TMI BlogIntangible AssetsX X X X Extracts X X X X X X X X Extracts X X X X ..... ( b ) financial assets [1] ; ( c ) mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil, natural gas and similar non-regenerative resources; and ( d ) intangible assets arising in insurance enterprises from contracts with policyholders. This Standard should not be applied to expenditure in respect of termination benefits [2] also. 2. If another Accounting Standard deals with a specific type of intangible asset, an enterprise applies that Accounting Standard instead of this Standard. For example, this Standard does not apply to: ( a ) intangible assets held by an enterprise for sale in the ordinary course of business (see AS 2, Valuation of Inventories, and AS 7, Accounting for Construction Contracts); ( b ) deferred tax assets (see AS 22, Accounting for Taxes on Income); ( c ) leases that fall within the scope of AS 19, Leases; and ( d ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ministrative purposes. 6.2 An asset is a resource: ( a ) controlled by an enterprise as a result of past events; and ( b ) from which future economic benefits are expected to flow to the enterprise. 6.3 Monetary assets are money held and assets to be received in fixed or determinable amounts of money. 6.4 Non-monetary assets are assets other than monetary assets. 6.5 Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. 6.6 Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or use. 6.7 Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life. 6.8 Depreciable amount is the cost of an asset less its residual value. 6.9 Useful life is either: ( a ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intangible asset, expenditure to acquire it or generate it internally is recognised as an expense when it is incurred. However, if the item is acquired in an amalgamation in the nature of purchase, it forms part of the goodwill recognised at the date of the amalgamation (see paragraph 55). 9. Some intangible assets may be contained in or on a physical substance such as a compact disk (in the case of computer software), legal documentation (in the case of a licence or patent) or film (in the case of motion pictures). The cost of the physical substance containing the intangible assets is usually not significant. Accordingly, the physical substance containing an intangible asset, though tangible in nature, is commonly treated as a part of the intangible asset contained in or on it. 10. In some cases, an asset may incorporate both intangible and tangible elements that are, in practice, inseparable. In determining whether such an asset should be treated under AS 10, Accounting for Fixed Assets, or as an intangible asset under this Standard, judgement is required to assess as to which element is predominant. For example, computer software for a computer controlled machine tool tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control since an enterprise may be able to control the future economic benefits in some other way. 15. Market and technical knowledge may give rise to future economic benefits. An enterprise controls those benefits if, for example, the knowledge is protected by legal rights such as copyrights, a restraint of trade agreement (where permitted) or by a legal duty on employees to maintain confidentiality. 16. An enterprise may have a team of skilled staff and may be able to identify incremental staff skills leading to future economic benefits from training. The enterprise may also expect that the staff will continue to make their skills available to the enterprise. However, usually an enterprise has insufficient control over the expected future economic benefits arising from a team of skilled staff and from training to consider that these items meet the definition of an intangible asset. For a similar reason, specific management or technical talent is unlikely to meet the definition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of the evidence available at the time of initial recognition, giving greater weight to external evidence. 23. An intangible asset should be measured initially at cost. Separate Acquisition 24. If an intangible asset is acquired separately, the cost of the intangible asset can usually be measured reliably. This is particularly so when the purchase consideration is in the form of cash or other monetary assets. 25. The cost of an intangible asset comprises its purchase price, including any import duties and other taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), and any directly attributable expenditure on making the asset ready for its intended use. Directly attributable expenditure includes, for example, professional fees for legal services. Any trade discounts and rebates are deducted in arriving at the cost. 26. If an intangible asset is acquired in exchange for shares or other securities of the reporting enterprise, the asset is recorded at its fair value, or the fair value of the securities issued, whichever is more clearly evident. Acquisition as Part of an Amalgamation 27. An intangible asset acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnition criteria in paragraphs 20 and 21, even if that intangible asset had not been recognised in the financial statements of the transferor; and ( b ) if the cost (i.e. fair value) of an intangible asset acquired as part of an amalgamation in the nature of purchase cannot be measured reliably, that asset is not recognised as a separate intangible asset but is included in goodwill (see paragraph 55). 32. Unless there is an active market for an intangible asset acquired in an amalgamation in the nature of purchase, the cost initially recognised for the intangible asset is restricted to an amount that does not create or increase any capital reserve arising at the date of the amalgamation. Acquisition by way of a Government Grant 33. In some cases, an intangible asset may be acquired free of charge, or for nominal consideration, by way of a government grant. This may occur when a government transfers or allocates to an enterprise intangible assets such as airport landing rights, licences to operate radio or television stations, import licences or quotas or rights to access other restricted resources. AS 12, Accounting for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise s internally generated goodwill or of running day-to-day operations. Therefore, in addition to complying with the general requirements for the recognition and initial measurement of an intangible asset, an enterprise applies the requirements and guidance in paragraphs 39-54 below to all internally generated intangible assets. 