PROJECT REPORT ON INTANGIBLE ASSETS UNDER AS 26, IND AS 38 & IAS 38

Learning Group 8:

Ambreen Shahid Prerna Agarwal

010111097 010111059 010111057

Debjani Chatterjee Anurag Basu Rajib Biswas

- 010111088 - 010111017

Suvankar Karmakar - 010111016

TABLE OF CONTENTS 1. Introduction.. 1 2. IFRS. 1 3. Accounting Standards under Indian GAAP 1

4. Converged Accounting Standards OR IND AS... 2 5. Role of India.... 6. Intangible Assets. 2 3-5

7. Objective of the Study. 6 8. Main Study.. 6-9 9. Findings and Recommendations. 9 10. References and Bibliography 10

INTRODUCTION Different accounting concepts, conventions, customs, traditions, and rules were prevailing in different nations leading to misunderstanding, uncertainty and often resulting in scandal. Accounting terminology was not standardised and were left to the users of accounting to interpret ate the accounting terms suiting their interest .Therefore, the universally accepted and internationally standardised accounting terminology known as Accounting Standards was introduced. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) International Financial Reporting Standards Board began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. They are sometimes still called by the original name of International Accounting Standards (IAS). IAS was issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards International Financial Reporting Standards (IFRS). The Conceptual Framework for Financial Reporting states basic principles for IFRS. The term International Financial Reporting Standards (IFRS) comprises of: a. International Financial Reporting Standards (IFRS) b. International Accounting Standards (IAS) c. Interpretations from the International Financial Reporting Interpretations Committee (IFRIC)
d. Interpretations from Standing Interpretations Committee (SIC).

ACCOUNTING STANDARDS UNDER INDIAN GAAP The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC, constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to harmonise the diverse accounting policies and practices in use in India. There are total 32 accounting standards numbered AS-1 to AS-7 and AS-9 to AS-32 (AS-8 is no longer in force since it was merged with AS-26).

Page 1 CONVERGED ACCOUNTING STANDARDS OR IND AS Idea of convergence of Indian GAAP with IFRS was made by the Prime Minister of India Dr. Manmohan Singh by committing in G20 to align Indian accounting standards with IFRS. Thereafter the Ministry of Corporate Affairs which are converged with International Financial Reporting Standards (IFRS). These accounting standards are formulated by Accounting Standards Board of Institute of Chartered Accountants of India. Now India will have two sets of accounting standards viz. existing accounting standards under Companies (Accounting Standard) Rules, 2006 and IFRS converged Indian Accounting Standards (Ind AS). ROLE OF INDIA The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April 2012. This will be done by revising existing accounting standards to make them compatible with IFRS. Reserve Bank of India from April 2011. Phase wise applicability details for different companies in India: Phase wise applicability details for different companies in India: Phase 1: Opening Balance sheet as at 1st April, 2011. (i) Companies which are part of NSE Index Nifty 50 (ii) Companies which are part of BSE SENSEX BSE 30 (a). Companies whose shares or other securities are listed on a stock exchange outside India (b). Companies, whether listed or not, having net worth of more than INR 1000 crore (INR 10 billion) Phase 2: Opening balance sheet as at 1 April 2012 Companies not covered in phase 1 and having net worth exceeding INR 500 crore (INR 5 billion) Phase 3: Opening balance sheet as at 1 April 2014 Listed companies not covered in the earlier phases. If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year. On January 22, 2010, the Ministry of Corporate Affairs issued the road map for transition to IFRS. It is clear that India has deferred transition to IFRS by a year. In the first phase, companies included in Nifty 50 or BSE Sensex, and companies whose securities are listed on stock exchanges outside India and all other companies having net worth of INR 1000 crore will prepare and present financial statements using Indian Accounting Standards converged with IFRS. According to the press note issued by the government, those companies will convert their first balance sheet as at April 1, 2011, applying accounting standards convergent with IFRS if the accounting year ends on March 31. This implies that the transition date will be April 1, 2011. According to the earlier plan, the transition date was fixed at April 1, 2010.

