dsrawat, fca intangible assets

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The board believes that it is not appropriate to consider accounting for R& D on an aggregate or totalenterprise basis for several reasons. For accounting purpose the expectation of future benefits generally is notevaluated in relation to broad categories of expenditures on an enterprise-wide basis but rather in relation toindividual or related transactions or projects. Also, an enterprise’s total R&D programme may consist of anumber of projects at varying stages of completion and with varying degrees of uncertainty as to theirultimate success. If R&D were capitalized on an enterprise –wide basis, a meaningful method ofamortization could not be developed because the period of benefit could not be determined. Moreover, 90%of the respondents to a survey reported in AICPA indicated that their company’s philosophy is that R&Dexpenditures are intended to be recovered by current revenues rather than by revenue from new products.Selective capitalization - capitalizing R&D when incurred if specified conditions are fulfilled and charging toexpense all other R&D costs –requires establishment of conditions that must be fulfilled before R&D costsare capitalized. The board considered a number of factors on which prerequisite conditions might be based,including the following:Definitions of a product or progress: - the new or improved product or process must be defined.Technology feasibility: - the new or improved product or process must be determined to be technologyfeasible.Marketability/usefulness: - the marketability of the product or process or, if it is to be used internally ratherthan sold, its usefulness to the enterprise must be substantially assured.Economic feasibility: - Probability of the future economic benefits sufficient to recover all capitalized costsmust be high. Encompassed by the notion of economic feasibility is measurability of future benefits. Alsoimplicit is the ability to associates particular future benefits with particular costs.Management action: - Management must have definitely decided to produce and market or use the newproduct or process or to incorporate the significant improvement into an existing product or process.Distortion of net income comparison: - capitalization or immediate charging to expanse of R&D costs mustbe determined on the basis of whether inter-period comparisons of net income would be materially distorted.None of the above factors, however, lends itself to establishing a condition that could be objectively andcomparably applied by all enterprises. Considerable judgement is required to identify the point in theprogress of a R&D project at which a new or improved product or process is defined or is determined to be‘technologically feasibility’, marketable or useful. Nor can the probability of future benefits be readilyassessed. A management decision to improve with production does not necessarily assure future benefits.The board does not believe that distortion of net income comparisons is an operable criterion by which todecide whether research and development costs should be capitalized because the point at which net incomecomparisons might be distorted cannot be defined. Moreover, in assessing risk financial statement users haveindicates that they seek information about the variability of earnings. The board concluded that no set ofconditions that might be established for capitalization of costs could achieve the comparability amongstenterprises that proponents of ‘selective capitalization’s cite as a primary objective of that approach. Ifselective capitalization were applied only to cost incurred after fulfillment of the specified conditions, only aportion of the total costs of a particular R&D project would be capitalized and amortised. Thus thecapitalized amount would not indicate the total costs incurred to produce future benefits, nor would theamount of periodic amortization of capitalized costs represent a ‘matching’ of costs and benefits. Selectivecapitalization might involve retrospective capitalization of previously incurred costs in addition tocapitalization of costs incurred after fulfillment of the specified conditions. However, many R&D costsincurred before fulfillment of the conditions are not likely to be directly identifiable with the particular new6
or improved product or process for which costs would be capitalized. Moreover, retrospective capitalizationof the costs previously charged to expense is contrary to present accounting practice for other transactionswhose initial accounting is not altered as a result of hindsight. The preparation of periodic financialstatements requires many estimates and judgement for which restatement are not made in retrospectIntangibles assets not subject to AmortizationFAS-142, prescribes that if an intangible asset is determine to have an indefinite useful life, it shall not beamortized until its useful life is determined to be no longer indefinite. An entity shall evaluate the remaininguseful life of an intangible asset that is not being amortized, each reporting period to determine whetherevents and circumstances continue to support an indefinite useful life. If an intangible asset that is not beingamortized is subsequently determined to have a finite useful life, the asset shall be tested for impairment inaccordance with Para 16 that intangible asset shall then be amortized prospectively over its estimatedremaining useful life and accounted for in the same manner as other intangible assets that are subject toamortization.Under the Indian GAAP (AS-26) goodwill is also subject to amortization in spite of the fact that goodwillhas indefinite useful life. A rebuttable presumption of the useful life of goodwill under AS-26 is 10 year.Subsequent ExpenditureIt is unknown whether that approach is commonly extended to intangible assets under US GAAP as the FAS-142 is silent about subsequent expenditures. To the extent that US enterprises do not capitalize subsequentexpenditures, AS-26, guidance on subsequent expenditures constitutes another difference between Indian ASand US GAAP.Equity Method InvestmentsFAS-142, prescribes that the portion of the difference between the cost of an investment and the amount ofunderlying equity in net assets of an equity method investee that is recognised as goodwill in accordancewith Para 19(b) of APB Opinion No. 18, The Equity Method of Accounting for Investment in Common Stock(equity method goodwill) shall not be amortized. However, equity method goodwill shall not be reviewed forimpairment in accordance with this Statement. Equity method investment shall continue to be reviewed forimpairment an accordance with Para 19 (h) of Opinion18.Goodwill arising under the Equity Method of Accounting for Investment is not recognised under the IndianGAAP but only determined/identified for the purpose of disclosure in the consolidated financial statementsof the investor (AS-23).Financial Statement PresentationAs per FAS-142, all intangible assets shall be aggregated and presented as a separate line item in thestatement of financial position. However, that requirement does not preclude presentation of individualintangibles assets or classes of intangibles assets as separate line items. The amortization expenses andimpairment losses for intangible assets shall be presented in income statement line items within continuingoperations as deemed appropriate for each entity .Para 14 and16 require that an intangible asset be tested forimpairment when it is determined that the asset should no longer be amortized or should begin to beamortized due to a reassessment of its remaining useful life. An impairment loss resulting from thatimpairment test shall not be recognised as a change in accounting principles.The aggregate amount of goodwill shall be presented as a separate line item in the statement of financialposition. The aggregate amount of goodwill impairment losses shall be presented as a separate line item inthe income statement before the subtotal income from continuing operations (or similar caption) unless agoodwill impairment loss is associated with a discontinuing operation. A goodwill impairment loss7
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