Now that we know what to treat as and how to treat the expenses incurred in research phase, we can move onto the development phase. If the company has decided the path to pursue with the generation of the asset, it starts to develop it, meaning that it can now identify the asset and perhaps more reliably measure and state future economic benefits arising from use of the asset.

However, it’s not that clear with the recognition as it was with research phase, where everything was expensed. An intangible asset arising from development shall be recognized if, and only if, the company can demonstrate all of the following:

– technical feasibility of completing the asset so that it will be available for use;
– intention to complete the assets and use it;
– ability to use the asset;
– how the asset will generate probably future economic benefits;
– availability of adequate technical, financial and other resources to complete the development and to use the asset (usually done in the form of a business plan or something similar);
– ability to measure reliably the expenditure attributable to the asset during its development (note here that if this distinction is impossible, the expenses are considered as related to research phase and expense when they incur).

The reason why development phase expenses are recognized as assets is because in this stage the company is able to identify the asset and as such, measure probable benefits arising from the use of this asset.
The activities done in development phase are for an example the following: design, construction and testing of prototypes and models, also pilot plant, design of tools, modules etc, design, construction and testing of processes, systems and services etc.

From the definitions and examples we just saw, it should be evident why those expenses can be recognized. We say ‘can’ however because all the above mentioned conditions have to be met.