Accounting Standard 26 (2)

7/30/2019 Accounting Standard 26 (2)

1/49

1

Accounting Standard 26

Intangible Assets


2/49

2

Intangible Assets..An Understanding

From 1840 to 1990 , a corporate value was driven by its

tangible assets

The market capitalization also followed the tangible assets

held by the companies

In early 2000 , the book value of the assets represented less

than 15% of the total market value

Therefore what are the key drivers of market value,today?

It is the Intangibles


3/49

3

Managing a knowledge Organization

Leverages

Knowledge organization

KNOW

HOW

INNOVATION

REPUTAION

Success inMarket place


4/49

4

Intangibles.

Intangibles include its brands,its ability to attract,develop

& mature a cadre of competent professionals & its ability

to attract and retain top notch clients

Intangibles4 major categories:

HumanResources:

Collective expertise

Innovation & leadershipEntrepreneur & mgt.skills

Intellectual PropertyAssets:

Know how

Copyrights

Patents

Products & tools

Internal Assets:Systems

Technologies

Methodologies

Processes & tools

Specific to enterprise

External Assets:Market related intangibles

Customer loyalty

Brand value


5/49

5

Objective

The objective of this Statement is to prescribe theaccounting treatment for intangible assetsthatare not dealt with specifically in anotherAccounting Standard.

This Statement requires an enterprise torecognisean intangible asset if, and only if,certain criteria are met.

The Statement also specifieshow to measure thecarrying amount of intangible assetsandrequirescertain disclosuresabout intangibleassets.


6/49

6

Scope

This Statement should be applied by all enterprises in

accounting for intangible assets, except:

(a) intangible assets that are covered by another AccountingStandard:

(b) financial assets;

(c) mineral rights and expenditure on the exploration for, ordevelopment and extraction of, minerals, oil, natural gasand similar non-regenerative resources; and

(d) intangible assets arising in insurance enterprises fromcontracts with policyholders.

This Statement should not be applied to expenditure in respect oftermination benefits also.


7/497

Definitions

An intangible asset is an identifiable non-monetary asset,without physical substance, held for use in the productionor supply of goods or services, for rental to others, or foradministrative purposes.

Anasset is a resource:

(a) controlled by an enterprise as a result of past events;and

(b) from which future economic benefits are expected toflow to the enterprise.

Cont


8/498

Definitions

Monetary assetsare money held and assets to be receivedin fixed or determinable amounts of money.

Non-monetary assetsare assets other than monetary

assets.

Research is original and planned investigationundertaken with the prospect of gaining new scientific ortechnical knowledge and understanding.

Amortisation is the systematic allocation of thedepreciable amount of an intangible asset over its usefullife.

Cont


9/499

Definitions

Development is the application of research findings or

other knowledge to a plan or design for the production ofnew or substantially improved materials, devices,products, processes, systems or services prior to thecommencement of commercial production or use.

Depreciable amount is the cost of an asset less its residualvalue.

Residual valueis the amount which an enterprise expectsto obtain for an asset at the end of its useful life after

deducting the expected costs of disposal.

Fair valueof an asset is the amount for which that assetcould be exchanged between knowledgeable, willingparties in an arm's length transaction.

Cont


10/4910

Definitions

Useful lifeis either:

(a) the period of time over which an asset is expected to beused by the enterprise; or

(b) the number of production or similar units expected tobe obtained from the asset by the enterprise.

An active market is a market where all the followingconditions exist:

(a) the items traded within the market are homogeneous;(b) willing buyers and sellers can normally be found at anytime; and

(c) prices are available to the public.

Cont


11/4911

Definitions

An impairment loss is the amount by which the carryingamount of an asset exceeds its recoverable amount.

Carrying amount is the amount at which an asset isrecognised in the balance sheet, net of any accumulatedamortisation and accumulated impairment lossesthereon.


12/4912

Recognition and InitialMeasurement of an IntangibleAsset

An intangible asset should berecognised if, and onlyif:

(a) it is probablethat thefuture economic benefitsthat areattributable to the assetwill flowto the enterprise;and

(b) the cost of the asset can be measured reliably.

An enterprise should assess the probability of futureeconomic benefits using reasonable and supportableassumptions that represent best estimate of the set ofeconomic conditions that will exist over the useful life ofthe asset.

An intangible asset should be measured initially at cost.


13/4913

Different situations

Separate Acquisition

Acquisition as Part of an Amalgamation

Acquisition by way of a Government GrantExchanges of Assets

Internally Generated Goodwill

Internally Generated Intangible Assets


14/4914

Research Phase

No intangible asset arising from research (orfrom the research phase of an internalproject) should be recognised.

Expenditure on research (or on the researchphase of an internal project) should berecognised as an expensewhen it is incurred.


