Contents
OBJECTIVE
SCOPE Paragraphs
1-5
DEFINITIONS 6-18
Intangible Assets 7-18
Identifiability 11-13
Control 14-17
Future
Economic Benefits 18
RECOGNITION
AND INITIAL MEASUREMENT OF AN
INTANGIBLE
ASSET 19-54
Separate Acquisition 24-26
Acquisition as Part of an Amalgamation 27-32
Acquisition by way of a Government Grant 33
Exchanges of Assets 34
Internally Generated Goodwill 35-37
Internally Generated Intangible Assets 38-54
Research
Phase 41-43
Development
Phase 44-51
Cost
of an Internally Generated Intangible Asset 52-54
Continued../..
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Intangible
Assets 431
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RECOGNITION
OF AN EXPENSE
|
55-58
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Past
Expenses not to be Recognised as an Asset
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58
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SUBSEQUENT
EXPENDITURE
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59-61
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MEASUREMENT
SUBSEQUENT TO INITIAL
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RECOGNITION
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62
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AMORTISATION
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63-80
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Amortisation
Period
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63-71
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Amortisation
Method
|
72-74
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Residual
Value
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75-77
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Review
of Amortisation Period and Amortisation Method
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78-80
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RECOVERABILITY
OF THE CARRYING AMOUNT –
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IMPAIRMENT
LOSSES
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81-86
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RETIREMENTS
AND DISPOSALS
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87-89
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DISCLOSURE
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90-98
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General
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90-95
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Research
and Development Expenditure
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96-97
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Other
Information
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98
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TRANSITIONAL
PROVISIONS
|
99-100
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ILLUSTRATIONS
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432 AS 26
Accounting
Standard (AS) 26
Intangible
Assets
(This
Accounting Standard includes paragraphs set in bold italic type and
plain type, which have equal authority. Paragraphs in bold italic type indicate
the main principles. This Accounting Standard should be read in the context of
its objective and the General Instructions contained in part A of the Annexure
to the Notification.)
Objective
The objective of this Standard is 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 only if, certain criteria are met. The Standard also
specifies how to measure the carrying amount of intangible assets and requires
certain disclosures about intangible assets.
Scope
1. This Standard
should be applied by all enterprises in accounting for intangible assets,
except:
(a) intangible assets that are covered by another Accounting
Standard;
(b)
financial assets1;
(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.
1 A financial asset is any asset that is :
(a)
cash;
(b) a contractual right to receive cash or another financial asset
from another enterprise;
(c) a contractual right to exchange financial instruments with
another enterprise under conditions that are potentially favourable; or
(d)
an ownership interest in another enterprise.
Intangible Assets 433
This Standard should
not be applied to expenditure in respect of termination benefits2 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 Statement
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, 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) goodwill arising on an amalgamation (see AS 14, Accounting for
Amalgamations) and goodwill arising on consolidation (see AS 21, Consolidated
Financial Statements).
3.
This Standard applies to,
among other things, expenditure on advertising, training, start-up, research
and development activities. Research and development activities are directed to
the development of knowledge. Therefore, although these activities may result
in an asset with
physical substance (for example, a prototype), the physical
element of the asset is secondary to its intangible component, that is the
knowledge
embodied in it. This
Standard also applies to rights under licensing agreements for items such as
motion picture films, video recordings, plays, manuscripts, patents and copyrights.
These items are excluded from the
4 . In the case of a
finance lease, the underlying asset may be either tangible or intangible. After
initial recognition, a lessee deals with an intangible asset held under a
finance lease under this Standard.
5. Exclusions from the
scope of an Accounting Standard may occur if certain activities or transactions
are so specialised that they give rise to accounting issues that may need to be
dealt with in a different way. Such issues arise in the expenditure on the
exploration for, or development and
2 Termination benefits are employee benefits payable as a result
of either:
(a)
an enterprise's decision
to terminate an employee's employment before the normal retirement date; or
(b)
an employee's decision to
accept voluntary redundancy in exchange for those benefits (voluntary
retirement).
434 AS 26
extraction of, oil, gas and mineral deposits in extractive
industries and in the case of contracts between insurance enterprises and their
policyholders. Therefore, this Standard does not apply to expenditure on such
activities. However, this Standard applies to other intangible assets used
(such as computer software), and other expenditure (such as start-up costs), in
extractive industries or by insurance enterprises. Accounting issues of
specialised nature also arise in respect of accounting for discount or premium
relating to borrowings and ancillary costs incurred in connection with the
arrangement of borrowings, share issue expenses and discount allowed on the
issue of shares. Accordingly, this Standard does not apply to such items also.
Definitions
6. The following terms are used in this Standard with the
meanings specified:
6.1 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.
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,
Intangible Assets 435
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) the period of time over which an asset is expected to be used by
the enterprise; or
(b) the number of production or similar units expected to be
obtained from the asset by the enterprise.
6.10 Residual value
is the amount which an enterprise expects to obtain for an asset at the end of
its useful life after deducting the expected costs of disposal.
6.11 Fair value of an
asset is the amount for which that asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction.
6.12 An active market is a market where all the following
conditions exist:
(a)
the items traded within
the market are homogeneous;
(b) willing buyers and sellers can normally be found at any time;
and
(c)
prices are available to
the public.
6.13 An impairment loss is the amount by which the carrying
amount of an asset exceeds its recoverable amount.3
3 Accounting Standard (AS)
28, ‘Impairment of Assets’, specifies the requirements relating to impairment
of assets.
436 AS 26
6.14 Carrying amount
is the amount at which an asset is recognised in the balance sheet, net of any
accumulated amortisation and accumulated impairment losses thereon.
Intangible
Assets
7.
