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Accounting
Standard 26 - Intangible Assets
| Issuing
Authority: |
The
Institute of Chartered Accountants of India. |
| Status: |
Mandatory |
Effective
Date:
- Expenditure
incurred on intangible items during accounting periods
commencing on or
after 1-4-2003 for the following:
-
Enterprises whose equity or debt securities are
listed on a recognised stock exchange in India,and
enterprises that are in the process of issuing
equity or
debt securities that will be listed on a recognised
stock exchange in India as evidenced by the board
of direcors' resloution in this regard.
-
All other commercial,industrial and business reporting
enterprises,whose
turnover for the accounting period exceeds Rs.50crores.
- Expenditure
incurred on intangible items during accounting periods
commencing on or after 1-4-2004 for all other enterprises.
Earlier
application of the standard is encouraged.
From the
date of applicability of this standard for the concerned
enterprises,the following stand withdrawn:
-
AS 8 - Accounting for Research and Development;
-
AS 6 - Depreciation Accounting, regarding amortisation(depreciation)
of intangible assets;and
-
AS 10 - Accounting for Fixed Assets - paragraphs
16.3 to 16.7 ,37,and 38.
Objective
To
prescribe the accounting treatment for intangible assets
that are not dealt with specifically in another accounting
standard.This standard requires an enterprise to recognise
an intangible asset if,and if only if,certain criteria
are met.
Scope
This standard is not applicable to:
- intangible
assets covered by another accounting standard e.g.
deferred tax assets
(AS 22), goodwill arising on amalgamation or consolidation(AS
14 or AS- 21),leases(AS19), intangible assets covered
by AS 2 - Valuation of Inventories and AS-7 Accounting
for construction contracts;
- financial
assets;
- mineral
rights and expenditure on exploration etc. of minerals,oil,natural
gas etc.
- intangible
assets arising in insurance enterprises form contracts
with policyholders.
This standard
applies to,among other things,expenditure on advertising,training,start-up,research
and development activities.
Important
Definitions
Intangible
Asset
An
intangible asset is an identifiable non-monetary asset,
without physical substance,held for use in the production
or supply of goods or services,for rental to others,or
for administrative purposes.
Common
examples are:
- computer
software,
- patents,copyrights,
- motion
picture films,
- customer
lists,
- franchises,marketing
rights.
Recognition
and Initial Measurement of an Intangible Asset
- An
intangible asset should be recognised if,and only
if:
-
it is probable that the future economic benefits
that are attributable to the asset will
flow to the enterprise;and
-
the cost of the asset can be measured reliably.
- An
enterprise should assess the probability of future
economic benefits using reasonable
supportable assumptions that represent best estimate
of the set of economic conditions that will exist
over the useful life of the asset.Use of judgement
is required,giving greater weight to external evidence.
- An
intangible asset should be measured initially at cost.
The acquisition
of an intangible asset may be through the following
modes:
-
Purchase
-
As part of an Amalgamation
-
By way of a Government Grant
-
In exchange or part exchange for another asset.
Internally
Generated Goodwill
Internally generated goodwill should not be recognised
as an asset.
Internally
Generated Intangible Assets
An enterprise classifies the generation of an internally
generated intangible asset into:
- a research
phase;and
- a development
phase.
Where it
is impossible to distinguish between the two phases,
the expenditure incurred is treated as the research
phase only.
Research
Phase
No
intangible asset arising from research (or from the
research phase of an internal project) should be recognised.Expenditure
on research (or on the research phase of an internal
project) should be recognised as an expense when it
is incurred.
Development
Phase
An intangible asset arising from development (or from
the development phase of an internal project) should
be recognised if,and only if,an enterprise can demonstrate
all of the following:
- the
technical feasibility of completing the intangible
asset so that it will be available for use or sale;
- its
intention to complete the intangible asset and use
or sell it;
- its
ability to use or sell the intangible asset;
- how
the intangible asset will generate probable future
economic benefits e.g.existence of a market for the
asset or its output or its usefulness(if it is internally
generated);
- the
availability of adequate,technial,financial and other
resources to complete the development and to use or
sell the intangible asset; and
- its
ability to measure the expenditure attributable to
the intangible asset during its development reliably.
Internally
generated brands,mastheads,publishing titles,customer
lists and items similar in substance should not be recognised
as intangible assets
Cost
of an Internally Generated Intangible Asset
The cost of an internally generated intangible asset
comprises all expenditure that can be reliably attributed,or
allocated on a reasonable and consistent basis,to creating,producing
and making the asset ready for its intended use.However,the
following are not included:
- selling,administrative
and other general overhead expenditure unless this
expenditure can
be directly attributed to making the asset ready for
use;
- clearly
identified inefficiencies and initial operating losses
incurred before an asset achieves planned performance;and
- expenditure
on training the staff to operate the asset.
Recognition
of an Expense
- Expenditure
on an intangible item should be recognised as an expense
when it is incurred
unless:
-
it forms part of the cost of an intangible asset
that meets the recognition criteria;or
-
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
(refer AS 14,Accounting for Amalgamations).
