October 01, 2019

(DISCLAIMER : This blog is for education purposes. User(s) is/are requested to make appropriate reference(s) prior to its use.)

1. Basic introduction

2. Initial Recognition

3. Subsequent Recognition

4. Disclosure

1. BASIC INTRODUCTION

Definition: Intangible assets are identifiable, non-monetary assets, without physical substance, held for use in production of goods, rendering of services or for rental purposes.

i. Identifiable – means capability of sale. If it does not has capability of sale, it is not identifiable. Example : staff training cost incurred by a firm to train its employees is not identifiable because it does not has any capability of being sold in the market.

ii. Non-monetary assets – means whose realisation is not fixed under a contract. Bank FD is a monetary asset because its realisation is fixed under a contract. So to test the applicability of non-monetary asset, follow the below table:

Asset Name	Realisation Fixed	Under Contract	Non-monetary
Plants & Machinery	No		Yes
Debtors	Yes	Yes	No
Self Goodwill	No	No	Yes

iii. Without physical substance means no substance of its own but storage device is possible. Eg: software in a CD. So, Cd is a storage device not an IA and software is IA. Patents document – document is a paper (storage device) but patent is IA.

iv. Held for use means purpose of holding such assets should be used in production or services or rent.

If all the above condition are met then an asset is termed as IA.  It is shown in below table (4 condition test)

Item	Identifiable (capable of sale)	Non-monetary(price not fixed under contract)	without physical substance	Held for use / rental	Classification
Plant & machinery	Satisfied	Satisfied	Not-satisfied	Satisfied	Not IA
Software (as stock)	Satisfied	Satisfied	Satisfied	Not-satisfied	Not IA
Software (for office use,production,rental)	Satisfied	Satisfied	Satisfied	Satisfied	IA
Preliminary expense	Not-satisfied				Not IA
FD investment	Satisfied	Not-satisfied	Satisfied		Not IA
Investment in Shares	Satisfied	Satisfied	Satisfied	Not-satisfied	Not IA

Following are not considered as IA. They are written off in the year of expense.

Preliminary expense, advertisement expense, relocation expense, shifting expense, staff training expenses. These are mentioned in para 56 of AS 26 which requires them to be written off in P&L. They are written off because they are not capable of sales, hence are not identifiable, hence are not IA.   

Recognition principles: Following condition should be satisfied for recognition of IA.

1. Future Economic Benefit should flow towards the entity and

2. Cost can be measured reliably.

AS 26 is not applicable on deferred tax assets (AS 22), stock (AS 2), financial instruments (Ind AS 109), discount on issue of debentures (AS16), Termination benefits (AS 15).

2. INITIAL RECOGNITION

Once you have identified that an asset is an IA, then how will you recognise (cost) it in your books of accounts? This is covered under initial recognition.

In the following ways IA can be recognised in books of accounts –

a. Purchase b. Exchange c. Government grants d. In the scheme of amalgamation (goodwill) e. self- generated.

a. If IA is purchased then, Purchase price + Taxes on purchase (non-refundable) + Expenses on valuations +Expenses to obtain title = Initial cost of IA.

b. If IA has been obtained on exchange then, Fair value of asset obtained or fair value of asset given – whichever is more clearly evident. (Based on judgement).

c. If IA is obtained through Government grant then, value of IA is recorded at nominal value (small).

d. If IA obtained in the scheme of amalgamation then, value of IA will be fair value of such IA (If such fair value can’t be identified then book value of transferor should be considered). Goodwill will be recognised as residual value.

e. If IA obtained as self-generated then,

1. Goodwill, Brands, Mastheads (Titles, eg newspaper titles), Copyrights are NOT recognised as assets since it’s cost cannot be measured reliably.

Goodwill is an asset. But a self-generated goodwill asset is not recognised in your own books. 

2. Others like softwares, websites, patent, etc. if self-generated then, expenditure incurred during research phase will be written off in P&L. Expenditure during development phase will be capitalised as “IA under developments”.

Research means planned investigation with objective of gaining knowledge.

Development means application of gained knowledge. If following conditions are satisfied we consider it as development stage:

1. Technical feasibility has been satisfied (possibility has been proved).

2. Market/Future economic value from such intangible asset should exist (IA can be recognised upto value of future benefits)

3. Resources for completion of IA should exist. Eg. of resources – finance, manpower, govt. permission, raw material, etc.

4. Intention of management should exist.

Notes : Following expenses cannot be capitalised :

Administration, Selling & distribution, staff training, advertisement,

Note: if any expense has been written off earlier then now it cannot be reinstated as asset.

Note : If cost of development is more than expected future economic benefit, excess cost will be written off. expected economic benefits are present value of expected cash flow from IA.   

4. SUBSEQUENT RECOGNITION

Subsequent recognition means after asset is ready for use. What after you have recognised the IA?

1. Revaluation of IA is NOT allowed (however IND AS allows it).

2. Subsequent expenditure which improves IA should be capitalised if

i>the cost can be identified and

ii> improvement in benefits can be identified.

3. Amortisation : First preference – use ratio of future economic benefit (use best estimates of revised FEB on date of amortisation). Prospective amortisation is applied.

If FEB ration cannot be identified – then use SLM. Consider life as 10 years (softwares and websites 3 to 5 years). Lower life can be taken or Higher life can be taken, if justified. It cannot be infinite.

Residual value take it as zero. However, residual value can be taken any amount which is guaranteed.   

4. DISCLOSURE

Following disclosures shall be given in the financial statements for each class of the IA:

(a) The useful lives or the amortisation rates used;

(b) The amortisation methods used;

(c) The gross carrying amount and the accumulated amortisation (aggregated with accumulated impairment losses) at the beginning and end of the period;

(d) a reconciliation of the carrying amount at the beginning and end of the period showing:

(i) additions, indicating separately those from internal development and through amalgamation;

(ii) retirements and disposals;

(iii) impairment losses recognised in the statement of profit and loss during the period (if any);

(iv) impairment losses reversed in the statement of profit and loss during the period (if any);

(v) amortisation recognised during the period; and

(vi) other changes in the carrying amount during the period

(e) IA of similar nature and use shall be grouped into class. Example of seperate class may include: brand names; mastheads and publishing titles; computer Softwares; licenses and franchises; copyrights, and patents and other industrial property rights, service and operating rights; IA under development.