The research phase
The research phase is the part of an internal project aimed at gaining new knowledge before a specific application is technically and commercially demonstrable. Under IAS 38, all research expenditure is expensed when incurred, because the entity cannot yet show that an asset exists that will generate probable future economic benefitsS1. For AI, this captures most experimentation and pre-training.
What counts as research
IAS 38 gives examples of research activities: work aimed at obtaining new knowledge; the search for, evaluation and selection of applications of research findings; the search for alternatives; and the formulation and design of possible alternatives before one is chosen IAS 38§56. The unifying feature is that no specific, feasible asset has yet been identified.
Why it is expensed
Because the future benefit of research is uncertain, IAS 38 concludes that an entity cannot demonstrate that an intangible asset exists during this phase, so the expenditure is recognised as an expense when incurredIAS 38§54. This is a bright-line rule, not a matter of judgement: research is expensed.
Research phase → EXPENSE
Worked signals for AI
Pre-training a model from scratch, testing whether a technique works at all, broad architecture search, and open-ended data exploration read as research: at that point the entity cannot demonstrate technical feasibility or a probable benefit. The label follows the activity, not the cost centre, so compute and labour on these activities are expensed even when the wider programme is later capitalised.
- S1IAS 38 Intangible Assets, IFRS Foundation (IFRS). https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/