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US GAAP prohibits, with limited exceptions, the capitalization of development costs. Development costs are capitalized under IFRS if certain criteria are met.
Further differences might exist in such areas as software development costs, where US GAAP provides specific detailed guidance depending on whether the software is for internal use or for sale. Other industries also have specialized capitalization guidance under US GAAP (e.g., film and television production). The principles surrounding capitalization under IFRS, by comparison, are the same, whether the internally generated intangible is being developed for internal use or for sale.
US GAAP
IFRS
In general, both research costs and development costs are expensed as incurred, making the recognition of internally generated intangible assets rare.
However, separate, specific rules apply in certain areas. For example, there is distinct guidance governing the treatment of costs associated with the development of software for sale to third parties. Separate guidance governs the treatment of costs associated with the development of software for internal use, including fees paid in a cloud computing arrangement.
The guidance for the two types of software varies in a number of significant ways. There are, for example, different thresholds for when capitalization commences, and there are also different parameters for what types of costs are permitted to be capitalized.
ASU 2018-15 was issued to provide specific US guidance on when implementation costs incurred in a cloud computing service contract should be capitalized under US GAAP. This guidance is effective for calendar year-end public business entities on January 1, 2020. It can be early adopted.
Costs associated with the creation of intangible assets are classified into research phase costs and development phase costs. Costs in the research phase are always expensed. Costs in the development phase are capitalized, if all of the following six criteria are demonstrated:
  • The technical feasibility of completing the intangible asset
  • The intention to complete the intangible asset
  • The ability to use or sell the intangible asset
  • How the intangible asset will generate probable future economic benefits (the entity should demonstrate the existence of a market or, if for internal use, the usefulness of the intangible asset)
  • The availability of adequate resources to complete the development and to use or sell it
  • The ability to measure reliably the expenditure attributable to the intangible asset during its development
Expenditures on internally generated brands, mastheads, publishing titles, customer lists, and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognized as intangible assets.
Development costs initially recognized as expenses cannot be capitalized in a subsequent period.
IFRS does not contain specific guidance relating to cloud computing arrangements. Although non-authoritative, the IFRS Interpretations Committee issued an agenda decision that if a customer receives a software asset at contract commencement (either in the form of a software lease or software intangible asset), the customer would recognize an asset at the date it obtains control of the software. If the customer only obtains access to the software over the contract term, the arrangement is a service contract. Assessing these arrangements will require judgment.
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