39. To assess whether an internally generated intangible asset meets the criteria for recognition, an enterprise classifies the generation of the asset into: ( a ) a research phase; and ( b ) a development phase. Although the terms research and development are defined, the terms research phase and development phase have a broader meaning for the purpose of this Standard. 40. If an enterprise cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the enterprise treats the expenditure on that project as if it were incurred in the research phase only. Research Phase 41. No intangible asset arising from research (or from the research phase of an internal project) sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a project, an enterprise can, in some instances, identify an intangible asset and demonstrate that future economic benefits from the asset are probable. This is because the development phase of a project is further advanced than the research phase. 46. Examples of development activities are: ( a ) the design, construction and testing of pre-production or pre-use prototypes and models; ( b ) the design of tools, jigs, moulds and dies involving new technology; ( c ) the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and ( d ) the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services. 47. To demonstrate how an intangible asset will generate probable future economic benefits, an enterprise assesses the future economic benefits to be received from the asset using the principles in Accounting Standard on Impairment of Assets [4] . If the asset will generate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generating the asset, such as fees to register a legal right and the amortisation of patents and licences that are used to generate the asset; and ( d ) overheads that are necessary to generate the asset and that can be allocated on a reasonable and consistent basis to the asset (for example, an allocation of the depreciation of fixed assets, insurance premium and rent). Allocations of overheads are made on bases similar to those used in allocating overheads to inventories (see AS 2, Valuation of Inventories). AS 16, Borrowing Costs, establishes criteria for the recognition of interest as a component of the cost of a qualifying asset. These criteria are also applied for the recognition of interest as a component of the cost of an internally generated intangible asset. 54. The following are not components of the cost of an internally generated intangible asset: ( a ) selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to making the asset ready for use; ( b ) clearly identified inefficiencies and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that meets the recognition criteria (see paragraphs 19-54); or ( b ) the item is acquired in an amalgamation in the nature of purchase and cannot be recognised as an intangible asset. If this is the case, this expenditure (included in the cost of acquisition) should form part of the amount attributed to goodwill (capital reserve) at the date of acquisition (see AS 14, Accounting for Amalgamations). 56. In some cases, expenditure is incurred to provide future economic benefits to an enterprise, but no intangible asset or other asset is acquired or created that can be recognised. In these cases, the expenditure is recognised as an expense when it is incurred. For example, expenditure on research is always recognised as an expense when it is incurred (see paragraph 41). Examples of other expenditure that is recognised as an expense when it is incurred include: ( a ) expenditure on start-up activities (start-up costs), unless this expenditure is included in the cost of an item of fixed asset under AS 10. Start-up costs may consist of preliminary expenses incurred in establishing a legal entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... internally generated intangible asset result in additions to the cost of the intangible asset. 61. Consistent with paragraph 50, subsequent expenditure on brands, mastheads, publishing titles, customer lists and items similar in substance (whether externally purchased or internally generated) is always recognised as an expense to avoid the recognition of internally generated goodwill. Measurement Subsequent to Initial Recognition 62. After initial recognition, an intangible asset should be carried at its cost less any accumulated amortisation and any accumulated impairment losses. Amortisation Amortisation Period 63. The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use. Amortisation should commence when the asset is available for use. 64. As the future economic benefits embodied in an intangible asset are consumed over time, the carrying amount of the asset is reduced to reflect that consumption. This is achiev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise: ( a ) amortises the intangible asset over the best estimate of its useful life; ( b ) estimates the recoverable amount of the intangible asset at least annually in order to identify any impairment loss (see paragraph 83); and ( c ) discloses the reasons why the presumption is rebutted and the factor(s) that played a significant role in determining the useful life of the asset (see paragraph 94( a )). Examples ( a ) An enterprise has purchased an exclusive right to generate hydro-electric power for sixty years. The costs of generating hydroelectric power are much lower than the costs of obtaining power from alternative sources. It is expected that the geographical area surrounding the power station will demand a significant amount of power from the power station for at least sixty years. The enterprise amortises the right to generate power over sixty years, unless there is evidence that its useful life is shorter. ( b ) An enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mortisation charge for each period should be recognised as an expense unless another Accounting Standard permits or requires it to be included in the carrying amount of another asset. 73. A variety of amortisation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the unit of production method. The method used for an asset is selected based on the expected pattern of consumption of economic benefits and is consistently applied from period to period, unless there is a change in the expected pattern of consumption of economic benefits to be derived from that asset. There will rarely, if ever, be persuasive evidence to support an amortisation method for intangible assets that results in a lower amount of accumulated amortisation than under the straight-line method. 