Criteria for capitalizing personnel costs in intangible assets

Therefore, within the framework of applying IAS 38 - Intangible Assets, this newsletter analyzes the accounting aspects that companies applying full IFRS must consider when developing intangible assets with internal personnel or through a software factory.

Limitation for companies that apply IFRS for PYMES:

Before continuing with what has been mentioned, it is important to clarify that this treatment is not applicable to PYMES, since in such cases, Section 18 of the IFRS applies and, consequently, internally incurred expenditures, including those for research and development, will be recognized as expenses, unless they are part of the cost of another asset that meets the recognition criteria.

In practice, the process for determining compliance with requirements that support the recognition of employee compensation costs as an intangible asset presents complexities in ensuring regulatory compliance.

These complexities are particularly evident in:

• Reliable cost determination: Because employee compensation disbursements and costs such as salaries, social security contributions and other considerations, directly attributable to the internally generated intangible asset in its development phase, must be reliably measured.
• The distinction between research and development phases: The nature of the projects, the combined effort of interdisciplinary teams, and the knowledge accumulated from other projects make this distinction subjective or unreliable. In this sense, the standard requires that, when it is not possible to distinguish these phases, the disbursements be treated as expenses.
• Control of future economic benefits: Since in the absence of documents that justify enforceable legal rights, demonstrating control is a complex task.

Therefore, on this occasion, we share some strategies that can be very useful in the correct allocation of personnel costs to internally generated intangible assets:

1. Implement policies to distinguish the research and development phases based on documentation that demonstrates technical and economic feasibility, allowing the identification of the capitalizable phase.

2. Develop methodologies for the reliable and direct measurement of personnel costs to determine the proportion of salaries and benefits that directly contributes to the generation of intangible assets through methods such as timekeeping.

3. Document, from all areas involved, the decisions on cost capitalization and the demonstration of future economic benefits with technical and financial documents.

These strategies are general and their application is recommended when developing intangible assets internally, as the implementation of clear accounting policies along with technical and financial documentation is key in recognition decisions and in the reasonableness of financial information.