Enterprises frequently
expend resources, or incur liabilities, on the acquisition, development,
maintenance or enhancement of intangible resources such as scientific or
technical knowledge, design and imple-mentation of new processes or systems,
licences, intellectual property, market knowledge and trademarks (including
brand names and publishing titles). Common examples of items encompassed by
these broad headings are computer software, patents, copyrights, motion picture
films, customer lists, mortgage servicing rights, fishing licences, import
quotas, franchises, customer or supplier relationships, customer loyalty,
market share and marketing rights. Goodwill is another example of an item of
intangible nature which either arises on acquisition or is internally
generated.
8.
Not all the items
described in paragraph 7 will meet the definition of an intangible asset, that
is, identifiability, control over a resource and
expect- ation of future economic benefits flowing to the
enterprise. If an item covered by this Standard does not meet the definition of
an 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
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
docu-mentation (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
con-taining 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
Intangible Assets 437
compute r controlled machine tool that cannot operate without
that specific software is an integral part of the related hardware and it is
treated as a fixed asset. The same applies to the operating system of a
computer. Where the software is not an integral part of the related hardware,
computer software is treated as an intangible asset.
Identifiability
11.
The definition of an
intangible asset requires that an intangible asset be identifiable. To be
identifiable, it is necessary that the intangible asset is clearly
distinguished from goodwill. Goodwill arising on an amalgamation in the nature
of purchase represents a payment made by the acquirer in anticipation of future
economic benefits. The future economic benefits may result from synergy between
the identifiable assets acquired or from assets which, individually, do not
qualify for recognition in the financial statements but for which the acquirer
is prepared to make a payment in the amalgamation.
12.
An intangible asset can be
clearly distinguished from goodwill if the asset is separable. An asset is
separable if the enterprise could rent, sell,
exchange or distribute the specific future economic benefits
attributable to the asset without also disposing of future economic benefits
that flow from other assets used in the same revenue earning activity.
13. Separability is not a necessary condition fo r identifiability
since an enterprise may be able to identify an asset in some other way. For
example, if an intangible asset is acquired with a group of assets, the
transaction may involve the transfer of legal rights that enable an enterprise
to identify the intangible asset. Similarly, if an internal project aims to
create legal rights for the enterprise, the nature of these rights may assist
the enterprise in identifying an underlying internally generated intangible
asset. Also, even if an asset generates future economic benefits only in
combination with other assets, the asset is identifiable if the enterprise can
identify the future economic benefits that will flow from the asset.
Control
14. An enterprise controls an asset if the enterprise has the
power to obtain the future economic benefits flowing from the underlying
resource and also can restrict the access of others to those benefits. The
capacity of an enterprise to control the future economic benefits from an
intangible
438 AS 26
asset would normally stem from legal rights that a re
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 con-dition 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
an intangible asset, unless it is protected by legal rights to use it and to
obtain the future economic benefits expected from it, and it also meets the
other parts of the definition.
17. An enterprise may have a portfolio of customers or a market
share and expect that, due to its efforts in building customer relationships
and loyalty, the customers will continue to trade with the enterprise. However,
in the absence of legal rights to protect, or other ways to control, the
relationships with customers or the loyalty of the customers to the enterprise,
the enterprise usually has insufficient control over the economic benefits from
customer relationships and loyalty to consider that such items (portfolio of
customers, market shares, customer relationships, customer loyalty) meet the
definition of intangible assets.
Future
Economic Benefits
18. The future economic benefits flowing from an intangible
asset may include revenue from the sale of products or services, cost savings,
or other benefits resulting from the use of the asset by the enterprise. For
example, the use of intellectual property in a production process may reduce
future production costs rather than increase future revenues.
Intangible Assets 439
Recognition
and Initial Measurement of an
Intangible
Asset
19. The recognition of an item as an intangible asset requires an
enterprise to demonstrate that the item meets the:
(a)
definition of an intangible asset (see paragraphs 6-18); and
(b) recognition criteria set out in this Standard (see paragraphs
20-54).
20.
An intangible asset should
be recognised if, and only if:
(a) it is probable that the future economic benefits that are
attributable to the asset will flow to the enterprise; and
(b)
the cost of the asset can
be measured reliably.
21.
An
enterprise should assess the probability of future economic benefits using
reasonable and supportable assumptions that represent best estimate of the set
of economic conditions that will exist over the useful life of the asset.
22.
An enterprise uses
judgement to assess the degree of certainty attached to the flow of future
economic benefits that are attributable to the use of the asset on the basis 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,
440 AS 26
or
the fair value of the securities issued, whichever is more clearly evident.
Acquisition
as Part of an Amalgamation
27.
An intangible asset
acquired in an amalgamation in the nature of purchase is accounted for in
accordance with Accounting Standard (AS) 14, Accounting for Amalgamations.
Where in preparing the financial statements of the transferee company, the
consideration is allocated to individual identifiable assets and liabilities on
the basis of their fair values at the date of amalgamation, paragraphs 28 to 32
of this Standard need to be considered.
28.
Judgement is required to
determine whether the cost (i.e. fair value) of an intangible asset acquired in
an amalgamation can be measured with sufficient reliability for the purpose of
separate recognition. Quoted market prices in an active market provide the most
reliable measurement of fair value. The appropriate market price is usually the
current bid price. If current bid prices are unavailable, the price of the most
recent similar transaction may provide a basis from which to estimate fair
value, provided that there has not been a significant change in economic circumstances
between the transaction date and the date at which the asset's fair value is
estimated.
29.
If no active market exists
for an asset, its cost reflects the amount that the enterprise would have paid,
at the date of the acquisition, for the asset in an arm's length transaction
between knowledgeable and willing parties, based on the best information
available. In determining this amount, an enterprise considers the outcome of
recent transactions for similar assets.
30.
