dsrawat, fca intangible assets

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An entity shall evaluate the remaining useful life of an intangible asset that is being amortized each reportingperiod to determine whether events and circumstances warrant a revision to the remaining period ofamortization. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carryingamount of the intangible asset shall be amortized prospectively over that revised remaining useful life. If anintangible asset that is being amortized is subsequently determined to have an indefinite useful life, the assetshall be tested for impairment an accordance with Para 17. That intangible asset shall no longer be amortizedand shall be accounted for in the same manner as other intangibles assets that are not subject to amortization.Impairment LossesUnder the Indian GAAP there is separate accounting standard (AS-28) “Impairment of Assets” which alsoprescribes the principles for calculating the impairment losses on intangibles. However, under the US GAAP(FAS-142), it prescribes the principles for impairment of intangibles. Broadly the principles laid down underboth GAAPs are the same.DisclosureThese are the disclosures required under both the GAAPs in the financial statements:-• Useful life or amortization rate• Amortization method.• Gross carrying amount, accumulated amortization and impairment loss at the beginningand at the end of the period.• Reconciliation of carrying amount at the beginning and at the end of the period.Revaluation of IntangiblesRevaluation of intangibles is permitted neither under US GAAP nor under Indian GAAP.SIGNIFICANT DIFFERENCES BETWEEN THE TWO GAAPSSeparate Requirement for Some IntangiblesThe scope of AS-26 covers a number of intangible assets that are scattered across several pronouncementsunder US GAAP. US GAAP has separate requirements for some of those items, which includes Researchand development costs, computer software, motion picture films, licenses, customer lists, mortgage servicingrights and franchisesTreatment of R &D ExpensesAS-26 addresses research and development as separate components of internally generated intangiblesassets, like FASB statement No.-2 Accounting for Research and Development Costs, AS-26 requires thatcosts incurred for research is charged to expenses. Unlike US GAAP, AS-26 requires capitalization ofdevelopment costs, provided certain criteria are met; otherwise they must be expensed.FAS-2 requires all development costs to be expensed. FASB-86 however makes an exception in relation tosoftware development expenses, which should be capitalized only after technology feasibility is established.FASB had four options to consider whilst preparing FAS-2 i.e. (a) charge all cost to expenses when incurred(b) capitalized all cost when incurred (c) capitalize costs when incurred if specific conditions are fulfilledand charge all other costs to expense (d) accumulate all costs in s special category until the existence offuture benefits can be determine. FASB concluded that all R &D expenses should be charged to expenseswhen incurred, for reasons discussed below.4
There is normally a high degree of uncertainty about the future benefits of individual research anddevelopment projects, although the element of uncertainty may diminish as the project progresses. Estimatesof the rate of success of R & D projects vary markedly-depending in part on how narrowly one defines a‘project’ and how one defines ‘success’ – but such estimates indicate a high failure rate. For example, onestudy of a number of industries found that an average of less than 2% of new product ideas and less than15% of product development projects were commercially successful. Even after a project has passed beyondthe R & D stage, and a new or improved product or process is being marketed or used, the failure rate high.Estimates of new product failure range from 30-90% depending on the definition of failure used. One studyconcludes that ‘four about every three’ products emerging from R&D department as technical successes,there is average of only one commercial success. That study goes on to say that’ of all the dollars of newproduct expenses, almost 3/4 th go to unsuccessful products.A direct relationship between R&D costs and specific future revenue generally has not demonstrated, evenwith the benefit of hindsight. For example, three empirical research studies, which focus on companies inindustries intensively involved in R&D activities, generally failed to find a significant correlation betweenR&D expenditures and increased future benefits.The criterion of measurability would require that a resource not be recognised as an asset for accountingpurpose unless at the time it is acquired or developed its future economic benefits can be identified andobjectively measured. Due to the uncertainty involved, there is no indication that an economic resource hasbeen created. Moreover, even if at some point in the progress of an individual R&D project the expectationof future benefits becomes sufficiently high to indicate that an economic resource has been created, thequestion remains whether that resource should be recognised as an asset for accounting purposes. Althoughfuture benefits from a particular R&D project may be foreseen, they generally cannot be measured with areasonable degree of certainty. R&D costs therefore fail to satisfy the suggested measurability teat foraccounting recognition as an asset.Some costs are recognised as expenses on the basis of a presumed direct association with specific revenue;recognizing them as expenses accompanies recognition of the revenue. This is known as cause and effect. Ifan asset provides benefits for several periods its cost is allocated to the periods in a systematic and rationalmanner in the absence of a more direct basis for associating cause and effect. Some costs are associated withthe current accounting periods expenses because (a) costs incurred during the period provide no discerniblefuture benefits (b) costs recorded as assets in prior periods no longer provide discernible benefits, or (c)allocating costs either on the basis of association with revenue or among several accounting periods isconsidered to serve no useful purpose. The principles of immediate recognition also requires that itemscarried as assets in prior periods that are discovered to have no discernible future benefit be charges toexpense, for example, patent that is determined to worthless. Since evidence of direct casual relationshipbetween R&D expenditure and future benefits ha snot been found and due to high degree of uncertainty onfuture economic benefits, R&D expenses should be charged to expense immediately. The notion of‘matching’ – when used to refer to the process of recognizing cots as expenses on any sot of cause and effectbasis – cannot be applied to R&D costs. Indeed the general lack of discernible future benefits at the time thecosts are incurred indicates that the ‘immediate recognition’ principles of expense recognition should apply.Certain costs are immediately recognised as expense because allocating them to several accounting periods isconsidered to serve no useful purpose. The FASB interviews with selected bankers and analysts suggestedthat the relationship between current R&D expenses and future benefits is so uncertain that capitalization ofany R&D costs is not useful in assessing the earning potential of the enterprise. Therefore, it is unlikely thatone’s ability to predict the return on an investment and the variability of that return would be enhances by thecapitalization.5
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