15/4915

Development Phase

An intangible asset arising from development (orfrom the development phase of an internal project)should be recognised if, and only if, an enterprise candemonstrate all of the following:

(a) the technical feasibility of completingtheintangible asset so that it will be available for use orsale;

(b) its intention to completethe intangible asset anduse or sell it;

Cont


16/4916

Development Phase

(c) its ability to use or sell the intangible asset;

(d) how the intangible asset will generate probablefuture economic benefits.

Among other things, the enterprise shoulddemonstrate the existence of a market for the output ofthe intangible asset or the intangible asset itself or, if it

is to be used internally, the usefulness of theintangible asset;

Cont


17/4917

Development Phase

(e) the availability of adequate technical, financial

and other resourcesto complete the development andto use or sell the intangible asset; and

(f) its ability to measure the expenditure attributable

to the intangible asset during its developmentreliably.

Internally generated brands, mastheads,publishing titles, customer lists and items similar in

substance should not be recognised as intangibleassets.


18/4918

Cost of an Internally Generated Intangible Asset

Example An enterprise is developing a new production

process. During the year 2001, expenditure incurredwas Rs. 10 lakhs, of which Rs. 9lakhs was incurredbefore 1 December 2001 and 1 lakh was incurred

between 1 December 2001 and 31 December 2001.The enterprise is able to demonstratethat, at 1December 2001, the production process met thecriteria for recognition as an intangible asset.

The recoverable amountof the know-how embodied

in the process (including future cash outflows tocomplete the process before it is available for use) isestimated to be Rs. 5 lakhs.


19/4919

Example

At the end of 2001, the production process isrecognised as an intangible asset at a cost of Rs. 1lakh (expenditure incurred since the date when therecognition criteria were met, that is, 1 December2001).

The Rs. 9 lakhs expenditure incurred before 1December 2001 is recognised as an expense becausethe recognition criteria were not met until 1December 2001.

This expenditure will never form part of the cost ofthe production process recognised in the balancesheet.


20/4920

Example

During the year 2002, expenditure incurred is Rs. 20lakhs. At the end of 2002, the recoverable amount of

the know-how embodied in the process (includingfuture cash outflows to complete the process before it isavailable for use) is estimated to be Rs. 19 lakhs.

At the end of the year 2002, the cost of the productionprocess is Rs. 21 lakhs (Rs. 1 lakh expenditurerecognised at the end of 2001 plus Rs. 20 lakhs

expenditure recognised in 2002).The enterprise recognises an impairment loss of Rs. 2lakhs to adjust the carrying amount of the processbefore impairment loss (Rs. 21 lakhs) to its recoverable

amount (Rs. 19 lakhs).


21/4921

Recognition of an Expense

Expenditure on an intangible item should be

recognised as an expense when it is incurred unless:

(a) it forms part of the cost of an intangible assetthat meets the recognition criteria

or(b) the item is acquired in an amalgamation in

the nature of purchase and cannot be recognised asan intangible asset.

If this is the case, this expenditure (included in thecost of acquisition) should form part of the amountattributed to goodwill (capital reserve) at the date of

acquisition (AS 14, Accounting for Amalgamations).


22/49

22

Past Expenses not to be Recognised as an Asset

Expenditure on an intangible item that wasinitially recognised as an expense by a reportingenterprise in previous annual financial statements orinterim financial reports should not be recognised aspart of the cost of an intangible asset at a later date.


23/49

23

Subsequent Expenditure

Subsequent expenditure on an intangible assetafter its purchase or its completion should berecognised as an expense when it is incurred unless:

(a) it is probable that the expenditure will enablethe asset to generate future economic benefits in excess

of its originally assessed standard of performance; and

(b) the expenditure can be measured and attributedto the asset reliably.

If these conditions are met, the subsequentexpenditure should be added to the cost of theintangible asset.


24/49

24

Measurement Subsequent to Initial Recognition

After initial recognition, an intangible assetshould be carried at its cost less any accumulatedamortisation and any accumulated impairment

losses.


25/49

25

Amortisation

Amortisation Period

The depreciable amount of an intangible asset should beallocated on a systematic basisover the best estimate ofits useful life.

There is a rebuttable presumption that the useful life ofan intangible assetwill not exceed ten years from the datewhen the asset is available for use.

Amortization should commence when the asset isavailable for use.

Cont


26/49

26

Amortisation Period Examples

A. An enterprise has purchased an exclusive right togenerate hydro-electric power for sixty years. The costs ofgenerating hydroelectric power are much lower than thecosts of obtaining power from alternative sources. I t isexpected that the geographical area surrounding thepower station will demand a significant amount of powerfrom the power station for at least sixty years.

The enterprise amortises the right to generate powerover sixty years, unless there is evidence that its usefullife is shorter.

B. An enterprise has purchased an exclusive rightto operate a toll motorway for thirty years. There is no

plan to construct alternative routes in the area served bythe motorway. I t is expected that this motorway will be inuse for at least thirty years.

