not intended to address the circumstances of
any particular individual or entity. Although we endeavor to provide accurate and timely information, there
can be no guarantee that such information is accurate as of the date it is received or that it will continue to
be accurate in the future. No one should act on such information without appropriate professional advice
after a thorough examination of the particular situation.
KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International,
a Swiss cooperative. 080810
us.kpmg.com

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