Certain enterprises that
are regularly involved in the purchase and sale of unique intangible assets
have developed techniques for estimating
their fair values indirectly. These techniques may be used for
initial measurement of an intangible asset acquired in an amalgamation in the
nature of purchase if their objective is to estimate fair value as defined in
this Standard and if they reflect current transactions and practices in the
industry to which the asset belongs. These techniques include, where appropriate,
applying multiples reflecting current market transactions to certain indicators
driving the profitability of the asset (such as revenue, market shares,
operating profit, etc.) or discounting estimated future net cash flows from the
asset.
Intangible Assets 441
31.
In accordance with this Standard:
(a) a transferee recognises an intangible asset that meets the
recognition criteria in paragraphs 20 and 21, even if that intang-ible 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 Government Grants, requires that government
grants in the form of non-monetary assets, given at a concessional rate should
be accounted for on the basis of their acquisition cost. AS 12 also requires
that in case a non-monetary asset is given free of cost, it should be recorded
at a nominal value. Accordingly, intangible asset acquired free of charge, or
for nominal consideration, by way of government grant is recognised at a
nominal value or at the acquisition cost, as appropriate; any expenditure that
is directly attributable to making the asset ready for its intended use is also
included in the cost of the asset.
Exchanges
of Assets
34. An intangible asset may be acquired in exchange or part
exchange for another asset. In such a case, the cost of the asset acquired is
determined in accordance with the principles laid down in this regard in AS 10,
Accounting for Fixed Assets.
442 AS 26
Internally
Generated Goodwill
35. Internally generated goodwill should not be
recognised as an asset.
36. In some cases, expenditure is incurred to generate future
economic benefits, but it does not result in the creation of an intangible
asset that meets the recognition criteria in this Standard. Such expenditure is
often described as contributing to internally generated goodwill. Internally
generated goodwill is not recognised as an asset because it is not an
identifiable resource controlled by the enterprise that can be measured
reliably at cost.
37. Differences between the market value of an enterprise and
the carrying amount of its identifiable net assets at any point in time may be
due to a range of factors that affect the value of the enterprise. However,
such differences cannot be considered to represent the cost of intangible
assets controlled by the enterprise.
Internally
Generated Intangible Assets
38. It is sometimes difficult to assess whether an internally
generated intangible asset qualifies for recognition. It is often difficult to:
(a) identify whether, and the point of time when, there is an
identifiable asset that will generate probable future economic benefits; and
(b) determine the cost of the asset reliably. In some cases, the
cost of generating an intangible asset internally cannot be distinguished from
the cost of maintaining or enhancing the enterprise's inter-nally 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:
Intangible Assets 443
(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) 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.
42.
This Standard takes the
view that, in the research phase of a project, an enterprise cannot demonstrate
that an intangible asset exists from which
future economic benefits are probable. Therefore, this
expenditure is recognised as an expense when it is incurred.
43.
Examples of research activities are:
(a)
activities aimed at obtaining new knowledge;
(b) the search for, evaluation and final selection of, applications
of research findings or other knowledge;
(c) the search for alternatives for materials, devices, products,
processes, systems or services; and
(d) the formulation, design, evaluation and final selection of
possible alternatives for new or improved materials, devices, products,
processes, systems or services.
Development
Phase
44. An
intangible asset arising from development (or from the
444 AS 26
development phase o f an internal pro ject ) should be
recognised if, and only if, an enterprise can demonstrate all of the following:
(a) the technical feasibility of completing the intangible asset so
that it will be available for use or sale;
(b)
its intention to complete
the intangible asset and use or sell it;
(c)
its ability to use or sell
the intangible asset;
(d) how the intangible asset will generate probable future economic
benefits. Among other things, the enterprise should demonstrate the existence
of a market for the output of the intangible asset or the intangible asset
itself or, if it is to be used internally, the usefulness of the intangible
asset;
(e) the availability of adequate technical, financial and other
resources to complete the development and to use or sell the intangible asset;
and
(f) its ability to measure
the expenditure attributable to the intangible asset during its development
reliably.
45.
In the development phase
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.
Intangible Assets 445
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 Assets4. If the asset will
generate economic benefits only in combination with other assets, the
enterprise applies the concept of cash-generating units as set out in
Accounting Standard on Impairment of Assets.
48. Availability of resources to complete, use and obtain the
benefits from an intangible asset can be demonstrated by, for example, a
business plan showing the technical, financial and other resources needed and
the enterprise's ability to secure those resources. In certain cases, an
enterprise demonstrates the availability of external finance by obtaining a
lender's indication of its willingness to fund the plan.
49. An enterprise's costing systems can often measure reliably
the cost of generating an intangible asset internally, such as salary and other
expenditure incurred in securing copyrights or licences or developing computer
software.
50. Internally generated brands, mastheads, publishing titles,
customer lists and items similar in substance should not be recognised as
intangible assets.
51.
This Standard takes the
view that expenditure on internally generated brands, mastheads, publishing
titles, customer lists and items similar in substance cannot be distinguished
from the cost of developing the business as a whole. Therefore, such items are
not recognised as intangible assets.
Cost
of an Internally Generated Intangible Asset
52.
The cost of an internally
generated intangible asset for the purpose of paragraph 23 is the sum of
expenditure incurred from the time when the intangible asset first meets the
recognition criteria in paragraphs 20-21 and
44. Paragraph 58 prohibits reinstatement of expenditure recognised
as an expense in previous annual financial statements or interim financial
reports.
53.
The cost of an internally
generated intangible asset comprises all expenditure that can be directly
attributed, or allocated on a reasonable and
consistent basis, to creating, producing and making the asset
ready for its intended use. The cost includes, if applicable:
4 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies
the requirements relating to impairment of assets.
446
AS 26
(a) expenditure on materials and services used or consumed in
generating the intangible asset;
(b) the salaries, wages and other employment related costs of
personnel directly engaged in generating the asset;
(c) any expenditure that is directly attributable to 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,
Bor-rowing 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 initial operating losses
incurred before an asset achieves planned performance; and
(c)
expenditure on training the staff to operate the asset.