The enterprise amortises the right to operate themotorway over thirty years, unless there is evidence that

its useful life is shorter.


27/49

27

Amortisation Period

If control over the future economic benefits froman intangible asset is achieved through legal rightsthat have been granted for a finite period, the usefullife of the intangible asset should not exceed the

period of the legal rights unless:

(a) the legal rights are renewable; and

(b) renewal is virtually certain.


28/49

28

Amortisation Method

The amortisation method used should reflect thepattern in which the asset's economic benefits areconsumed by the enterprise.

If that pattern cannot be determined reliably, thestraight-line method should be used.

The amortisation charge for each period should be

recognised as an expense unless another AccountingStandard permits or requires it to be included in thecarrying amount of another asset.


29/49

29

Residual Value

The residual value of an intangible asset should

be assumed to be zero unless:

(a) there is a commitment by a third party topurchase the asset at the end of its useful life; or

(b) there is an active market for the asset and:

(i) residual value can be determined byreference to that market; and

(ii) it is probable that such a market willexist at the end of the asset's useful life.


30/49

30

Review of Amortisation Period and Amortisation Method

The amortisation period and the amortisation methodshould be reviewed at least at each financial year end.

If the expected useful life of the asset is significantly

different from previous estimates, the amortisation periodshould be changed accordingly

If there has been a significant change in the expectedpattern of economic benefits from the asset, the

amortisation method should be changed to reflect thechanged pattern.

Such changes should be accounted for in accordancewith AS 5, Net Profit or Loss for the Period, Prior Period

Items and Changes in Accounting Policies.


31/49

31

Recoverability of the CarryingAmountImpairment Losses

In addition to the requirements of AccountingStandard on Impairment of Assets, an enterpriseshould estimate the recoverable amount of thefollowing intangible assets at least at each financialyear end even if there is no indication that the assetis impaired:

(a) an intangible asset that is not yet availablefor use; and

(b) an intangible asset that is amortised over a

period exceeding ten years from the date when theasset is available for use.The recoverable amount should be determined

under Accounting Standard on Impairment of Assetsand impairment losses recognised accordingly.


32/49

32

Retirements and Disposals

An intangible asset should be derecognised(eliminated from the balance sheet) on disposal orwhen no future economic benefits are expected fromits use and subsequent disposal.

Gains or losses arising from the retirement ordisposal of an intangible asset should be determinedas the difference between the net disposal proceedsand the carrying amount of the asset andshould berecognised as income or expense in the statement ofprofit and loss.

i l


33/49

33

Disclosure General

The financial statements should disclose thefollowing for each class of intangible assets,distinguishing between internally generatedintangible assets and other intangible assets:

(a) the useful lives or the amortisation rates

used;(b) the amortisation methods used;(c) the gross carrying amount and the

accumulated amortization (aggregated withaccumulated impairment losses) at the beginning

and end of the period;(d) a reconciliation of the carrying amount at

the beginning and end of the period showing:(i) additions, indicating separately those

from internal development and throughamalgamation; Cont


34/49

34

General Disclosure

(ii) retirements and disposals;

(iii) impairment losses recognised in the statementof profit and loss during the period (if any);

(iv) impairment losses reversed in the statement ofprofit and loss during the period (if any);

(v) amortisation recognised during the period; and

(vi) other changes in the carrying amount duringthe period.


35/49

35

Disclosure in Financial Statement

(a) if an intangible asset is amortised over more

than ten years, the reasons why it is presumedthatthe useful life of an intangible asset will exceed tenyears from the date when the asset is available foruse. In giving these reasons, the enterprise should

describe the factor(s) that played a significant role indetermining the useful life of the asset;

(b) a description, the carrying amount andremaining amortisation period of any individual

intangible asset that ismaterial to the financialstatements of the enterprise as a whole;

Cont


36/49

36

Disclosure in Financial Statement

(c) the existence and carrying amounts ofintangible assets whose title is restricted and thecarrying amounts of intangible assets pledged assecurity for liabilities; and

(d) the amount of commitments for theacquisition of intangible assets.


37/49

37

Research and DevelopmentExpenditure

The financial statements should disclose theaggregate amount ofresearch and developmentexpenditure recognised as an expense during the

period.


38/49

38

Transitional Provisions

Where, on the date of this Statement coming intoeffect, an enterprise is following an accountingpolicy ofnot amortising an intangible item oramortising an intangible item over a period longerthan the period determined under amortisation

period of this Statementand the period determinedunder amortisation period has expired on the date ofthis Statement coming into effect, the carryingamount appearing in the balance sheet in respect ofthat itemshould be eliminatedwith a corresponding

adjustment to the opening balance of revenuereserves.Cont

i i l i i


39/49

39


In the event the period determined under

amortisation period has not expired on the date ofthis Statement coming into effect and:

(a) if the enterprise is following an accounting

policy of not amortising an intangible item, thecarrying amount of the intangible item should berestated, as if the accumulated amortisation hadalways been determined under this Statement, with

thecorresponding adjustment to the opening balanceof revenue reserves. The restated carrying amountshould be amortised over the balance of the period asdetermined in amortisation period.

