Accounting Standard 26Intangible Assets

Javeed budhwani

Overview• Intangible asset has been defined as expenses incurred

by companies on scientific technical knowledge, design and implementation of new processes or systems, licences intellectual property, trademarks, computer software, patents, copyrights, motion picture films, customer lists, mortgage, servicing rights, licenses, import quotas, franchisees.

• The financial statements should disclose the aggregate amount of research and development expenditure and amortisation details of the assets.

• The standard will, however, not apply on certain intangible items like financial assets, mineral rights and expenditure on the exploration for, or development and extraction of minerals, oil, natural gas and similar non-regenerative resources and intangible assets arising in insurance enterprises from contracts with policyholders.

Valuation/Recognition of Intangible Assets

1. Primary Recognition

(a) Acquired Intangible Assets

(b) Self-Generated Intangible Assets

2. Secondary Recognition

Acquisition by way of

Acquisition by way of Purchase

Acquisition by way of Amalgamation

Acquisition by way of Government Grant

Acquisition by way of Exchange for another asset

Acquisition by way of Purchase• Purchase Cost• - Trade discount• + Taxes on purchase• - Refundable Taxes• + Installation Expenses• + Expenses on Valuation• + Any other directly attributable expenseto make the asset ready for its intended use(e.g. professional fees or legal charges for

aquisition of asset)

Acquisition by way of Amalgamation

• Amalgamation in the nature of Merger

► at Book value

• Amalgamation in the

nature of Purchase☞Fair Value of Intangible

asset 1. Can be identified ► at Fair Value2. Can’t be identified ► at such value due to

which capital reserve does not arise or increase

Acquisition by way of Government Grant

• at Nominal Value

Acquisition by way of Exchange for another asset

• at Fair Value of asset obtained or

• at Fair Value of asset surrendered

• whichever is more clearly evident.

Note: if Fair Value is not clearly evident then

consider lower value as value of intangible asset.

Self-generatedRemaining self-generated intangible assets

will be recognised.

▪ Expenditure on self-generated intangible asset

is incurred in two phases.

1. Research Phase

2. Development Phase

Research Phase

• Research expenditure means planned expenditure for

gaining knowledge.

• Expenditure during research phase will be charged to

P&L A/c. It can never be reinstated as asset in future.

Development Phase• Development expenditure means expenditure incurred

on application of already gained knowledge.• Expenditure during development phase will be

capitalised as intangible asset till such asset is ready for use.

• Maximum capitalisation <= Future Economic Benefits• Amount to be transferred to P&L A/c = Amount already capitalised + Expenditure incurred -

Future Economic Benefits

Secondary RecognitionSecondary Expenditure

If it can be measured If it can’t be measured

Whether such expenditure improves

the performance of the asset

beyond standard performance

yes

Capitalised

However, it is encouraged to write-off

such expenditure to P&L A/c

no

Transfer to P&L A/c

Not recognised

Amortisation of Intangible Asset

Amortisation of Intangible asset

Method of amortisation

(in order of preference) Life of amortisation Scrap Value

Method of amortisation(in order of preference)

1. Production unit method

2. SLM method

3. WDV method

Life of amortisation

1. Over a period of 10 years (including goodwill)

2. 3-5 years for software/website

3. As per AS-14 goodwill due to amalgamation will be written-off over a period of 5 years

Life of amortisation ★ Higher life can be considered if justified.

▪ Justification to be given in notes to accounts. ▪ Such higher life is considered as an indicator of

impairment loss. ▪ If justification is not provided then Valuation as per AS-26 less: Book Value = written-off against opening revenue reserve ▪ If any intangible asset is not used, it is also an

indicator of impairment loss.

Scrap Value

• Method of amortisation, life of amortisation & scrap value will be reviewed every year. All effects will be on prospective basis.

★ Intangible assets can never be revalued in any case.

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