Ind AS 38 prescribes the accounting treatment for intangible assets that are not dealt with specifically in another standard — identifiable non-monetary assets without physical substance, such as patents, licences, software, and certain development costs. As value increasingly resides in intellectual property rather than physical assets, the recognition, measurement, and amortisation of intangibles matter more and more. Ind AS 38 shares the cautious recognition framework of AS 26 but differs importantly in allowing indefinite useful lives (non-amortised, impairment-tested) and a revaluation model.
Objective and scope
The objective is to prescribe the accounting treatment for intangible assets not dealt with specifically in another standard. An intangible asset is an identifiable non-monetary asset without physical substance. The standard requires recognition only where specified criteria are met, and prescribes measurement of the carrying amount and disclosures. Certain intangibles are outside its scope where covered by other standards — for example, intangible assets held for sale in the ordinary course (Ind AS 2), deferred tax assets (Ind AS 12), goodwill acquired in a business combination (Ind AS 103), and financial assets (Ind AS 109).
Recognition and initial measurement
An intangible asset is recognised if, and only if, it is probable that the expected future economic benefits attributable to the asset will flow to the entity, and the cost of the asset can be measured reliably. The item must also meet the definition of an intangible asset — in particular it must be identifiable (separable, or arising from contractual or legal rights), the entity must control it, and it must give rise to future economic benefits. Identifiability distinguishes an intangible asset from goodwill.
An intangible asset is measured initially at cost. For a separately acquired intangible, cost comprises the purchase price and directly attributable costs of preparing the asset for its intended use. An intangible acquired in a business combination is recognised at fair value at the acquisition date if it is identifiable, separately from goodwill.
Internally generated intangibles — research and development
Ind AS 38, like AS 26, is cautious about internally generated intangibles and draws a firm line between research and development:
Research phase expenditure is recognised as an expense when incurred — no intangible asset from research is recognised, because at that stage the entity cannot demonstrate that an asset generating probable future benefits exists.
Development phase expenditure gives rise to an intangible asset only if the entity can demonstrate all of: the technical feasibility of completing the asset for use or sale; its intention to complete and use or sell it; its ability to use or sell it; how the asset will generate probable future economic benefits; the availability of adequate technical, financial, and other resources to complete it; and its ability to measure reliably the expenditure attributable to the asset during development. Only then is development expenditure capitalised; otherwise it is expensed.
Internally generated goodwill is not recognised, and internally generated brands, mastheads, publishing titles, customer lists, and similar items are not recognised, because their cost cannot be distinguished from the cost of developing the business as a whole.
Useful life — finite and indefinite
This is the most significant area of difference from AS 26. Under Ind AS 38, an entity assesses whether the useful life of an intangible asset is finite or indefinite:
An intangible asset with a finite useful life is amortised on a systematic basis over that life, with the method reflecting the pattern of consumption of benefits (straight-line if the pattern cannot be reliably determined), and residual value generally assumed to be zero (with limited exceptions). The amortisation period and method are reviewed at least at each financial year-end.
An intangible asset with an indefinite useful life is not amortised. "Indefinite" does not mean infinite — it means that, based on an analysis of all relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows. Instead of amortisation, the asset is tested for impairment at least annually (under Ind AS 36) and whenever there is an indication of impairment, and the indefinite-life assessment is reviewed each period.
Crucially, Ind AS 38 has no ten-year presumption of the kind AS 26 applies. This is a substantive difference: an intangible that would be amortised over (at most) around ten years under AS 26 might, under Ind AS 38, be assessed as having an indefinite life and not amortised at all (subject to annual impairment testing).
The revaluation model
After recognition, an entity chooses either the cost model (cost less accumulated amortisation and impairment) or the revaluation model as its policy for a class of intangible assets. Under the revaluation model, an intangible asset is carried at a revalued amount (fair value at the date of revaluation less subsequent amortisation and impairment) — but only where fair value can be determined by reference to an active market for the asset. Because active markets for intangibles are rare, the revaluation model is seldom available in practice, but its existence is a difference from AS 26, which does not offer it. Revaluation increases are recognised in other comprehensive income (a revaluation surplus), consistent with the OCI concept.
Disclosure
Disclosures include, for each class of intangible assets, whether useful lives are indefinite or finite (and, if finite, the useful lives or amortisation rates); the amortisation methods; the gross carrying amount and accumulated amortisation at the beginning and end of the period; and a reconciliation of the carrying amount showing additions, disposals, amortisation, impairment losses, revaluations, and other changes. For an intangible assessed as having an indefinite useful life, the carrying amount and the reasons supporting the indefinite-life assessment are disclosed. Research and development expenditure recognised as an expense in the period is disclosed.
A brief illustration
A company acquires a patent for ₹50 lakh — a separately acquired intangible with a finite useful life of 10 years, amortised at ₹5 lakh a year. It also acquires, in a business combination, a well-established brand that it assesses as having an indefinite useful life (no foreseeable limit to the cash flows it will generate); under Ind AS 38 this brand is not amortised but is tested for impairment annually. Its internal research costs are expensed; development costs are capitalised once all six conditions are met. Under AS 26, by contrast, the brand could not be assigned an indefinite life — everything would be amortised, subject to the rebuttable ten-year presumption.
How Ind AS 38 compares with AS 26
Ind AS 38 and AS 26 share the same recognition criteria, the same research-versus-development distinction, and the same prohibition on recognising internally generated goodwill and brands. The significant differences concern useful life and revaluation. AS 26 applies a rebuttable ten-year maximum useful life presumption and requires all intangibles to be amortised. Ind AS 38 distinguishes between finite useful lives (amortised) and indefinite useful lives (not amortised, tested for impairment annually), with no ten-year presumption. Ind AS 38 also permits a revaluation model (where an active market exists), which AS 26 does not. These differences can produce materially different carrying amounts and expense profiles for intangibles such as acquired brands.
Common pitfalls
Recurring issues include capitalising research expenditure; capitalising development expenditure without demonstrating all the required conditions; recognising internally generated brands, customer lists, or goodwill; treating an indefinite-life intangible as if it must be amortised (or failing to test an indefinite-life intangible for impairment annually); and applying the revaluation model without an active market.
Why this is cleaner on a unified system
Accounting for intangible assets — tracking cost, distinguishing research from development, capitalising eligible development costs, amortising finite-life assets, and impairment-testing indefinite-life assets — is more reliable when the project cost records and the ledger sit in one connected system. When development expenditure is captured against the project in a single source of truth and flows into the asset records and the accounts, applying the recognition conditions, determining useful lives, amortising or impairment-testing correctly, and producing the reconciliations for disclosure is more straightforward than reconciling separate project ledgers against the accounts.
This article is a detailed educational summary of Ind AS 38 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of Ind AS 38 as notified under the Companies Act before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.