These are identifiable non-monetary assets without physical substance, such as computer software, licenses, and patents. Example: The Kenyan government’s e-Citizen platform or the IFMIS software.

• Recognition: Recognized if it is probable that future benefits/service potential will flow to the entity and the cost can be measured reliably.
• Internally Generated Intangibles:
  • Research Phase: Costs must be expensed as they are incurred.
  • Development Phase: Costs can be capitalized as an intangible asset only if strict criteria are met, including technical feasibility, intention to complete and use the asset, and the ability to measure costs reliably.
• Subsequent Measurement:
  • Generally carried at cost less accumulated amortization and impairment.
  • The revaluation model is allowed but only if an active market exists for the intangible asset, which is rare.
• Amortization:
  • Intangible assets with a finite useful life are amortized (similar to depreciation) over that life.
  • Assets with an indefinite useful life are not amortized but must be tested for impairment annually.

Example: Internally Generated Intangible Asset (Software)

A County Government in Kenya decides to develop a new online portal for citizens to pay for services like parking and business permits. The project begins on July 1, 2023.

• Research Phase (July 1, 2023 – Dec 31, 2023): The county spends Ksh 5,000,000 on activities such as evaluating alternative systems, conducting feasibility studies, and gathering user requirements.
• Development Phase (Jan 1, 2024 – Dec 31, 2024): After confirming the project’s technical feasibility and securing a budget, the county spends Ksh 20,000,000 on software coding, system design, and testing.
• The portal becomes available for use on January 1, 2025, and is expected to have a useful life of 5 years.

Step 1: Accounting for Research Phase Costs

Under IPSAS 31, all costs incurred during the research phase must be recognized as an expense when they are incurred. This is because, at this stage, the entity cannot yet demonstrate that an asset that will generate future benefits exists.

• Costs to be expensed: Ksh 5,000,000

Journal Entry (for the period ended June 30, 2024):

• Dr Research Expense Ksh 5,000,000
• Cr Cash/Payables Ksh 5,000,000 (To record costs incurred during the research phase)

Step 2: Accounting for Development Phase Costs

Costs from the development phase can be capitalized as an intangible asset because the criteria in IPSAS 31 have been met (e.g., technical feasibility is proven, and the county intends to complete and use the portal).

• Costs to be capitalized: Ksh 20,000,000

Journal Entry (for the period ended June 30, 2025):

• Dr Intangible Asset (Software under development) Ksh 20,000,000
• Cr Cash/Payables Ksh 20,000,000 (To capitalize development costs for the new citizen portal)

Step 3: Amortization of the Intangible Asset

Amortization begins when the asset is available for use, which is January 1, 2025. The capitalized cost is systematically allocated over the asset’s useful life.

• Capitalized Cost: Ksh 20,000,000
• Useful Life: 5 years
• Annual Amortization Expense: Ksh 20,000,000 / 5 years = Ksh 4,000,000

For the financial year ending June 30, 2025, six months of amortization will be charged (from January 1 to June 30, 2025).

• Amortization for FY 2024/2025: Ksh 4,000,000 × (6/12) = Ksh 2,000,000

Journal Entry (at June 30, 2025):

• Dr Amortization Expense Ksh 2,000,000
• Cr Accumulated Amortization (Intangible Asset) Ksh 2,000,000 (To record amortization for the first six months of use)