Example
Illustrating Paragraph 52
An
enterprise is developing a new production process. During the year 20X1,
expenditure incurred was Rs. 10 lakhs, of which Rs. 9 lakhs was incurred before
1 December 20X1 and 1 lakh was incurred between 1 December 20X1 and 31 December
20X1. The enterprise is able to demonstrate that, at 1 December 20X1, the
production process met the criteria for recognition as an intangible asset. The
recoverable amount of the know-how embodied in the process (including future
cash outflows to complete the process before it is available for use) is
estimated to be Rs. 5 lakhs.
Intangible Assets 447
At
the end of 20X1, the production process is recognised as an intangible asset at
a cost of Rs. 1 lakh (expenditure incurred since the date when the recognition
criteria were met, that is, 1 December 20X1). The Rs. 9 lakhs expenditure
incurred before 1 December 20X1 is recognised as an expense because the
recognition criteria were not met until 1 December 20X1. This expenditure will
never form part of the cost of the production process recognised in the balance
sheet.
During
the year 20X2, expenditure incurred is Rs. 20 lakhs. At the end of 20X2, the
recoverable amount of the know-how embodied in the process (including future
cash outflows to complete the process before it is available for use) is
estimated to be Rs. 19 lakhs.
At
the end of the year 20X2, the cost of the production process is Rs. 21 lakhs
(Rs. 1 lakh expenditure recognised at the end of 20X1 plus Rs. 20 lakhs
expenditure recognised in 20X2). The enterprise recognises an impairment loss
of Rs. 2 lakhs to adjust the carrying amount of the process before impairment
loss (Rs. 21 lakhs) to its recoverable amount (Rs. 19 lakhs). This impairment
loss will be reversed in a subsequent period if the requirements for the
reversal of an impairment loss in Accounting Standard on Impairment of Assets5, are met.
Recognition
of an Expense
55. 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 asset 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
5 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies
the requirements relating to impairment of assets.
448 AS 26
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 such as legal and secretarial costs, expenditure to open a new
facility or business (pre-opening costs) or expenditures for commencing new
operations or launching new products or processes (pre-operating costs);
(b)
expenditure on training activities;
(c)
expenditure on advertising and promotional activities; and
(d) expenditure on relocating or re-organising part or all of an
enterprise.
57.
Paragraph 55 does not
apply to payments for the delivery of goods or services made in advance of the
delivery of goods or the rendering of
services.
Such prepayments are recognised as assets.
Past
Expenses not to be Recognised as an Asset
58. Expenditure on an intangible item that was initially
recognised as an expense by a reporting enterprise in previous annual financial
statements or interim financial reports should not be recognised as part of the
cost of an intangible asset at a later date.
Subsequent
Expenditure
59 . Subsequent
expenditure on an intangible asset after its purchase or its completion should
be recognised as an expense when it is incurred unless:
(a) 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
Intangible Assets 449
(b) the expenditure can be measured and attributed to the asset
reliably.
If these conditions
are met, the subsequent expenditure should be added to the cost of the
intangible asset.
60. Subsequent expenditure on a recognised intangible asset is
recognised as an expense if this expenditure is required to maintain the asset
at its originally assessed standard of performance. The nature of intangible
assets is such that, in many cases, it is not possible to determine whether
subsequent expenditure is likely to enhance or maintain the economic benefits
that will flow to the enterprise from those assets. In addition, it is often
difficult to attribute such expenditure directly to a particular intangible
asset rather than the business as a whole. Therefore, only rarely will
expenditure incurred after the initial recognition of a purchased intangible
asset or after completion of an internally generated intangible asset result in
additions to the cost of the intangible
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
450 AS 26
consumed over time, the carrying amount of the asset is reduced
to reflect that consumption. This is achieved by systematic allocation of the
cost of the asset, less any residual value, as an expense over the asset's
useful life. Amortisation is recognised whether or not there has been an
increase in, for example, the asset's fair value or recoverable amount. Many
factors need to be considered in determining the useful life of an intangible
asset including:
(a) the expected usage of the asset by the enterprise and whether
the asset could be efficiently managed by another management team;
(b) typical product life cycles for the asset and public information
on estimates of useful lives of similar types of assets that are used in a
similar way;
(c) technical, technological or other types of
obsolescence;
(d) the stability of the industry in which the asset operates and
changes in the market demand for the products or services output from the
asset;
(e) expected actions by competitors or potential
competitors;
(f) the level of maintenance expenditure required to obtain the
expected future economic benefits from the asset and the company's ability and
intent to reach such a level;
(g) the period of control over the asset and legal or similar limits
on the use of the asset, such as the expiry dates of related leases; and
(h) whether the useful life of the asset is dependent on the useful
life of other assets of the enterprise.
65. Given the history of rapid changes in technology, computer
software and many other intangible assets are susceptible to technological
obsolescence. Therefore, it is likely that their useful life will be short.
66.
Estimates of the useful
life of an intangible asset generally become less reliable as the length of the
useful life increases. This Standard adopts a presumption that the useful life
of intangible assets is unlikely to exceed ten years.
67.
In some cases, there may be persuasive evidence that the useful
life of
Intangible Assets 451
an intangible asset will be a specific period longer than ten
years. In these cases, the presumption that the useful life generally does not
exceed ten years is rebutted and the enterprise:
(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 hydro-electric 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
enterprise has purchased an exclusive right to operate a toll motorway for
thirty years. There is no plan to construct alternative routes in the area
served by the motorway. It is expected that this motorway will be in use for at
least thirty years.
The
enterprise amortises the right to operate the motorway over thirty years,
unless there is evidence that its useful life is shorter.
68.