74. Amortisation is usually recognised as an expense. However, sometimes, the economic benefits embodied in an asset are absorbed by the enterprise in producing other assets rather than giving rise to an expense. In these cases, the amortisation charge forms part of the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period needs to be changed. 80. Over time, the pattern of future economic benefits expected to flow to an enterprise from an intangible asset may change. For example, it may become apparent that a diminishing balance method of amortisation is appropriate rather than a straight-line method. Another example is if use of the rights represented by a licence is deferred pending action on other components of the business plan. In this case, economic benefits that flow from the asset may not be received until later periods. Recoverability of the Carrying Amount- Impairment Losses 81. To determine whether an intangible asset is impaired, an enterprise applies Accounting Standard on Impairment of Assets [6] . That Standard explains how an enterprise reviews the carrying amount of its assets, how it determines the recoverable amount of an asset and when it recognises or reverses an impairment loss. 82. If an impairment loss occurs before the end of the first annual accounting period commencing after acquisition for an intangible asset acquired in an amalgamation in the nature of purchase, the impairment loss is recognised as an adjustment to both the amount assigned to the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r use, an enterprise performs the impairment test required under paragraph 83( b ) and also makes the disclosure required under paragraph 94( a ). Retirements and Disposals 87. An intangible asset should be derecognised (eliminated from the balance sheet) on disposal or when no future economic benefits are expected from its use and subsequent disposal. 88. Gains or losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the statement of profit and loss. 89. An intangible asset that is retired from active use and held for disposal is carried at its carrying amount at the date when the asset is retired from active use. At least at each financial year end, an enterprise tests the asset for impairment under Accounting Standard on Impairment of Assets [7] , and recognises any impairment loss accordingly. Disclosure General 90. The financial statements should disclose the following for each class of intangible assets, distinguishing between internally generated intang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Impairment of Assets [8] in addition to the information required by paragraph 90( d )( iii ) and ( iv ). 93. An enterprise discloses the change in an accounting estimate or accounting policy such as that arising from changes in the amortisation method, the amortisation period or estimated residual values, in accordance with AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. 94. The financial statements should also disclose: ( a ) if an intangible asset is amortised over more than ten years, the reasons why it is presumed that the useful life of an intangible asset will exceed ten years from the date when the asset is available for use. In giving these reasons, the enterprise should describe the factor(s) that played a significant role in determining the useful life of the asset; ( b ) a description, the carrying amount and remaining amortisation period of any individual intangible asset that is material to the financial statements of the enterprise as a whole; ( c ) the existence and carrying amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraph 63. ( b ) if the remaining period as per the accounting policy followed by the enterprise: ( i ) is shorter as compared to the balance of the period determined under paragraph 63, the carrying amount of the intangible item should be amortised over the remaining period as per the accounting policy followed by the enterprise, ( ii ) is longer as compared to the balance of the period determined under paragraph 63, the carrying amount of the intangible item should be restated, as if the accumulated amortisation had always been determined under this Standard, with the corresponding adjustment to the opening balance of revenue reserves. The restated carrying amount should be amortised over the balance of the period as determined in paragraph 63. 100. Illustration B attached to the Standard illustrates the application of paragraph 99. Illustration A This Illustration, which does not form part of the Accounting Standard, provides illustrative application of the principles laid down in the Standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are. Development Stage 5. An internally generated software arising at the development stage should be recognised as an asset if, and only if, an enterprise can demonstrate all of the following: ( a ) the technical feasibility of completing the internally generated software so that it will be available for internal use; ( b ) the intention of the enterprise to complete the internally generated software and use it to perform the functions intended. For example, the intention to complete the internally generated software can be demonstrated if the enterprise commits to the funding of the software project; ( c ) the ability of the enterprise to use the software; ( d ) how the software will generate probable future economic benefits. Among other things, the enterprise should demonstrate the usefulness of the software; ( e ) the availability of adequate technical, financial and other resources to complete the development and to use the software; and ( f ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or consumed in developing the software; ( b ) the salaries, wages and other employment related costs of personnel directly engaged in developing the software; ( c ) any expenditure that is directly attributable to generating software; and ( d ) overheads that are necessary to generate the software and that can be allocated on a reasonable and consistent basis to the software (For example, an allocation of the depreciation of fixed assets, insurance premium and rent). Allocation of overheads are made on basis similar to those used in allocating the overhead to inventories. 