Accounting Standard -
26
Intangible Assets
Outline
Intangibles – a perspective
Perspective and issues
Background
Applicability
Scope Recognition criteria
Intangible assets (IA) – examples
Research and development expenses
Cost – internally generated
Amortization
Impairment review
Disclosure requirements
Transitional provisions
Intangibles – a perspective
Intangible assets form significant portion of
assets
Not much accounting literature, standards
available
Accounting treatment scattered over several
standards
Need for clarity on accounting aspects felt more
today
AS 26 on Intangible Assets seeks to address
many of these issues.
Perspective and issues
Concept of future economic benefits with regard
to recognizing and carrying value of long term
asset introduced first time
The Standard deals with intangible assets held for
future economic use
The applicability of the Standard to all deferred
revenue expenses needs to be examined
Recently promulgated standard on Impairment of
Assets – AS 28 - relevant to discussion
Background
Common practice in India to defer certain
expenditures
Deferred Revenue Expenditure, main source of
reconciliation between Indian and US GAAP
Capitalization of internally generated goodwill and
brand names, without amortization
New standard sets forth criteria for recognition,
measurement and disclosure
Applicability
Category of enterprise Applicable for accounting
periods commencing on
or after
Enterprises – listed / to
be listed, or
April 1, 2003
Turnover for
accounting period
more than Rs. 50
crores
All other enterprises April 1, 2004
Objective
To prescribe the accounting treatment for
intangible assets that are not dealt with other
accounting standard.
To recognise an intangible assets if and only if
certain criteria are met.
To measure the carrying amount
To ensure proper disclosure
Scope
Covers all intangibles including research and
development costs
Does not apply to:
Intangibles covered by other AS
• Deferred taxes
• Leases
• Goodwill
• Specialized industries – mineral exploration,
etc.
Financial assets
Intangible assets arising in insurance enterprise
from contracts with policyholders.
Definition
Para 6 of the Accounting Standard defines
Intangible Asset as an identifiable non-
monetary asset, without physical substance, held
for use in the production or supply of goods or
services, for rental to others, or for
administrative purposes.
An asset is a resource:
controlled by an enterprise as a result of past
events; and
from which future economic benefits are
expected to flow to the enterprise.
Intangible Assets - Example
Internally generated/Acquired
Goodwill
Research and development phase assets
Software – sale and captive use
Patents, Licences
Copyrights
Motion picture films
Brands, Trade marks, customer lists, etc.
Qualifying / Recognition Criteria
Qualifying criteria
Identifiability/Seperability – distinct from goodwill
Control – enforceable rights, critical condition
Future economic benefits – both revenues and cost
savings covered
Recognition criteria
Probable that future economic benefits will flow
cost of asset can be measured reliably
Two modes of recognizing intangible asset
acquisition
internal generation
Measurement
Recognise initially at cost
In case of acquisition include all direct cost
In case of amalgamation
Allocate based on fair values if cost is
measurable
Treat as part of goodwill
If acquired by way of Government Grant - at cost
or nominal value
Internally generated goodwill not to be
recognised
Internally generated IA
Expenditure whether at research or development
phase – critical for recognition
Development
Research Phase
Phase
Expenditure on Expenditure
research should should be
be recognised as recognised as an
an expense Intangible
when it is Asset if certain
incurred criteria met
Research & Development expenses...
Research activities - examples
Obtaining new knowledge
Research for alternative materials, processes, etc.
Formulation, design, evaluation and final selection
of materials, processes etc.
Development phase – criteria
intention and technical feasibility to complete
development
ability to sell or use asset
availability of resources to complete development
and sell/use it
probable future economic benefits
ability to reliably measure development cost
...Research & Development expenses
Development phase - examples
Design, construction and testing of prototypes
Design, construction and testing of chosen alternatives
for new or improved materials and products
Cost – internally generated…
Cost relating to research phase expensed
Cost in development phase capitalized from date of
asset meeting recognition criteria
Expenditure enhancing asset value unlikely to meet
recognition criteria (para 55)
Cost determined on same basis as for tangible
assets
...Cost – internally generated...
Expenditure once expensed out (in annual/interim
report) should not be recognised as part of cost
of intangible assets at a later date (para 58)
Subsequent expenditure to be expensed out
unless such expenses:
generate future economic benefit in excess of originally
assessed standard of performances
reliably measured and attributed to asset
...Cost – internally generated
Recognition of computer software - issues
Cost on developing software – where held for sale
Software to be used for in-house applications only –
whether future economic benefits will flow – key issue
Cost of purchased software – tangible or intangible
Assets Not Eligible For Recognition
Goodwill
Brands, masterheads, publishing titles, customer list
etc.