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Transition in phases Companies, whether listed or not, having net worth of more than INR 500 crores will convert their opening balance sheet as at April 1, 2013. Listed companies having net worth of INR 500 crores or less will convert their opening balance sheet as at April 1, 2014. Un-listed companies having net worth of Rs 500 crore or less will continue to apply existing accounting standards, which might be modified from time to time. Public sector companies should take the lead and the Institute of Chartered Accountants of India (ICAI) should develop a clear strategy to diffuse the learning. Size of companies the government has decided to measure the size of companies in terms of net worth. Ind As are issued to develop high quality standards of Indian companies throughout the world and to improve the comparability and transparency of financial information throughout the world.

However there are some general point of difference between IND AS and IAS:

Different terminology is used in Ind AS e.g. the term balance sheet is used instead of Statement of financial position and Statement of Profit and Loss is used instead of Statement of comprehensive income. The words approval of the financial statements for issue have been used instead of authorisation of the financial statements for issue in the context of financial statements considered for the purpose of events after the reporting period. The transitional provisions given in IFRS have not been given in IND AS, since all transitional provisions related to IND ASs, wherever considered appropriate, have been included in IND AS 101, first-time adoption of Indian Accounting Standards.

INTANGIBLE ASSETS Intangible assets are defined as identifiable non-monetary that cannot be seen, touched or physically measured, and are created through time and effort, and are identifiable as a separate asset. Examples being Patents, Copyrights, Licenses, Marketing Rights, trademark, trade secrets etc. There are two primary forms of intangibles legal intangibles (such as trade secrets (e. g., customer lists), copyrights, patents, and trademarks) and competitive intangibles (such as knowledge activities (know-how, knowledge), collaboration activities, leverage activities, and structural activities). Legal intangibles are known under the generic term intellectual property and generate legal property rights defensible in a court of law. Page 3

Goodwill Goodwill is only recognised as a result of a business combination and represents the difference between the total purchase consideration and the total of the fair values of the acquired assets, including recognised intangible assets, and liabilities assumed. If the amount of goodwill is negative, that is the total fair value of acquired assets and liabilities is more than the purchase consideration, the excess must be recognised immediately as a profit.

Intangible Assets V/S Goodwill While goodwill is technically an intangible asset, it is usually listed as a separate item on a company's balance sheet. As a distinct type of intangible asset, goodwill would come in for example in an acquisition, where it represents the amount of money a company has paid or would pay over the fair value of the net assets to acquire another company. Measurement after recognition Companies may choose to value intangible assets at cost or at a re-valued amount. Revaluations must be undertaken regularly, in effect annually, and increases in carrying value are taken to a revaluation surplus account. Companies may also choose an indefinite or a finite life for each asset. The useful life is deemed to be indefinite if there is no foreseeable time limit to future cash flows, and there is no amortisation charge to profits. For assets with a finite useful life, the cost is amortised over that life. Goodwill is not amortised. Impairment testing Goodwill, intangible assets with indefinite lives and those not yet in use must all be tested for impairment at least annually. Intangible assets with finite lives require a review for indications of any impairment, and tests as required. The test involves a comparison of the carrying value of the asset with its estimated recoverable amount. The recoverable amount is defined as the higher of the value less costs to sell and the value in use. The value in use is generally based on the discounted future cash flows from the asset. When the recoverable amount is found to be lower than the carrying value, the carrying value is reduced to the recoverable amount with a charge to profits. It is possible to reverse an impairment loss related to an intangible asset, but not for goodwill. Remaining differences between IAS and US GAAP under US GAAP, there are very limited circumstances in which internally generated intangible assets are recognised and capitalised. This will have a significant impact on companies with material research and development expenditure, and who are quoted on a US stock exchange.

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Goodwill no longer amortised One of the most significant changes introduced by IFRS 3 is the fact that intangible assets other than goodwill that are recognised on the balance sheet will either be amortised over their useful life (hitting the profit and loss account and reducing earnings) or, if appropriate, assigned indefinite lives. Assets given an indefinite life will not be amortised, but will have to undergo an annual impairment test. The criteria for indefinite lives are strict, to the extent that few assets can be expected to meet them. IFRS 3 has also changed the rules for residual goodwill. Goodwill is no longer amortised, but is instead subjected to a stringent, annual impairment test. In the event that it is impaired, an immediate charge will be taken to the profit and loss account, so poor-performing acquisitions will be highlighted through such a charge sooner rather than later. This represents a fundamental shift in the way goodwill is viewed. Goodwill is seen no longer as a steadily wasting asset, but instead as one that should be expected to maintain its value.

