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Accounting Standard 26 (AS 26) Intangible Assets By: Jayesh Ratadia

Content
Objective Scope Definition of Intangible Assets Conditions for Recognition Cost of Intangible Assets Internally Generated Intangible Assets Amortisation of Intangible Assets Disclosure of Intangible Assets Comparison between IFRS, US GAAP and Indian GAAP

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Objective

Prescribe the accounting treatment for Intangible Assets which are not dealt with specifically in other Accounting Standard.

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Scope
Applies to all enterprises in accounting for intangible assets, except for
Intangible assets covered by other accounting standard Financial assets Mineral rights and expenditure on exploration Intangible assets arising in Insurance Company from contract with policy

holders
Expenditure in respect of termination benefits (AS 15) Deferred tax assets (AS 22) Goodwill arising on Amalgamation / Consolidation (AS 14 and 21) Tangible assets held for sale (AS 2) Lease (AS 19) Accounting issue of specialised nature e.g. discount / premium in relation

to borrowing, share issue expenses, discount on issue of shares etc.


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Definition of Intangible Assets


Intangible assets is:
Identifiable non monetary assets Without physical substance Held for use in production or supply of goods or services
Examples: Licenses Intellectual property rights Brand names, publishing titles Computer software Patents, copy rights Motion picture licenses Customers lists
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Franchises Mortgage services rights Import quotas Customer supplier relationships Customer loyalty Market share and marketing right Goodwill
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Conditions for Recognition


Identifiability
Distinguishable from goodwill. Enterprise

can rent, sale, exchange or distribute the future economic benefits from assets without disposing the same. future economic benefits are separately identifiable.

Separability is not necessary condition if

Control

Power to obtain future economic benefits. Legal rights over the use of assets.

Future economic benefits

Revenue, cost savings or other benefits

flowing from the assets.

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Cost of Intangible Assets...


Recognise if, and only if,
Probability of flow of future economic benefits Cost can be reliably measured

Intangible Assets should be recognised only at cost Separate acquisition


Recognise at cost of acquisition Cost of acquisition includes:

Purchase price (net of any discounts, rebates etc) Non recoverable import duties and other taxes Direct expenses to make assets ready for intended use
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Cost of Intangible Assets


Acquisition as part of Amalgamation (AS 14)
Amalgamation in nature of purchase

(contd)

Recognise at cost (i.e. at fair value) if consideration allocated to individual assets and liabilities based on fair value as on the date of amalgamation. Forms part of goodwill, If cost (fair value) can not be measured reliably. If no active market exists, restrict cost to an amount that does not create or increase capital reserve
Amalgamation in Nature of Merger

Recognise at book Value. (of transferor company) Acquisition by way of Government Grant
Accounted at acquisition value or nominal value as applicable (AS 12).

Exchange of assets / Shares or Securities


Accounted at its Fair value or of the securities issued, whichever is more clearly

evident (AS 10).


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Internally Generated Intangible Assets


Goodwill
Not to be recognised as Intangible Asset as;

Not an identifiable resource controlled by the entity Cost can not be measured reliably.
Difference between the Market value and carrying amount of entity

cannot be considered as cost of intangible assets as these difference are due to range of factors that affect the value of entity and are not in control of entity.
Internally generated brands, mastheads, publishing titles, customer lists

and items similar in substance should not be recognised as Intangible Assets as expenditure on these cannot be distinguished from the cost of developing the business as a whole
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Internally Generated Intangible Assets...


Others
Internal generation of Intangible Assets classified into two phases:
Research Phase

(Contd)

Recognise expenditure incurred during Research phase as an expense, when incurred as probability of future economic benefits not demonstrable.
Development Phase

Recognise Intangible Assets if entity can demonstrate all the following conditions:
Technical feasibility to complete the Intangible Assets so that it will be available for use. Intention and Availability of adequate technical, financial and other resources to complete the assets Ability to use / sell it. Demonstration of probable future economic benefits. Ability to measure reliably the expenditure attributable to Intangible Assets.
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Internally Generated Intangible Assets...