Start-up costs (e.g; Incorporation cost, product launch
cost, pre-operating costs)
Training
Advertisement and promotional costs
Relocation / Reorganisation cost
Subsequent measurement
At carrying cost, less:
accumulated depreciation, and
accumulated impairment losses
Amortisation
At carrying cost, less:
accumulated depreciation, and
accumulated impairment losses
Recognition
Cost of an internally generated intangible asset
• cost incurred from the time the asset meets all the relevant criteria for
recognition.
• Cost may include
– material and service cost
– personnel cost
– other direct cost
– overheads to the extent they can be attributed to the creation of the asset.
Expenditure on intangibles that do not satisfy the
forgoing conditions to be expensed out in the period in
which incurred.
Once expensed out (in annual/interim reports) ,an
expenditure cannot later be added to the cost of
intangible.
Recognition
Subsequent expenditure
on intangibles is to be expensed out in the period in which
incurred.except when such expenditure
• generates additional future benefits ;
• can be reliably measured and
• can be attributed to the asset.
Subsequent Measurement
At cost less
accumulated amortisation and
accumulated impairment loss.
Amortisation Period
Over the estimated useful life.
Useful life to be estimated taking into account among
others the following:
expected usage
public information on estimates
obsolescence
stability of the industry
competition
maintenance
legal limits
useful life of the asset on which it is dependent ,if any .
Amortisation Period
Where useful life exceeds 10 years asset to be
amortised
over the best estimate of useful life
recoverable amount to be estimated annually to ascertain impairment
reasons for estimating useful life in excess 10 years to be disclosed.
Where the control over the asset is through a legal
right , the useful life shall not exceed the tenure of
such right unless
legal rights are renewable and
renewal is certain.
Amortisation Method
Should reflect the pattern in which economic benefits
are consumed.
If the pattern cannot be determined then the straight
line method is to be used.
Residual value
To be assumed to be zero unless:
there is a commitment by a third party to purchase the asset at the end of
the useful life.
There is an active market for the asset
• residual value can be determined by reference to the market
• it is probable that the market will exist at the end of the useful life.
Review of amortisation
Atleast at the end of each financial year.
If the period /method is found to be inappropriate the
same should be changed and the change is to be
reflected in accordance with the principles of AS-5.
Impairment losses
In respect of intangible asset that are :
not yet available for use and
to be amortised over a period exceeding 10 years
the recoverable amount is to be estimated at the end of
each financial year and the impairment loss if any is to
recognised in accordance with the relevant accounting
standard.
Impairment loss before the end of the first accounting
period after an amalgamation in nature of purchase is
to be adjusted in goodwill/capital reserve and the
carrying amount of the asset.
Retirement & Disposal
To be eliminated from the balance sheet when no
future economic benefits are expected from it.
Gains/losses arising from retirement/disposal to be
recognised as income/expense of the period .
Disclosure
The following information should be disclosed
separately for internally generated and other
intangible asset in the financial statement :
useful life or the amortisation rate
amortisation method used
gross carrying amount and accumulated amortisation at the beginning
and at the end of the period
a reconciliation of the carrying amount at the beginning and end of the
period showing:
• additions,indicating separately those from internal development and
through amalgamation
• retirement and disposals
• impairment losses recognised in the statement of profit and loss during the
period(if any)
• impairment losses reversed in the statement of profit and loss during the
period(if any)
Disclosure
• Amortisation recognised during the period
• other changes in the carrying amount during the period.
In case of intangible asset amortised over more than 10 years
the reasons and the factors tha t led the management to take
this decision to amortise the asset over a period exceeding
10 years.
In case of material intangible assets the following :
description
carrying amount
remaining amortisation period
In case of intangible asset whose title is restricted the
following
Disclosure
Existence
carrying amount
carrying amount of intangible assets pledged as security for liabilities.
Amount of capital commitments for acquisition of
intangible assets.
Aggregate amount of research and development
expenditure recognised as expense during the period.
An intangible asset that has been fully amortised but is
still in use may also be disclosed.
Transitional Provisions
Where the period determined under this standard has
expired, the carrying amount appearing in the balance
sheet is to be eliminated and the opening revenue
reserves are to be adjusted to that extent.
Where the period determined under this standard has
not expired and
the enterprise is following a policy of not amortising the carrying
amount ,the carrying amount should be adjusted as if the
enterprise has been following the standard from the time of
acquisition of the asset and the opening revenue reserves are to
be adjusted to that extent.
the enterprise is following a policy of amortising the asset and,
• where the period of amortisation is shorter than the one estimated
Transitional Provisions
under this standard ,the carrying amount is to be amortised as per
the accounting policy followed by the enterprise.
• where the period of amortisation is longer than the one estimated
under this standard ,the carrying amount is to be restated as if the
enterprise has been following this standard from the time it acquired
the asset.
Thank You
