Accounting Standard – 26 Intangible Assets - tnkpsc.com

Accounting Standard – 26
Intangible Assets
CA Ashish Makhija
LL.B., AICWA, FCA
17/05/2008 1

Objective
1. To prescribe accounting
treatment for intangible assets
2. Prescribe recognition criterion
3. Prescribe Measurement of
Intangibles
4. Disclosure
17/05/2008 2

Status
♦ For Accounting Periods commencing on or
after 1.4.2004 – Mandatory for all
enterprises
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Accounting Standards
Withdrawn
♦ AS 8 – Accounting for Research &
Development
♦ AS 6 – Depreciation Accounting with
respect to the amortisation of intangible
assets
♦ AS 10 – Accounting for Fixed Assets –
paragraphs 16.3 to 16.7, 37 and 38
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Scope
To be applied by all enterprises in
accounting for intangible assets except
– Intangible assets covered by another AS
– Financial assets
– Mineral rights & expenditure on the exploration
for, or development and extraction of, minerals,
oil, natural gas and similar non-regenerative
resources
– Intangible assets in insurance companies
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What Is Intangible Asset ?
Intangible asset
–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
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Asset
Resource
Controlled by an enterprise
Expectation of future economic
benefits
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Recognition of Intangible Asset
♦Falls within the ambit of definition of
intangible asset, and
♦Probability of future economic benefits
flowing to the enterprise, and
♦Reliable measurement of cost
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Assessment of Probable Future
Economic Benefits
♦ Reasonable & supportable assumptions
representing best estimate of economic
conditions,over useful life
♦ Evidence available at the time of initial
recognition
♦ Greater weight to external evidence
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Initial Measurement of Intangible
Asset
Initially to be valued at cost
♦ Separate Acquisition
♦ Acquisition as part of an amalgamation
♦ Acquisition by by way of a Government Grant
♦ Exchange of Assets
♦ Internally Generated Goodwill
♦ Internally Generated Intangible Assets
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Cost of Internally Generated
Intangible Asset
♦ Research Phase
– Expensed off on incurrence
♦ Developmental Phase
– Technical feasibility of completing the intangible asset
– Intention to complete the intangible asset and use or sell
it
– Ability to use or sell the asset
– Probable future economic benefits
– Availability of adequate resources to complete the
development
– Ability to reliably measure expenditure during
development
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Cost of an Internally Generated
Intangible Asset
♦ Directly attributable or
reasonably allocable
expense to create, produce
or making the asset ready
for its intended use
♦ Can include
– Expenditure on material and
services used or consumed
– Direct personnel cost
– Directly attributable
expenditure
– Allocable overheads
♦ Does not include
– Selling, administrative
and general overheads
– Clearly defined
inefficiencies and
initial operating losses
before asset achieves
planned performance
– Expenditure on
training of staff to
operate that asset
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Recognition of an Expense
♦ Expense to be recognised when incurred, unless
– Forms part of cost of intangible asset
– Acquired in an amalgamation in nature of purchase,
formed part of goodwill/capital reserve
♦ Part Expense to recognised as part of cost
♦ Subsequent Expenditure added to cost only if
– Probable to generate additional future economic
benefits, and
– Measurable and attributable to asset
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Amortisation - Period
♦Depreciable amount allocated over the
best estimate of useful life
♦Useful life is ten years, a rebuttable
presumption
♦Amortisation to commence when asset
is available for use
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Amortisation Method
♦ To reflect pattern of consumption of asset’s
economic benefit
♦ Straight Line Method where pattern cannot
be determined reliably
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Residual Value
♦ To be assumed to be zero
♦ Rebuttable assumption if –
– Commitment by third party to purchase the
asset at the end of useful life
– There is an active market for that asset
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Review of Amortisation Period &
Amortisation Method
♦ To be reviewed at least at each financial
year end
♦ To change amortisation period if change in
expected useful life of the asset
♦ To change amortisation method if there is
significant change in expected pattern of
economic benefits
♦ Changes to be in accordance with AS - 5
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Impairment Loss
♦
♦
♦
To determine recoverable amount & impairment
loss as per AS – 28 at least at each financial year
end
a) Intangible asset not available for use
b) Intangible asset amortised over a period exceeding 10 years
Impairment Loss is in the first accounting period
after amalgamation – adjust intangible asset &
goodwill
Impairment loss is due to specific events or
change in circumstances – AS 28
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Retirement & Disposal
♦ Intangible Asset to be derecognised /
eliminated from Balance Sheet
– On disposal, or
– No future economic benefits are expected from
its use and subsequent disposal
♦ Gains or Losses = Net Disposal proceeds
+/- carrying amount, to be recognised as
income or expense
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Disclosure
♦ Distinguish between internally generated and
other intangible asset
♦ To disclose following for each intangible asset
– Useful life or amortisation rates used
– Amortisation methods used
– Gross carrying amount and accumulated amortisation at
the beginning and end of the period
– Reconciliation of carrying amount at the beginning and
end of the period
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Disclosure
♦ Reasons for amortising an intangible asset over
more than ten years
♦ Description, carrying amount and remaining
amortisation period considering its materiality
♦ Restriction on title of any intangible asset and
carrying amounts of intangible assets pledged as
security for liabilities
♦ Commitments for acquisition of intangible asset
♦ Research & development expenditure recognised
as an expense
17/05/2008 21

Transitional Provisions
♦ Intangible Asset not amortised earlier
– To be eliminated by contra adjustment to opening
balance of revenue reserves
♦ Intangible Asset amortised over a longer period
than specified in AS – 26
– Period under AS – 26 expired
• To be eliminated by contra adjustment to opening balance of
revenue reserves
– Period under AS – 26 not expired
• Carrying amount to be restated and adjusted to opening
balance of revenue reserves
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Transitional Provisions
♦ If remaining Period, as per accounting
policy followed by the enterprise, is
♦ Shorter
– Carrying amount to be amortised over remaining
period as per policy followed
♦ Longer
– Carrying amount to be restated after adjusting with
opening balance of revenue reserves. Restated
carrying amount to be amortised over balance period
as determined under AS - 26
17/05/2008 23

Thank you
Ashish Makhija
amc_ca@vsnl.com
17/05/2008 24