The useful life of an
intangible asset may be very long but it is always finite. Uncertainty
justifies estimating the useful life of an intangible asset on a prudent basis,
but it does not justify choosing a life that is unrealistically short.
69.
If
control over the future economic benefits from an intangible asset is achieved
through legal rights that have been granted for a finite period,
452 AS 26
the useful life 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.
70.
There may be both economic
and legal factors influencing the useful life of an intangible asset: economic
factors determine the period over which future economic benefits will be
generated; legal factors may restrict the period over which the enterprise
controls access to these benefits. The useful life is the shorter of the
periods determined by these factors.
71. The following factors, among others, indicate that renewal of a
legal right is virtually certain:
(a) the fair value of the intangible asset is not expected to reduce
as the initial expiry date approaches, or is not expected to reduce by more
than the cost of renewing the underlying right;
(b) there is evidence (possibly based on past experience) that the
legal rights will be renewed; and
(c) there is evidence that the conditions necessary to obtain the
renewal of the legal right (if any) will be satisfied.
Amortisation
Method
72.
The
amortisation method used 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 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
Intangible Assets 453
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 of the other asset
and is included in its carrying amount. For example, the amortisation of
intangible assets used in a production process is included in the carrying
amount of inventories (see AS 2, Valuation of Inventories).
Residual
Value
75. The residual
value of an intangible asset should be assumed to be zero unless:
(a) there is a commitment by a third party to purchase 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 by reference to that market;
and
(ii) it is probable that
such a market will exist at the end of the asset's useful life.
76. A residual value other than zero implies that an enterprise
expects to dispose of the intangible asset before the end of its economic life.
77.
The residual value is
estimated using prices prevailing at the date of acquisition of the asset, for
the sale of a similar asset that has reached the end of its estimated useful
life and that has operated under conditions similar to those in which the asset
will be used. The residual value is not subsequently increased for changes in
prices or value.
454 AS 26
Review
of Amortisation Period and Amortisation Method
78. 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.
79. During the life of an intangible asset, it may become apparent
that the estimate of its useful life is inappropriate. For example, the useful
life may be extended by subsequent expenditure that improves the condition of
the asset beyond its originally assessed standard of performance. Also, the
recognition of an impairment loss may indicate that the amortisation 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 Assets6. 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
6 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies
the requirements relating to impairment of assets.
Intangible Assets 455
acquired in an amalgamation in the nature of purchase, the
impairment loss is recognised as an adjustment to both the amount assigned to
the intangible asset and the goodwill (capital reserve) recognised at the date
of the amalgamation. However, if the impairment loss relates to specific events
or changes in circumstances occurring after the date of acquisition, the
impairment loss is recognised under Accounting Standard on Impairment of Assets
and not as an adjustment to the amount assigned to the goodwill (capital
reserve) recognised at the date of acquisition.
83. In addition to the requirements of Accounting Standard on
Impairment of Assets, an enterprise should estimate the recoverable amount of
the following intangible assets at least at each financial year end even if
there is no indication that the asset is
(a)
an intangible asset that
is not yet available for use; and
(b) 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.
84.
The ability of an
intangible asset to generate sufficient future economic benefits to recover its
cost is usually subject to great uncertainty until the asset is available for
use. Therefore, this Standard requires an enterprise to test for impairment, at
least annually, the carrying amount of an intangible asset that is not yet
available for use.
85.
It is sometimes difficult
to identify whether an intangible asset may be impaired because, among other
things, there is not necessarily any obvious
evidence of obsolescence. This difficulty arises particularly if
the asset has a long useful life. As a consequence, this Standard requires, as
a minimum, an annual calculation of the recoverable amount of an intangible
asset if its useful life exceeds ten years from the date when it becomes
available for use.
86. The requirement for an annual impairment test of an
intangible asset applies whenever the current total estimated useful life of
the asset exceeds ten years from when it became available for use. Therefore,
if the useful life of an intangible asset was estimated to be less than ten
years at initial recognition, but the useful life is extended by subsequent
expenditure to
456 AS 26
exceed ten years from when
the asset became available for 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
Assets7,
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
intangible 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 amortisation
(aggregated with accumulated 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:
7 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies
the requirements relating to impairment of assets.
Intangible Assets 457
(i) additions, indicating separately those from internal development
and through amalgamation;
(ii)
retirements and disposals;
(iii) impairment losses recognised in the statement of profit and loss
during the period (if any);
(iv) impairment losses reversed in the statement of profit and loss
during the period (if any);
(v)
amortisation recognised
during the period; and
(vi)
other changes in the
carrying amount during the period.
91.
A class of intangible
assets is a grouping of assets of a similar nature and use in an enterprise's
operations. Examples of separate classes may include:
(a)
brand names;
(b)
mastheads and publishing titles;
(c)
computer software;
(d)
licences and franchises;
(e) copyrights, and patents and other industrial property rights,
service and operating rights;
(f)
recipes, formulae, models, designs and prototypes; and
(g)
intangible assets under development.
The classes mentioned above are disaggregated (aggregated) into
smaller (larger) classes if this results in more relevant information for the
users of the financial statements.
92. An enterprise discloses information on impaired intangible
assets under Accounting Standard on Impairment of Assets8 in addition to the
information required by paragraph 90(d)(iii) and (iv).
8 Accounting Standard (AS)
28, ‘Impairment of Assets’, specifies the requirements relating to impairment
of assets.
458 AS 26
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 amounts of intangible assets whose
title is restricted and the carrying amounts of intangible assets pledged as
security for liabilities; and
(d) the amount of commitments for the acquisition of intangible
assets.
95.
When an enterprise
describes the factor(s) that played a significant role in determining the
useful life of an intangible asset that is amortised over more than ten years,
the enterprise considers the list of factors in paragraph 64.
