Lesson 2 of 8 · All lessons in this module
- Intangible assets: definition, purchase and business combinations
- Internally developed intangibles and capitalising versus expensingVideo lesson
- Impairment of PPE and intangiblesVideo lesson
- Assets held for sale and impairment reversals
- Derecognition: sale, abandonment, exchange and spin-offVideo lesson
- Disclosures for PPE and intangible assets
- Fixed asset turnover, asset age and reinvestmentVideo lesson
- Integrated cases: a purchase price allocation and the PPE note
Lesson 2 of 8 · 14 min
Internally developed intangibles and capitalising versus expensing
Building an intangible in-house is mostly expensed while buying one is capitalised, and that choice moves profit, assets, operating cash flow and many ratios.
In short
- Costs to develop intangibles internally are generally expensed, unlike construction costs of tangible assets.
- IFRS: research costs are expensed; development costs are capitalised once criteria are met, such as technical feasibility and the intent to use or sell the asset.
- US GAAP: research and development are both expensed, except software: for sale, capitalise after technological feasibility; for internal use, capitalise once completion is probable.
- Internally developed intangibles hit operating cash flow; purchased ones hit investing cash flow. Builders show fewer assets than buyers.
- Capitalising instead of expensing raises current profit, assets and operating cash flow, but slows later profit growth. Capitalised interest lowers fixed asset turnover.
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