However,advance
payments for delivery of goods or services are
recognised as assets.
- Expenditure
on an intangible item initially recognised as an expense
in previous annual
or interim financial statements/reports should not
be recognised as part of the cost of an intangible
asset at a later date.
- Subsequent
expenditure on an intangible asset after its purchase
or completion should be
added to the cost of asset only if the following conditions
are satisfied:
-
it is probable that the expenditure will enable
the asset to generate future economic
benefits in excess of its originally assessed
standard of performance;and
-
the expenditure can be measured and attributed
to the asset reliably.
- After
initial recognition,an intangible asset should be
carried at its cost less any accumulated amortisation
and any accumulated impairment losses.
Amortisation
Amortisation
Period
- The
amortisation period would be the best estimate of
its useful life, which is unlikely to
exceed ten yearsAmortisation should commence when
the asset is available for use.
- Where
legal rights have been granted for a finite period,the
useful life should not exceed
such period,unless:
-
the legal rights are renewable;and
-
renewal is virtually certain.
Amortisation
Method
The
method selected should reflect the pattern in which
the asset's economic benefits are consumed by the enterprise.If
that pattern cannot be determined reliably,the straight-line
method should be used.The amortisation charge should
be recognised as an expense unless another accounting
standard permits or requires it to be included in the
carrying amount of another asset
e.g.AS 2 - Valuation of Inventories.
Residual
Value
This should be assumed to be zero unless:
- there
is a commitment by a third party to purchase the asset
at the end of its useful
life;or
- there
is an active market for the asset and:
-
residual value can be determined by reference
to that market;and
-
it is probable that such a market will exist at
the end of the asset's useful life.
Review
of Amortisation Period and Amortisation Method
The amortisation period and the amortisation method
should 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 period
should be changed accordingly.If there has been a significant
change in the expected pattern of economic benefits
from the asset,the amortisation method should be changed
to reflect the changed pattern.Such changes should be
accounted for in accordance with AS 5 - Net Profit or
Loss for the Period,Prior Period Items and Changes in
Accounting Policies.
Recoverability
of the Carrying Amount - Impairment Losses
In
addition to the requirements of Accounting Standard
on Impairment of Assets, an enterprise should estimate
the revoverable amount of the following intangible assets
at least at each financial year end even if there is
no indication that the asset is impaired:
- an
intangible asset that is not yet available for use;and
- an
intangible asset that is amortised over a period exceeding
ten years from the date when the asset is available
for use.
The recoverable
amount should be determined under Accounting Standard
on Impairment of Assets and impairment losses recognised
accordingly.
Retirements
and Disposals
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.
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.
Disclosure
A. General
The
financial statements should disclose the following for
each class of intangible assets,distinguishing between
internally generated intangible assets and other intangible
assets:
- the
useful lives or the amortisation rates used;
- the
amortisation methods used;
- the
gross carrying amount and the accumulated amortisation
(aggregated with accumulated impairment losses) at
the beginning and end of the period;
- a reconciliation
of the carrying amount at the beginning and end of
the period showing:
-
additions,indicating separately those from internal
development and through amalgamation;
-
retirements and disposals;
-
impairment losses recognised in the statement
of profit and loss during the period (if
any);
-
impairment losses reversed in the statement of
profit and loss during the period (if any);
-
amortisation recognised during the period;and
-
other changes in the carrying amount during the
period.
The financial
statements should also disclose:
- if
an intangible asset is amortised over more than ten
years,the reasons for the presumption
that the useful life will exceed ten years from the
date of availability for use alongwith the
factor(s) that played a significant role in determining
the usefule life;
- a description,the
carrying amount and remaining amortisation period
of any individual
intangible asset that is material to the finanical
statements of the enterprise as a whole;
- the
existence and carrying amounts of intangible assets
whose title is restricted and the
carrying amounts of intangible assets pledged as security
for liabilities;and
- the
amounts of commitments for the acquisition of intangible
assets.
B. Research
and Development Expenditure
The financial statements should disclose the aggregate
amount of research and development expenditure recognised
as an expense during the period.
C. Other
Information
An enterprise is encouraged,but not required,to give
a description of any fully amortised intangible asset
that is still in use.
Transitional
Provisions
Where at the time of application of this standard for
the first time, an enterprise has
- not
been amortising an intangible item or
- amortising
it over a longer than the recommended period ( normally
ten years ) , and
such period has expired, then, the carrying amount
appearing in the balance sheet in respect of that
item should be eliminated with a corresponding debit
to the opening balance of revenue reserves.
If such
period has not expired and
- in
a case of not amortising the item,the carrying amount
should be restated,as if the
accumulated amortisation had always been determined
under this standard, with a corresponding adjustment
to the opening balance of revenue reserves.Further,the
restated carrying amount should be amortised over
the balance of the recommended period.
- if
the remaining period
-
is shorter than the balance of the recommended
period,the carrying amount should be amortised
over the remaining period
-
is longer than the balance of the recommended
period,the carrying amount 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 recommended period.
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