dsrawat, fca intangible assets

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value recognised by entities that adopt fresh-start reporting in accordance with AICPA Statement ofPosition 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code. Thisexcess reorganization value shall be reported as goodwill and accounted for in the same manner asgoodwill.Subsequent Expenditures on Intangible AssetsEnterprises may incur the expenditure on intangible asset after these intangible is recognized/recorded in thebook. It is just like that if any tangible asset i.e. Plant is purchased on 01.01.2002 the cost of Plant shall becapitalized/ recognized in books on 01.01.2002 expenditure after the purchase of this Plant once it becomeready for use are not capitalized and debited to expenses account, however if any major expenditure isincurred on plant which increases its productivity or future benefit then certainly such expenses arecapitalized. Same is the case with the intangible AS-26 prescribes the conditions when such expenses shouldbe capitalized or included in cost of intangibles.• Subsequent expenses increase the future economic benefits of intangibles.• Subsequent expenses can be attributed to asset and measured reliably.If above two conditions are not full filled the subsequent expenses after initial recognition shall be expensedi.e. to be debited in Expenses A/c and not to be capitalized.In general, US GAAP does not provide explicit criteria on which to capitalize subsequent expenditures on anintangible asset. Common practice in the United States for identifiable tangible assets is to capitalizeexpenditures that extend the useful life of the asset.Carrying Amount of IntangiblesUnder both GAAPs the intangibles shall be carried at its cost less any accumulated amortization and anyaccumulated impairment losses in the financial statements of the enterprises. As under the US GAAP, initialrecognition of intangibles sometimes is don on fair value basis, the carrying amount of intangibles shall befair value less accumulated amortization and any accumulated impairment losses.Amortization MethodAmortization is the process of allocating an amount (in the case of intangible assets) to expense over theperiod of benefited. We provide depreciation on the fixed assets whereas in the case of intangible we call itamortization.The Accounting Standard-26, states that the depreciable amount of an intangible asset should be allocatedon a systematic basis over the best estimates of its useful life. Amortization should start when the assets isavailable for use.What is depreciable amount- Cost of intangible asset less residual value. The residual value of intangibles isgenerally taken as zero, unless it is evident that at the end of useful life third party will purchase it at certainamount or there is active market for intangible where it can be sold at the end of useful life and market valuecan be reasonably estimated.Next question comes of useful life - can we estimate the useful life of intangibles? There is lot of debate onthis point, take a case of goodwill, there are views that goodwill has infinite life.If it has infinite life why the amortization of goodwill should be done, if we decide to amortize what usefullife shall be taken for it? The Accounting Standard has tried to resolve the controversy by suggesting 10years as useful life. Until and unless there is clear evidence that useful life is longer than 10 years.2
Now the controversy of amortization or not amortization has been put to rest and as per the accountingstandard the intangible asset should be carried at cost less accumulated amortization.If economic benefits from intangible asset are achieved through legal right granted for finite period theuseful life of intangible should not exceeded legal right period unless the legal right is renewable andrenewal is almost certain.What method of amortization should be followed the answer mainly comes from the matching concept whichrequires that the benefit derived (consumed) from the intangible in the form of increased profitability shouldbe matched with the cost (Depreciation/amortization expenses).If the pattern of benefit and cost can be determined, reliably, then the enterprises should amortize theintangible as per the pattern. However if no pattern of benefit consumed can be determined reliably thenStraight-line method should be followed.Amortization is generally recorded as an expense in financial statement. However sometimes economicbenefits consumed of intangible asset is used to produce other asset, in this case the amortization expenses isadded in the cost of other asset rather than showing it as an expenses AS-2 ‘valuation of Inventory’.As per FAS-142 (US GAAP) intangible assets which are subject to amortization are treated almost in thesame way as under Indian GAAP (AS-26). FAS-142 prescribes the following principles/rule foramortization:-• A recognised intangibles asset shall be amortized over its useful life to the reporting entity unless thatlife is determined to be indefinite. If an intangibles asset has a finite useful life, but the precise lengthof that life is not known, that intangibles asset shall be amortized over the best estimate of its usefullife. The method of amortization shall reflect the pattern in which the economic benefits of theintangibles asset are consumed or otherwise used up. If that pattern cannot be reliably determined, astraight-line amortization method shall be used. An intangibles asset shall not be written down or offin the period of acquisition unless it becomes impaired during that period.• The amount of an intangibles asset to be amortized shall be the amount initially assigned to that assetless any residual value. The residual value of an intangible asset shall be assumed to be zero unless atthe end of its useful life to the entity the asset is expected to continue to have a useful life to anotherentity and (a) the reporting entity has a commitment from a third party to purchase the asset at the endof its useful life or (b) the residual value can not be determined by reference to an exchangetransaction in an existing market for that asset and that market is expected to exist at the end of theasset’s useful life.Review of Amortization MethodAs per Accounting Standard-26, the amortization method should be reviewed at the end of each financialyear and if-• The expected useful life of the intangible asset has significantly changed,• The pattern of future economic benefit has significantly changed.The amortization method should be changed accordingly. Significant change in useful life of asset may bedue to subsequent improvement in intangible asset, on account of subsequent expenditure on intangibles.FAS-142 also, laid down the same principles as in Indian GAAP. Para 14 of FAS-142 states as under forreview of amortization method3
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dsrawat, fca intangible assets

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