Research
and Development Expenditure
96. The financial statements should disclose the aggregate amount of
research and development expenditure recognised as an expense during the
period.
97.
Research and development
expenditure comprises all expenditure that is directly attributable to research
or development activities or that can be
Intangible Assets 459
allocated on a reasonable and consistent basis to such
activities (see paragraphs 53-54 for guidance on the type of expenditure to be
included for the purpose of the disclosure requirement in paragraph 96).
Other
Information
98. An enterprise is
encouraged, but not required, to give a description of any fully amortised
intangible asset that is still in use.
Transitional
Provisions
99. Where, on the date of this Standard coming into effect, an
enterprise is following an accounting policy of not amortising an intangible
item or amortising an intangible item over a period longer than the period
determined under paragraph 63 of this Standard and the period determined under
paragraph 63 has expired on the date of this Standard coming into effect, the carrying
amount appearing in the balance sheet in respect of that item should be
eliminated with a corresponding adjustment
In the even t the
period determined unde r para graph 63 has not expired on the date of this
Standard coming into effect and:
(a) if the enterprise is following an accounting policy of not
amortising an intangible item, 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.
(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,
460 AS 26
(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.
Intangible Assets 461
Illustration
A
This Illustration which does not form part of the Accounting
Standard, provides illustrative application of the principles laid down in the
Standard to internal use software and web-site costs. Its purpose is to
illustrate the application of the Accounting Standard to assist in clarifying
its meaning.
I. Illustrative
Application of the Accounting Standard to Internal Use Computer Software
Computer
software for internal use can be internally generated or acquired.
Internally
Generated Computer Software
1.
Internally generated
computer software for internal use is developed or modified internally by the
enterprise solely to meet the needs of the enterprise and at no stage it is
planned to sell it.
2.
The stages of development
of internally generated software may be categorised into the following two
phases:
•
Preliminary project stage, i.e., the research phase
•
Development stage
Preliminary
project stage
3.
At the preliminary project
stage the internally generated software should not be recognised as an asset.
Expenditure incurred in the preliminary project stage should be recognised as
an expense when it is incurred. The reason for such a treatment is that at this
stage of the software project an enterprise can not demonstrate that an asset
exists from which future economic benefits are probable.
4.
When a computer software
project is in the preliminary project stage, enterprises are likely to:
(a) Make strategic decisions to allocate resources between
alternative projects at a given point in time. For example, should programmers
462 AS 26
develop a new payroll system or direct their efforts toward
correcting existing problems in an operating payroll system.
(b) Determine the performance requirements (that is, what it is that
they need the software to do) and systems requirements for the computer
software project it has proposed to undertake.
(c) Explore alternative means of achieving specified performance
requirements. For example, should an entity make or buy the software. Should
the software run on a mainframe or a client server system.
(d) Determine that the technology needed to achieve performance
requirements exists.
(e) Select a consultant to assist in the development and/or
installation of the software.
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
Intangible Assets 463
(f) the ability of the enterprise to measure the expenditure
attributable to the software during its development reliably.
6. Examples of development activities in respect of internally
generated software include:
(a) Design including detailed program design - which is the process
of detail design of computer software that takes product function, feature, and
technical requirements to their most detailed, logical form and is ready for
coding.
(b) Coding which includes generating detailed instructions in a
computer language to carry out the requirements described in the detail program
design. The coding of computer software may begin prior to, concurrent with, or
subsequent to the completion of the detail program design.
At the end of these stages of the development activity, the
enterprise has a working model, which is an operative version of the computer
software capable of performing all the major planned functions, and is ready
for initial testing ("beta" versions).
(c) Testing which is the process of performing the steps necessary
to determine whether the coded computer software product meets function,
feature, and technical performance requirements set forth in the product
design.
At the end of the testing process, the enterprise has a maste r
version of the internal use software, which is a completed version together
with the related user documentation and the training materials.
Cost
of internally generated software
7. The cost of an internally generated software is the sum of
the expenditure incurred from the time when the software first met the
recognition criteria for an intangible asset as stated in paragraphs 20 and 21
of this Standard and paragraph 5 above. An expenditure which did not meet the
recognition criteria as aforesaid and expensed in an earlier financial
statements should not be reinstated if the recognition criteria are met later.
464 AS 26
8. The cost of an
internally generated softwa re comprises all expenditure that can be directly
attributed or allocated on a reasonable and consistent basis to create the
software for its intended use. The cost include:
(a)
expenditure on materials
and services used 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) expenditure on training the staff to use the internally
generated software.
Software
Acquired for Internal Use
10. The cost of a software acquired for internal use should be
recongised as an asset if it meets the recognition criteria prescribed in
paragraphs 20 and 21 of this Standard.
11.
The cost of a software
purchased for internal use 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 software ready for its use.
Intangible Assets 465
Any trade discounts and rebates are deducted in arriving at the
cost. In the determination of cost, matters stated in paragraphs 24 to 34 of
the Standard need to be considered, as appropriate.
Subsequent
expenditure
12. Enterprises may incur considerable cost in modifying
existing software systems. Subsequent expenditure on software after its
purchase or its completion should be recognised as an expense when it is
incurred unless:
(a) it is probable that the expenditure will enable the software to
generate future economic benefits in excess of its originally assessed
standards of performance; and
(b) the expenditure can be measured and attributed to the software
reliably.
If these conditions are met, the subsequent expenditure should
be added to the carrying amount of the software. Costs incurred in order to
restore or maintain the future economic benefits that an enterprise can expect
from the originally assessed standard of performance of existing software
systems is recognised as an expense when, and only when, the restoration or
maintenance work is carried out.
Amortisation
period
13.
The depreciable amount of
a software should be allocated on a systematic basis over the best estimate of
its useful life. The amortisation should commence when the software is
available for use.
14.
As per this Standard,
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.