Cont

T iti l P i i


40/49

40


(b) if the remaining periodas per the accounting

policyfollowed by the enterprise:(i) is shorter as compared to the balanceof the period determined under amortisation period,the carrying amount of the intangible item should beamortised 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 amortisation period,the carrying amount of the intangible item should berestated, as if the accumulated amortisation had

always been determined under this Statement, withthe corresponding adjustment to the opening balanceof revenue reserves. The restated carrying amountshould be amortised over the balance of the period asdetermined in amortisation period.

E l T iti l


41/49

41

Examples on TransitionalProvisions

Example 1An intangible item is appearing in the balance

sheet of A Ltd. at Rs. 10 lakhs as on 1-4-2003. Theitem was acquired for Rs. 10 lakhs on April 1, 1990

and was available for use from that date. Theenterprise has been following an accounting policyof not amortising the item. Applying amortisationperiod, the enterprise determines that the item wouldhave been amortised over a period of 10 years from

the date when the item was available for use i.e.,April 1, 1990.


42/49

42

Example 2An intangible item is appearing in the balance

sheet of A Ltd. at Rs. 8 lakhs as on 1-4-2003. Theitem was acquired for Rs. 20 lakhs on April 1, 1991and was available for use from that date. Theenterprise has been following a policy of amortisingthe item over a period of 20 years on straight-line

basis. Applying amortisation period, the enterprisedetermines that the item would have been amortisedover a period of 10 years from the date when the itemwas available for use i.e., April 1, 1991.


43/49

43

Example 3

An intangible item is appearing in the balancesheet of A Ltd. at Rs. 8 lakhs as on 1-4-2003. Theitem was acquired for Rs. 20 lakhs on April 1, 2000and was available for use from that date. Theenterprise has been following a policy of amortisingthe intangible item over a period of 5 years onstraight line basis. Applying amortisation period, theenterprise determines the amortisation period to be 8years, being the best estimate of its useful life, fromthe date when the item was available for use i.e.,

April 1, 2000.


44/49

44

Example 4

An intangible item is appearing in the balance

sheet of A Ltd. at Rs. 18 lakhs as on 1-4-2003. Theitem was acquired for Rs. 24 lakhs on April 1, 2000and was available for use from that date. Theenterprise has been following a policy of amortising

the intangible item over a period of 12 years onstraight-line basis. Applying amortisation period, theenterprise determines that the item would have beenamortised over a period of 10 years on straight linebasis from the date when the item was available foruse i.e., April 1, 2000.


45/49

45

Example 5

An intangible item is appearing in the balance

sheet of A Ltd. at Rs. 20 lakhs as on 1-4-2003. Theitem was acquired for Rs. 20 lakhs on April 1, 2000and was available for use from that date. Theenterprise has been following an accounting policy of

not amortising the item. Applying amortisationperiod, the enterprise determines that the item wouldhave been amortised over a period of 10 years onstraight line basis from the date when the item wasavailable for use i.e., April 1, 2000.


46/49

46

Examples for Disclosure

Bajaj Auto Ltd.

Accounting Policies :

Intangible Assets :

a) Technical know-how acquired, expenditure on technicalknow-how acquired (including Income-tax and R&D cess) is

being amortised over a period of six years.b) Technical Know-how developed by the company

i. Expenditure incurred on know-how developed by thecompany, post research stage, is recognised as anintangible assets, if and only if the future economic

benefits attributable are probable to flow to the companyand the costs can be measured reliably.

Cont


47/49

47

Cont

ii. The cost of technical know-how developed is amortisedover its estimated life i.e. three years.

Research & Development Expenditure:

Research & Development Expenditure is charged torevenue under the natural heads of account in the year in

which it is incurred. Payments for R&D work by outsideagency are being charged out upto the stage ofcompletion. However, expenditure incurred atdevelopment phase, where it is reasonably certain thatoutcome of research will be commercially exploited toyield economic benefits to the company, is considered asan Intangible asset and accounted in the mannerspecified above.


48/49

48

Crompton-Greaves Ltd.

Accounting Policies:

Intangible Assets and Amortisation

Intangible assets are recognised as per thecriteria specified in Accounting Standard 26 and areamortised as follows:

a) Leasehold Land: Over the period of lease

b) Specialised software: Over a Period of five years

c) Lump sum fees for technical know-how: Over aperiod of five years from the year of commercialproduction


49/49

Documents

Accounting Standard 26 (2)