Development costs: capitalise only from the date all six tests are met
A software product the team spent nine months building is now selling well, and someone asks whether everything spent on it can move to the balance sheet. Under IAS 38 as adopted in the UK, it cannot. Research is expensed as incurred. Development spending becomes part of an intangible asset only from the date the entity can demonstrate all six recognition criteria, and spending expensed before that date is not reinstated when the product later succeeds. The decision finance needs to record is that date, with the evidence behind it.
Research, development and the six tests
An intangible asset must be identifiable, controlled by the entity and meet the general recognition criteria. Expected future benefit on its own is not enough (IAS 38, paragraphs 8, 12 to 13, 18 and 21 to 23). Research spending is expensed when incurred. If the entity cannot tell the research phase from the development phase, it treats all the spending as research (paragraphs 51 to 56). A budget line labelled R&D settles nothing either way.
Development spending is recognised as an asset only when the entity can demonstrate all six of these: the technical feasibility of completing the asset; its intention to complete it and use or sell it; its ability to use or sell it; how the asset will generate probable future economic benefits; adequate technical, financial and other resources to complete the development and to use or sell the asset; and the ability to measure the attributable expenditure reliably (paragraphs 57 to 62). A working prototype or a board approval does not, on its own, show all six.
Ordnance Survey's July 2026 accounts show one company's control around this date. Its policy says development costs are capitalised only when they meet the IAS 38 criteria and its Investment Group has approved the project. That approval is Ordnance Survey's own control, not an additional IAS 38 criterion, and another entity's approval date does not prove compliance by itself.
A hypothetical software build
This example is hypothetical and uses generic currency units. The software is internally generated, identifiable and controlled, with no acquisition, tax, grants or impairment. The team spends 20,000 on research from January to March and 15,000 on development from April to June, before all six criteria are supported. On 1 July every criterion is demonstrably met. From July to September, eligible directly attributable development costs are 60,000. Launch also brings 5,000 of staff training and 8,000 of marketing. The software is available for use on 1 October, with an assumed five-year life, nil residual value and straight-line amortisation.
Amortisation is 12,000 a year, or 1,000 a month. It starts when the software is available for use rather than at the first project payment, so October to December carries 3,000 (paragraph 97). At 31 December the asset is 57,000 and total expense is 20,000 + 15,000 + 5,000 + 8,000 + 3,000 = 51,000. Together they account for the 108,000 spent.
Only directly attributable costs incurred from the date the criteria are first met enter the asset, and spending already expensed is not reinstated later (paragraphs 65 to 71). The 35,000 of earlier research and development stays expensed even though the product succeeds. That differs from a genuine prior-period error, where spending that did qualify was wrongly expensed. Training, selling costs, overheads that are not directly attributable, identified inefficiencies and initial operating losses are excluded (paragraphs 66 to 69). While an intangible is not yet available for use, it is tested for impairment annually regardless of indicators (IAS 36, paragraph 10).
| Hypothetical spending | Period | Amount | Treatment |
|---|---|---|---|
| Research | January to March | 20,000 | Expense |
| Development before criteria met | April to June | 15,000 | Expense |
| Eligible development after criteria met | July to September | 60,000 | Capitalise |
| Staff training | Launch | 5,000 | Expense |
| Launch marketing | Launch | 8,000 | Expense |
| Total spending | January to September and launch | 108,000 | 60,000 capitalised, 48,000 expensed |
A dated recognition memo
We suggest a dated memo that identifies the asset and the entity's control over it, with one evidence reference for each of the six tests. Product or engineering supplies feasibility and the technical plan, sales or operations supports the expected benefits and use, and finance confirms resources and how costs are measured. These owners are our suggestion, not a form the standard prescribes.
Open a separate approved cost code on the evidenced recognition date. Use dated time records and invoice allocation that separate qualifying development from research, maintenance, training and marketing. Reassess the memo when funding or technical plans change. Record the available-for-use date, the useful life conclusion, the amortisation start and the impairment calendar.
This test does not turn internally generated goodwill, brands or customer lists into assets. SaaS arrangements, acquired intangibles, tax R&D credits, UK GAAP and US GAAP each need a separate assessment.
Before the next capitalisation journal
Prove from time records and invoice dates that every cost in the asset was incurred on or after the date in the memo. Anything earlier stays in expense.