Intangible Assets
Treatment under IFRS
Internally generated intangible assets in the development phase must be capitalised once specific criteria are met. Research expenditure is expensed as incurred.
- Mandatory capitalisation in the development phase once the six criteria are met (IAS 38.57).
- Goodwill from business combinations: capitalised and not amortised (impairment-only testing under IAS 36).
- Optional revaluation model for intangible assets traded in an active market (rarely applicable).
- Extensive disclosure requirements by class of intangible asset.
Treatment under German GAAP (HGB)
Under German GAAP, internally generated intangible fixed assets may be capitalised (an option since BilMoG 2009), except internally generated goodwill. Purchased (derivative) goodwill must be capitalised.
- § 248 (2) HGB: an option to capitalise internally generated intangible fixed assets.
- § 255 (4) HGB: purchased goodwill must be capitalised and amortised systematically over its useful life.
- § 253 (1) HGB: cost ceiling; no revaluation model.
Key differences
- No mandatory capitalisation in the development phase – only an option under § 248 (2) HGB.
- Internally generated goodwill may not be capitalised under German GAAP.
- Purchased goodwill: HGB requires systematic amortisation, whereas IFRS applies impairment-only testing (no amortisation).
- Capitalised internally generated intangibles are subject to a restriction on distribution (dividend block) under § 268 (8) HGB.
Example
Worked example
Assumptions: A company develops a new product in Year 1. Development expenditure €600,000; the capitalisation criteria of IAS 38.57 are met from the start of the development phase. Useful life 5 years, straight-line amortisation from Year 2 (once available for use). Research costs are expensed immediately under both systems and are excluded here. IFRS: capitalisation is mandatory. HGB: in this example the company does not exercise the option in § 248 (2) HGB and expenses the development costs immediately (a common, prudence-driven choice). All amounts in euros.
Step 1 – Classification: research vs development
- Research phase: expenditure is expensed immediately under both systems (IAS 38.54; HGB prohibits capitalisation).
- Development phase: IFRS – mandatory capitalisation once the six criteria are met (IAS 38.57). HGB – capitalisation option (§ 248 (2) HGB).
Step 2 – Income-statement effect (expense per year)
Under IFRS the expense is spread over the useful life (amortisation from Year 2); under HGB (option not elected) it falls entirely in Year 1.
| Year | IFRS expense | HGB expense | Difference (IFRS − HGB) |
|---|---|---|---|
| 1 | 0 | 600,000 | −600,000 |
| 2 | 120,000 | 0 | +120,000 |
| 3 | 120,000 | 0 | +120,000 |
| 4 | 120,000 | 0 | +120,000 |
| 5 | 120,000 | 0 | +120,000 |
| 6 | 120,000 | 0 | +120,000 |
| Σ | 600,000 | 600,000 | 0 |
Step 3 – Balance-sheet effect (carrying amount of the intangible asset)
The cumulative profit difference from Step 2 equals, in every year, exactly the carrying amount capitalised under IFRS.
| Year-end | IFRS intangible | HGB | Difference |
|---|---|---|---|
| 1 | 600,000 | 0 | 600,000 |
| 2 | 480,000 | 0 | 480,000 |
| 3 | 360,000 | 0 | 360,000 |
| 4 | 240,000 | 0 | 240,000 |
| 5 | 120,000 | 0 | 120,000 |
| 6 | 0 | 0 | 0 |
Step 4 – Journal entries
IFRS – Year 1 (capitalise development costs):
| Account | Debit | Credit |
|---|---|---|
| Intangible assets (development) | 600,000 | |
| Bank / sundry | 600,000 |
IFRS – Year 2 (amortisation):
| Account | Debit | Credit |
|---|---|---|
| Amortisation expense | 120,000 | |
| Intangible assets | 120,000 |
HGB – Year 1 (option not elected → immediate expense):
| Account | Debit | Credit |
|---|---|---|
| Expense (development) | 600,000 | |
| Bank / sundry | 600,000 |
Step 5 – HGB option and goodwill (note)
- Option: if the company capitalises under § 248 (2) HGB, the picture resembles IFRS (spread amortisation); a distribution block then applies (§ 268 (8) HGB).
- Prohibition: internally generated goodwill as well as internally generated brands, mastheads and customer lists may not be capitalised under § 248 (2) sentence 2 HGB.
- Acquired goodwill: HGB requires systematic amortisation (§ 255 (4) HGB); IFRS only an annual impairment test with no scheduled amortisation (see IFRS 3 for details).
Key takeaway
IFRS requires development costs to be capitalised and spreads the expense over the useful life; HGB makes capitalisation an option. If the option is not elected (a common, prudent practice), the entire amount is expensed immediately – lower initial profit but higher subsequent profit. The total expense is identical in both systems (€600,000); the cumulative profit difference equals, in every year, exactly the carrying amount capitalised under IFRS.