9. The following are not components of the cost of an internally generated software: ( a ) selling, administration and other general overhead expenditure unless this expenditure can be directly attributable to the development of the software; ( b ) clearly identified inefficiencies and initial operating losses incurred before software achieves the planned performance; and ( c ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... much shorter, say 3 to 5 years. Amortisation method 15. The amortisation method used should reflect the pattern in which the software's economic benefits are consumed by the enterprise. If that pattern can not be determined reliably, the straight-line method should be used. The amortisation charge for each period should be recognised as an expenditure unless another Accounting Standard permits or requires it to be included in the carrying amount of another asset. For example, the amortisation of a software used in a production process is included in the carrying amount of inventories. II. Illustrative Application of the Accounting Standard to Web-Site Costs 1. An enterprise may incur internal expenditures when developing, enhancing and maintaining its own web site. The web site may be used for various purposes such as promoting and advertising products and services, providing electronic services, and selling products and services. 2. The stages of a web site's development can be described as follows: ( a ) Planning - includes undertaking feasibility studies, defining objectives and specifications, evaluating alternatives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it forms part of the cost of an intangible asset that meets the recognition criteria in paragraphs 19-54 of the Standard. Paragraph 56 of the Standard requires expenditure on start-up activities to be recognised as an expense when incurred. Developing a web site by an enterprise for its own use is not a start-up activity to the extent that an internally generated intangible asset is created. An enterprise applies the requirements and guidance in paragraphs 39-54 of this Standard to an expenditure incurred for developing its own web site in addition to the general requirements for recognition and initial measurement of an intangible asset. The cost of a web site, as described in paragraphs 52-54 of this Standard, comprises all expenditure that can be directly attributed, or allocated on a reasonable and consistent basis, to creating, producing and preparing the asset for its intended use. The enterprise should evaluate the nature of each activity for which an expenditure is incurred (e.g., training employees and maintaining the web site) and the web site's stage of development or post-development: ( a ) Paragraph 41 of this Standard requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered a corporate asset (one that does not generate cash inflows independently from other assets and their carrying amount cannot be fully attributed to a cash-generating unit), then an enterprise applies the 'bottom-up' test and/or the 'top-down' test under Accounting Standard on Impairment of Assets. ( ii ) an enterprise may incur an expenditure to enable use of content, which had been purchased or created for another purpose, on its web site ( e.g. , acquiring a license to reproduce information) or may purchase or create content specifically for use on its web site prior to the web site becoming available for use. In such circumstances, an enterprise should determine whether a separate asset, is identifiable with respect to such content (e.g., copyrights and licenses), and if a separate asset is not identifiable, then the expenditure should be included in the cost of developing the web site when the expenditure meets the conditions in paragraph 44 of this Standard. As per paragraph 20 of this Standard, an intangible asset is recognised if, and only if, it meets specified criteria, including the definition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... astructure Development purchasing or developing hardware Apply the requirements of AS 10 obtaining a domain name developing operating software (e.g., operating system and server software) developing code for the application installing developed applications on the web server stress testing Expense when incurred, unless it meets the recognition criteria under paragraphs 20 and 44 Graphical Design and Content Development designing the appearance (e.g., layout and colour) of web pages creating, purchasing, preparing (e.g., creating links and identifying tags), and uploading information, either textual or graphical in nature, on the web site pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over a period of 10 years from the date when the item was available for use i.e., April 1, 1990. Since the amortisation period determined by applying paragraph 63 has already expired as on 1-4-2003, the carrying amount of the intangible item of ₹ 10 lakhs would be required to be eliminated with a corresponding adjustment to the opening balance of revenue reserves as on 1-4-2003. Illustration 2 : Intangible Item is being amortised and the amortisation period determined under paragraph 63 has expired. An intangible item is appearing in the balance sheet of A Ltd. at ₹ 8 lakhs as on 1-4-2003. The item was acquired for ₹ 20 lakhs on April 1, 1991 and was available for use from that date. The enterprise has been following a policy of amortising the item over a period of 20 years on straight-line basis. Applying paragraph 63, the enterprise determines that the item would have been amortised over a period of 10 years from the date when the item was available for use i.e., April 1, 1991. Since the amortisation period determined by applying paragraph 63 has already expired as on 1-4-2003, the carrying amount of ₹ 8 lakhs would be required to be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the Standard) and the difference of ₹ 1.2 lakhs (Rs. 18 lakhs-Rs. 16.8 lakhs) would be required to be adjusted against the opening balance of the revenue reserves. The carrying amount of Rs. 16.8 lakhs would be amortised over 7 years which is the balance of the amortisation period as per paragraph 63. Illustration 5 : Intangible Item is not amortised and amortisation period determined under paragraph 63 has not expired. An intangible item is appearing in the balance sheet of A Ltd. at ₹ 20 lakhs as on 1-4-2003. The item was acquired for ₹ 20 lakhs on April 1, 2000 and was available for use from that date. The enterprise has been following an accounting policy of not amortising the item. Applying paragraph 63, the enterprise determines that the item would have been amortised over a period of 10 years on straight line basis from the date when the item was available for use i.e., April 1, 2000. On 1-4-2003, the enterprise would be required to restate the carrying amount of intangible item at ₹ 14 lakhs (Rs. 20 lakhs - 3xRs. 2 lakhs, i.e., amortisation that would have been charged as per the Standard) and the difference of ₹ 6 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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