Research and development costs under IAS 38

Software companies, app developers, carmakers and drug developers all spend heavily on research and development, and IAS 38 decides how much of it reaches the balance sheet. This guide explains the two phases, the six capitalisation criteria in practice, and works through the costs of building a mobile app.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. 3 minute read.

Short answer

Under IAS 38, research and development costs are split into two phases. Research costs, incurred to gain new knowledge, are always expensed. Development costs, incurred applying that knowledge to design and build a new product or process, are capitalised as an intangible asset once the company can demonstrate six criteria: technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, adequate resources, and reliable measurement. If the phases cannot be separated, everything is treated as research.

At a glance

Research phase
Always expensed
Development phase
Capitalised once six criteria are met
Before criteria met
Expensed, never reinstated
Cannot separate phases
Treat as research
Amortisation
From when available for use
US GAAP
Generally expensed
Research and development costs under IAS 38Research phase: Always expensed; Development phase: Capitalised once six criteria are met; Before criteria met: Expensed, never reinstated; Cannot separate phases: Treat as research; Amortisation: From when available for use; US GAAP: Generally expensed.KEY FACTS AT A GLANCEResearch and development costs under IAS 38Research phaseAlways expensedDevelopment phaseCapitalised once sixcriteria are metBefore criteria metExpensed, neverreinstatedCannot separate phasesTreat as researchAmortisationFrom when available foruseUS GAAPGenerally expensedTax BakersResearch and development costs under IAS 38Research phase: Always expensed; Development phase: Capitalised once six criteria are met; Before criteria met: Expensed, never reinstated; Cannot separate phases: Treat as research; Amortisation: From when available for use; US GAAP: Generally expensed.KEY FACTS AT A GLANCEResearch and development costsunder IAS 38Research phaseAlways expensedDevelopment phaseCapitalised once six criteria are metBefore criteria metExpensed, never reinstatedCannot separate phasesTreat as researchAmortisationFrom when available for useUS GAAPGenerally expensedTax Bakers
Key facts at a glance, as set out in this guide.

How are research and development costs treated?

Expense or capitalise?Expense or capitalise?Is the work in the developmentphase, not research?NoExpense:researchYesCan all six criteria bedemonstrated now?NoExpense untilthey areYesCapitalise as an intangible asset
Costs before the criteria are met stay expensed.
Research phase: expensedDevelopment phase: capitalised if criteria met
Activities to obtain new knowledgeDesign, construction and testing of prototypes and models
Searching for and evaluating applications of research findingsDesign of tools, jigs and moulds involving new technology
Formulating and evaluating possible alternatives for new productsBuilding a pilot plant not yet economically feasible for production
Concept studies and early feasibility workDesigning and testing a chosen alternative for new materials, devices or systems

What do the six capitalisation criteria mean in practice?

  1. Technical feasibility: a working design, prototype or proof of concept shows the product can be completed.
  2. Intention to complete: management has approved the project and budget.
  3. Ability to use or sell: the company has the rights and channels to use or sell it.
  4. Probable future economic benefits: a market exists for the output, or the asset will be useful internally.
  5. Adequate resources: funding, staff and technical resources are available, evidenced by a business plan.
  6. Reliable measurement: the costs can be tracked to the project, for example through time sheets.

A worked example: developing an app

A company develops a mobile app over one year.

ActivityCUTreatment
Market research and concept work50,000Expensed: research
Technical feasibility study and early prototypes30,000Expensed: before criteria met
Design, coding and testing after the project was approved and feasibility shown220,000Capitalised: development
Launch marketing40,000Expensed
Bug fixes and maintenance after launch30,000Expensed

The intangible asset of 220,000 is amortised from launch over its expected useful life, say three years, 73,333 a year, and tested for impairment when there are indicators. Costs of adding significant new features later may also be capitalised if the criteria are met for that development.

Which costs can be capitalised?

Only costs incurred after the criteria are met count, and only those directly attributable to creating, producing and preparing the asset for use: employee costs of developers, materials and services used, fees to register legal rights, and amortisation of patents used. Not selling and administrative overheads, training, inefficiencies or initial operating losses.

How should development costs be tracked?

With a project code for each development project, time records for developers showing hours on capitalisable work, and documented approval of the date when the six criteria were met. Without reliable records, the sixth criterion fails and costs must be expensed.

How does agile development fit the criteria?

In agile development, features are designed and built in short cycles, so the criteria are assessed for each feature or release rather than once for the whole product. Discovery and early prototyping sprints are usually research; sprints building and testing an approved feature for a product already shown to be feasible can be development. Capitalisation stops when the feature is ready for use, and amortisation starts from that date.

Why do some companies capitalise little?

In pharmaceuticals, regulatory approval is usually needed before future benefits are probable, so most development is expensed even under IFRS. In fast-moving software, technical feasibility may be reached late. Auditors look for contemporaneous evidence that the criteria were met, not reasoning added afterwards.

Where to go next

See IAS 38 explained, software and cloud computing costs and IAS 38 vs ASC 730.

Need help applying the standards?

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Questions people ask

How are research and development costs treated under IAS 38?

Research costs are expensed; development costs are capitalised once six criteria are met, including technical feasibility and probable future economic benefits.

Can development costs expensed earlier be capitalised later?

No. Costs expensed before the criteria were met cannot be reinstated as an asset.

What happens if research and development phases cannot be separated?

All the expenditure is treated as research and expensed.

Are app development costs capitalised under IFRS?

Development costs after the six criteria are met are capitalised; research, early feasibility work, marketing and maintenance are expensed.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 38 Intangible Assets

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 38IAS 38 intangible assets explainedIAS 38Software, websites and cloud computing costsIFRS vs US GAAPIAS 38 vs ASC 730: research and development costs

More in IAS 38

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This guide is general information. It is not tax or legal advice for your situation.