Cost:

(Contd)

Cost of Internally generated Intangible Assets is calculated from the time when the Intangible Assets first meet the recognition criteria till the asset becomes ready for use. Cost comprises: Directly attributable cost such as,
Expenditure on materials / services. Salary, wages and other employee related cost of personnel directly engaged in generating the assets. Any other expenditure such as registration fees, amortisation of patents and licenses etc. Overhead cost allocated on reasonable basis e.g. depreciation, borrowing cost etc. Cost does not include Selling, Administrative and other general overheads. Initial operating loss. Expenditure on training staff to operate the asset.

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Internally Generated Intangible Assets...


Past expenses should not be recognised as an asset.

(Contd)

Subsequent expenditure incurred on Intangible Asset should be recognise as expenditure unless;


It has increased the future economic benefits of the Intangible Assets; and The expenditure can be measured and attributed to the assets reliably.

The Intangible assets should be carried at cost less any accumulated amortisation / impairment.

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Amortisation
Period
Amortise over the best estimated useful life of the asset. Rebuttable presumption is that useful life can not exceed more than 10 years. Persuasive evidence required to justify useful life of more than 10 years. Amortisation period of more than 10 years requires: Annual impairment review Disclosure for reasons for rebuttable presumption and factors for determining useful life. In case of assets controlled through legal rights, useful life not to exceed the period of legal rights unless; Legal rights are renewable; and Renewal is virtually certain.

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Amortisation
Method of amortisation

(Contd)

Unit Production Method, Straight Line Method or Reducing Balance Method. Straight Line Method considered as most appropriate. Residual value assumed to be of Zero, unless there is a commitment of purchase

or active market for sale.


Residual Value determined at initial recognition and cannot be subsequently

increased for changes in prices or value.


Amortisation period and method needs to be reviewed atleast at each financial

year end.
Annual impairment review required for assets not available for use.

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Disclosure Requirement
Disclose for each class & separately for internally generated and others: Useful lives or amortisation rate; Amortisation method; Gross carrying amount & accumulated amortisation Reconciliation of carrying amount showing:
Additions/ retirement and disposals; Impairment losses recognised/ reversed, if any Amortisation recognised Other changes in the carrying amount. Changes in accounting policy as per AS 5 Where useful life is more than ten years, the reasons there of Description, carrying amount and remaining period for an Intangible Assets of

material amount.
Details of Intangible Assets that are pledged or have other restrictions. Commitments for acquisition of Intangible Assets. Research and Development expenses recognised as expenses. The entity is encouraged to give description of fully amortised Intangible Assets,

still in use.
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IFRS vs US GAAP vs Indian GAAP


Recognition Criteria
Separately Acquired Intangibles

Same in all the three frameworks


Internally Generated Intangibles

Same in case of Indian GAAP and IFRS where as in US GAAP recognition of internally generated intangible asset is rare. As both research and development cost needs to be expensed as incurred unless addressed by separate standard.
Development costs related to computer software developed for external use are

capitalized once technological feasibility is established and capitlization ceases when the product is available for general release to customers. In the case of software developed for internal use, only those costs incurred during the application development stage (as defined in SOP 98-1 Accounting for the Costs of Computer Software Develop or Obtained for Internal Use) may be capitalized.

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IFRS vs US GAAP vs Indian GAAP


Measurement
Separately Acquired Intangibles

(Contd)

Same in all the three frameworks


Internally Generated Intangibles

Same in case of Indian GAAP and IFRS where as in case of US GAAP development costs are expensed as incurred unless addressed by a separate standard. Under US GAAP costs of internally developing, maintaining and restoring intangible assets that are not specifically identifiable and that have indeterminable lives, or that are inherent in a continuing business and related to entity as a whole, are recognized as an expense when incurred.
Subsequent Measurement

In case of Indian GAAP and US GAAP revaluation model is prohibited where as the same can be adopted in IFRS if active market exists.

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IFRS vs US GAAP vs Indian GAAP


Amortisation

(Contd)

In case of Indian GAAP there is no concept of indefinite useful life and there is a rebuttable presumption that the useful life of intangible assets will not exceed 10 years but the same does not apply in case of IFRS and US GAAP. In IFRS and US GAAP there is no threshold of 10 years life and assets can have indefinite life but the same needs to be tested at least once in a year for impairment.
Advertising Cost

In case of IFRS and Indian GAAP advertising costs are expensed as incurred. There is no option of deferring the same up till the first time advertising takes place as in the case of US GAAP. In case of IFRS and Indian GAAP there is no provision of capitalizing direct response advertising cost as in the case of US GAAP.
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