Patents A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time, in exchange for the public disclosure of the invention. The procedure for granting patents, requirements placed on the patentee, and the extent of the exclusive rights vary widely between countries according to national laws and international agreements. Typically, however, a patent application must include one or more claims that define the invention. These claims must meet relevant patentability requirements, such as novelty and non-obviousness. The exclusive right granted to a patentee in most countries is the right to prevent others from making, using, selling, or distributing the patented invention without permission.

Copyrights Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time. Generally, it is the right to copy, but also gives the copyright holder the right to be credited for the work, to determine who may adapt the work to other forms, who may perform the work, who may financially benefit from it, and other related rights. It is a form of intellectual property (like the patent, the trademark, and the trade secret) applicable to any expressible form of an idea or information that is substantive and discrete.

Page 5 OBJECTIVE OF THE STUDY

To study accounting of intangible assets under AS 26, IAS 38 and IND AS 38 and a comparative study of the three. MAIN STUDY A comparative study of IAS 38 on Intangible assets and IND AS 38 on Intangible assets was done with regard to the acquisition of an intangible assets was done with regard to the acquisition of an intangible asset through government grant IAS 38.Intangible assets provides the option to different entities to recognize both asset and grant initially at fair value or nominal amount plus any expenditure that is directly attributable to preparing the asset for its intended use. In the comparative study between IND AS 38 and IAS 38 the following differences were observed.

As per the existing standard, accounting issues of specialized nature also arise in respect of accounting for discount or premium relating to borrowings and ancillary costs incurred in connection with the arrangement of borrowings, share issue expenses and discount allowed on the issue of shares. Accordingly, this Statement does not apply to such items also. Ind AS 28 does not include any such exclusion specifically as these aspects are covered by other accounting standards. The existing standard defines an 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 whereas in Ind AS 28, the requirement for the asset to be held for use in the production or supply of goods or services, for rental to others, or for administrative purposes has been removed from the definition of an intangible asset. The existing standard does not define identifiability, but states that an intangible asset could be distinguished clearly from goodwill if the asset was separable, but that separability was not a necessary condition for identifiability. Ind AS 38 provides detailed guidance in respect of identifiability. As per Ind AS 38, in the case of separately acquired intangibles, the criterion of probable inflow of expected future economic benefits is always considered satisfied, even if there is uncertainty about the timing or the amount of the inflow. However, there is no such provision in the existing standard. Under Ind AS 38, if payment for an intangible asset is deferred beyond normal credit terms, the difference between this amount and the total payments is recognised as interest expense over the period of credit unless it is capitalised as per AS 16. However, there is no such provision in the existing standard.

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Ind AS 38 deals in detail in respect of intangible assets acquired in a business combination. On the other hand, the existing standard refers only to intangible assets

acquired in an amalgamation in the nature of purchase and does not refer to business combinations as a whole. The existing standard is silent regarding the treatment of subsequent expenditure on an in-process research and development project acquired in a business combination whereas Ind AS 38 gives guidance for the treatment of such expenditure.

Ind AS 38 requires that if an intangible asset is acquired in exchange of a non-monetary asset, it should be recognised at the fair value of the asset given up unless the fair value of the asset received is more clearly evident. However, the existing standard requires the principles of existing AS 10 to be followed which includes an alternative accounting treatment. As per Ind AS 38, when intangible assets are acquired free of charge or for nominal consideration by way of government grant, an entity should, in accordance with AS 12, record both the grant and the intangible asset at fair value. As per the existing standard, intangible assets acquired free of charge or for nominal consideration by way of government grant is recognised at nominal value or at acquisition cost, as appropriate plus any expenditure that is attributable to making the asset ready for intended use. The existing standard is based on the assumption that the useful life of an intangible asset is always finite, and includes a rebuttable presumption that the useful life cannot exceed ten years from the date the asset is available for use. That rebuttable presumption has been removed from Ind AS 38. Ind AS 38 recognizes that the useful life of an intangible asset can even be indefinite subject to fulfilment of certain conditions, in which case it should not be amortised but should be tested for impairment. In Ind AS 38, guidance is available on cessation of capitalisation of expenditure, derecognition of a part of an intangible asset and useful life of a reacquired right in a business combination. There is no such guidance in the existing standard on these aspects. Ind AS 38 permits an entity to choose either the cost model or the revaluation model as its accounting policy, whereas in existing standard revaluation model is not permitted. Ind AS 38 provides more guidance on recognition of intangible items recognised as expense. Ind AS 38 clarifies that in respect of prepaid expenses, recognition of an asset would be permitted only up to the point at which the entity has the right to access the goods or upto the receipt of services. Further, unlike the existing standard, mail order catalogues have been specifically identified as a form of advertising and promotional activities which are required to be expensed. Paragraph 94 of Ind AS 38 acknowledges that the useful life of an intangible asset arising from contractual or legal rights may be shorter than the legal life. The existing standard does not include such a provision.