However, given the history of rapid changes in technology, computer software is
susceptible to technological obsole-scence. Therefore, it is likely that useful
life of the software will be 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.
466 AS 26
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 and selec-ting
preferences;
(b) Application and Infrastructure Development - includes obtaining
a domain name, purchasing and developing hardware and operating software,
installing developed applications and stress testing; and
(c) Graphical Design and Content Development - includes designing
the appearance of web pages and creating, purchasing, preparing and uploading
information, either textual or graphical in nature, on the web site prior to
the web site becoming available for use. This information may either be stored
in separate databases that
are integrated into (or accessed from) the web site or coded directly
into the web pages.
3. Once development of a
web site has been completed and the web site is available for use, the web site
commences an operating stage. During this stage, an enterprise maintains and
enhances the applications, infrastructure, graphical design and content of the
web site.
4. The expenditures for
purchasing, developing, maintaining and enhancing hardware (e.g., web servers,
staging servers, production servers
Intangible Assets 467
and Internet connections) related to a web site are not
accounted for under this Standard but are accounted for under AS 10, Accounting
for Fixed Assets. Additionally, when an enterprise incurs an expenditure for
having an Internet service provider host the enterprise's web site on it's own
servers connected to the Internet, the expenditure is recognised as an
5.
An intangible asset is
defined in paragraph 6 of this Standard as 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. Paragraph 7
of this Standard provides computer software as a common example of an
intangible asset. By analogy, a web site is another example of an intangible
asset. Accordingly, a web site developed by an enterprise for its own use is an
internally generated intangible asset that is subject to the requirements of
this Standard.
6. An enterprise should apply the requirements of this Standard to
an internal expenditure for developing, enhancing and maintaining its own
web site. Paragraph 55 of this Standard provides expenditure on
an intangible item to be recognised as an expense when incurred unless 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
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 requires an expenditure on
research (or on the research phase of an internal project) to be recognised as
an expense when incurred. The examples provided in paragraph 43
468 AS 26
of this Standard are
similar to the activities undertaken in the Planning stage of a web site's
development. Consequently, expenditures incurred in the Planning stage of a web
site's development are recognised as an expense when incurred.
(b) Paragraph 44 of this Standard requires an intangible asset
arising from the development phase of an internal project to be recognised if
an enterprise can demonstrate fulfillment of the six criteria specified.
Application and Infrastructure Development and Graphical Design and Content
Development stages are similar in nature to the development phase. Therefore,
expendi-tures incurred in these stages should be recognised as an inta-ngible
asset if, and only if, in addition to complying with the general requirements
for recognition and initial measurement of an intangible asset, an enterprise
can demonstrate those items described in paragraph 44 of this Standard. In
addition,
(i) an enterprise may be able to demonstrate how its web site will
generate probable future economic benefits under paragraph 44(d) by using the
principles in Accounting Standard on Impairment of Assets9. This includes situations
where the web site is developed solely or primarily for promoting and
advertising an enterprise's own products and services. Demonstrating how a web
site will generate probable future economic benefits under paragraph 44(d) by
assessing the economic
benefits to be received from the web site and using the principles in
Accounting Standard on Impairment of Assets, may be particularly difficult for
an enterprise that develops a web site solely or primarily for advertising and
promoting its own products and services; information is unlikely to be
available for reliably estimating the amount obtainable from the sale of the
web site in an
arm's length transaction,
or the future cash inflows and outflows to be derived from its continuing use
and ultimate disposal. In this circumstance, an enterprise determines the
future economic benefits of the cash-generating unit to which the web site
belongs, if it does not belong to one. If the web
9 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies
the requirements relating to impairment of assets.
Intangible Assets 469
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 of an intangible
asset. Paragraph 52 indicates that the cost of an internally generated
intangible asset is the sum of expenditure incurred from the time when the
intangible asset first meets the specified recognition criteria. When an
enterprise acquires or creates content, it may be possible to identify an
intangible asset (e.g., a license or a copyright) separate from a web site.
Consequently, an enterprise determines whether an expendi-ture to enable use of
content, which had been created for another purpose, on its web site becoming
available for use results in a separate identifiable asset or the expenditure
is included in the cost of developing the web
(c) the operating stage commences once the web site is available for
use, and therefore an expenditure to maintain or enhance the web site after
development has been completed should be recognised as an expense when it is
incurred unless it meets the criteria in paragraph 59 of the Standard.
Paragraph 60 explains that if the expenditure is required to maintain the asset
at its originally assessed standard of performance, then the expenditure is
re-cognised as an expense when incurred.
470 AS 26
7. An intangible asset is measured subsequent to initial
recognition by applying the requirements in paragraph 62 of this Standard.
Additionally, since paragraph 68 of the Standard states that an intangible
asset always has a finite useful life, a web site that is recognised as an
asset is amortised over the best estimate of its useful life. As indicated in
paragraph 65 of the Standard, web sites are susceptible to technological
obsolescence, and given the history of rapid changes in technology, their useful
life will be short.
8. The following table illustrates examples of expenditures that
occur within each of the stages described in paragraphs 2 and 3 above and
application of paragraphs 5 and 6 above. It is not intended to be a
comprehensive checklist of expenditures that might be incurred.