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As per the existing standard, there will rarely, if ever, be persuasive evidence to support

an amortisation method for intangible assets that results in a lower amount of accumulated amortisation than under straight-line method. Ind AS 38 does not contain any such provision.

Under Ind AS 38, the residual value is reviewed at least at each financial year-end. If it increases to an amount equal to or greater than the assets carrying amount, amortisation charge is zero unless the residual value subsequently decreases to an amount below the assets carrying amount. However, the existing standard specifically requires that the residual value is not subsequently increased for changes in prices or value. As per the existing standard, change in the method of amortisation is a change in accounting policy whereas as per Ind AS 38, this would be a change in accounting estimate. The existing standard also requires annual impairment testing of asset not yet available for use. There is no such requirement in Ind AS 38. As per Ind AS 38, if payment of consideration on disposal of an intangible asset is deferred, the consideration is recognised initially at the cost is cash price equivalent. There is no such provision in the existing standard. Intangible assets retired from use and held for sale are covered by the existing standard. However, Ind AS 38 does not include such intangible assets since they would be covered by Ind AS 105.

In the comparative study between IAS 38 and AS 26 and the following differences are found. According to IAS an identifiable non-monetary asset without physical substance. May be acquired or internally generated whereas an identifiable non-monetary asset without physical substance controlled by the entity and held for use in the production or supply of goods or services, for rental to others, or for administration purposes. May be acquired or internally generated. Intangibles assets acquired as a part of business combination in accordance with IFRS 3 Business Combinations, if an intangible asset is acquired in a business combination, the cost of that intangible asset is its Fair Value at the acquisition date. The intangible is recorded by the acquirer irrespective of whether the asset had been recognised by the acquiree before the business combination Whereas if an intangible asset is acquired in a business combination, the same should be accounted at cost or fair value if the cost/ fair value can be reliably measurable it is included as a part of goodwill. Intangible assets acquired in an amalgamation in the nature of merger or acquisition of a subsidiary are recorded at book values, which means that if the intangible asset was not recognized by the acquiree, the acquirer would not be able to record the same.

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In process research and development, expenditure that relates to an in process research or development project acquired separately or in a business combination is recognised as an intangible asset. But No specific guidance given in AS-26.

An entity shall choose either the cost model or the revaluation model as its accounting policy. If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same model, unless there is no active market for those assets. Whereas After initial recognition, an intangible asset should be carried at its cost less any accumulated amortisation and any accumulated impairment losses. Revaluation is prohibited. An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of production or similar units would constitute useful life. An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity unless there is persuasive evidence for amortising over a longer period. But there is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use. The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. The amortisation method used shall reflect the pattern in which the assets future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight line method shall be used. But Amortisation is done over useful life but should not exceed 10 years.

FINDINGS AND RECOMMENDATIONS In India Business were simple and accounting standards were also simple. Now business has become complex and India needs comprehensive accounting standards to bridge the gap between Indian and other companies across the globe. This move would lead to certain fundamental changes and would impact businesses on a large scale. Accounting for intangible assets under Ind as 38, As 26 AND IAS 38 was reviewed to point the benefits from mandatory adoption of IFRS. Using a variety of research techniques, studies provide evidence that IFRS has improved efficiency in accounting of Intangible assets.

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REFERENCES AND BIBLIOGRAPHY

www.icai.org www.ifrs.org
http://wirc-icai.org/wirc_referencer/index1.htm

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