|
Nature
of Expenditure
|
Accounting
treatment
|
|
|
|
|
|
|
Planning
|
|
|
|
• undertaking
feasibility studies
|
Expense when
incurred
|
|
|
• defining
hardware and software
|
|
|
|
|
specifications
|
|
|
•
|
evaluating
alternative products
|
|
|
|
and suppliers
|
|
|
•
|
selecting
preferences
|
|
|
|
|
|
|
Application
and Infrastructure
|
|
|
|
Development
|
|
|
|
• purchasing or
developing
|
Apply the requirements of AS 10
|
|
|
|
hardware
|
|
|
|
|
|
|
• obtaining a
domain name
|
Expense when
incurred, unless it
|
|
|
•
|
developing
operating software
|
meets the
recognition criteria
|
|
|
(e.g., operating
system and
|
under paragraphs
20 and 44
|
|
|
server software)
|
|
|
• developing code
for the
|
|
|
|
|
application
|
|
|
•
|
installing
developed applications
|
|
|
|
on the web server
|
|
|
•
|
stress testing
|
|
|
|
|
|
|
|
|
Intangible
Assets 471
|
|
|
|
|
|
Graphical
Design and Content
|
|
|
|
Development
|
|
|
|
•
|
designing the
appearance (e.g.,
|
If a separate
asset is not
|
|
|
layout and
colour) of web pages
|
identifiable,
then expense when
|
|
•
|
creating,
purchasing, preparing
|
incurred, unless
it meets the
|
|
|
(e.g., creating
links and
|
recognition
criteria under
|
|
|
identifying
tags), and uploading
|
paragraphs 20 and
44
|
|
|
information,
either textual or
|
|
|
|
graphical in
nature, on the web
|
|
|
|
site prior to the
web site becoming
|
|
|
|
available for
use. Examples of
|
|
|
|
content include
information about
|
|
|
|
an
enterprise, products or
|
|
|
|
services offered
for sale, and topics
|
|
|
|
that subscribers
access
|
|
|
|
|
|
|
Operating
|
|
|
|
• updating
graphics and revising
|
Expense when incurred, unless in
|
|
|
|
content
|
rare
circumstances it meets the
|
|
•
|
adding new
functions, features
|
criteria in paragraph 59, in which
|
|
|
and content
|
case the
expenditure is included
|
|
•
|
registering the
web site with
|
in the cost of
the web site
|
|
|
search engines
|
|
|
• backing up data
|
|
|
|
•
|
reviewing
security access
|
|
|
• analysing usage
of the web site
|
|
|
|
|
|
|
|
Other
|
|
|
|
• selling,
administrative and other
|
Expense when
incurred
|
|
|
|
general overhead
expenditure
|
|
|
|
unless it can be
directly attributed
|
|
|
|
to preparing the
web site for use
|
|
|
•
|
clearly
identified inefficiencies
|
|
|
|
and initial
operating losses
|
|
|
|
incurred before
the web site
|
|
|
|
achieves planned
performance
|
|
|
|
(e.g., false
start testing)
|
|
|
•
|
training
employees to operate the
|
|
|
|
web site
|
|
|
|
|
|
472 AS 26
Illustration
B
This illustration which does not form part of the Accounting
Standard, provides illustrative application of the requirements contained in paragraph
99 of this Accounting Standard in respect of transitional provisions.
Illustration
1 -Intang ible Item was not amortised and the amortisation period determined
under paragraph 63 has expired.
An intangible item is appearing in the balance sheet of A Ltd.
at Rs. 10 lakhs as on 1-4-2003. The item was acquired for Rs. 10 lakhs on April
1, 1990 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
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 Rs. 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 -Intang ible 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 Rs. 8 lakhs as on 1-4-2003. The item was acquired for Rs. 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 Rs. 8 lakhs would
be required to be eliminated with a corresponding adjustment to the opening
balance of revenue reserves as on 1-4-2003.
Intangible Assets 473
Illustration
3 - Amortisation period determined under paragraph 63 has not expired and the
remaining amortisation period as per the accounting policy followed by the
enterprise is shorter.
An intangible item is appearing in the balance sheet of A Ltd.
at Rs. 8 lakhs as on 1-4-2003. The item was acquired for Rs. 20 lakhs on April
1, 2000 and was available for use from that date. The enterprise has been
following a policy of amortising the intangible item over a period of 5 years
on straight line basis. Applying paragraph 63, the enterprise determines the
amortis-ation period to be 8 years, being the best estimate of its useful life,
from the date when the item was available for use i.e., April 1, 2000.
On 1-4-2003, the remainin g period of amortisation is 2 years as
per the accounting policy followed by the enterprise which is shorter as
compared to the balance of amortisation period determined by applying paragraph
63, i.e., 5 years. Accordingly, the enterprise would be required to amortise
the intangible item over the remaining 2 years as per the accounting policy
followed by the enterprise.
Illustration
4 - Amortisation period determined under paragraph 63 has not expired and the
remaining amortisation period as per the accounting policy followed by the
enterprise is longer.
An intangible item is appearing in the balance sheet of A Ltd.
at Rs. 18 lakhs as on 1-4-2003. The item was acquired for Rs. 24 lakhs on April
1, 2000 and was available for use from that date. The enterprise has been
following a policy of amortising the intangible item over a period of 12 years
on straight- line basis. 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 remaining
period of amortisation is 9 years as per the accounting policy followed by the
enterprise which is longer as compared to the balance of period stipulated in
paragraph 63, i.e., 7 years. Accordingly, the enterprise would be required to
restate the carrying amount of intangible item on 1-4-2003 at Rs. 16.8 lakhs
(Rs. 24 lakhs - 3xRs. 2.4 lakhs, i.e., amortisation that would have been
charged as per the Standard) and the difference of Rs. 1.2 lakhs (Rs. 18
lakhs-Rs. 16.8 lakhs) would be required to be adjusted against the
474 AS 26
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 Rs. 20 lakhs as on 1-4-2003. The item was acquired for Rs. 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 Rs. 14 lakhs (Rs. 20 lakhs - 3xRs. 2 lakhs, i.e., amortisation that would
have been charged as per the Standard) and the difference of Rs. 6 lakhs (Rs.
20 lakhs-Rs. 14 lakhs) would be required to be adjusted against the opening
balance of the revenue reserves. The carrying amount of Rs. 14 lakhs would be
amortised over 7 years which is the balance of the amortisation period as per
paragraph 63.
