- 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 directors’ resolution in this regard.
- All other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs. 50 crores.
In
respect of all other enterprises, the Accounting Standard comes into effect in
respect of expenditure incurred on intangible items during accounting periods
commencing on or after 1-4-2004 and is mandatory in nature from that date.
Earlier application of the Accounting Standard is encouraged.
In respect of intangible items appearing in the balance sheet as on the aforesaid date, i.e., 1-4-2003 or 1-4-2004, as the case may be, the Standard has limited application as stated in paragraph 99. From the date of this Standard becoming mandatory for the concerned enterprises, the following stand withdrawn :
- Accounting Standard (AS) 8, Accounting for Research and Development;
- Accounting Standard (AS) 6, Depreciation Accounting, with respect to the amortization (depreciation) of intangible assets; and
- Accounting Standard (AS) 10, Accounting for Fixed Assets - paragraphs 16.3 to 16.7, 37 and 38.
The following is the text of the Accounting Standard.
Objective
The objective of
this Statement is to prescribe the accounting treatment for intangible assets
that are not dealt with specifically in another Accounting Standard. This
Statement requires an enterprise to recognise an intangible asset if, and only
if, certain criteria are met. The Statement also specifies how to measure the
carrying amount of intangible assets and requires certain disclosures about
intangible assets.
Scope
1. This
Statement should be applied by all enterprises in accounting for intangible
assets, except:
a.
intangible assets that are covered by
another Accounting Standard;
b.
financial assets;
c.
mineral rights and expenditure on the
exploration for, or development and extraction of, minerals, oil, natural gas
and similar non-regenerative resources; and
d.
intangible assets arising in insurance
enterprises from contracts with policyholders.
This Statement should not be applied to expenditure in respect of termination benefits also.
This Statement should not be applied to expenditure in respect of termination benefits also.
2. If another Accounting Standard deals
with a specific type of intangible asset, an enterprise applies that Accounting
Standard instead of this Statement. 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, Accounting for Construction Contracts);
b.
deferred tax assets (see AS 22,
Accounting for Taxes on Income);
c.
leases that fall within the scope of
AS 19, Leases; and
d.
goodwill arising on an amalgamation
(see AS 14, Accounting for Amalgamations) and goodwill arising on consolidation
(see AS 21, Consolidated Financial Statements).
3. This Statement 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 Statement 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 scope of
AS 19.
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 Statement.
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 extraction of, oil, gas and mineral deposits in
extractive industries and in the case of contracts between insurance
enterprises and their policyholders. Therefore, this Statement does not apply
to expenditure on such activities. However, this Statement 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 Statement does not
apply to such items also.
(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).
Definitions
6. The
following terms are used in this Statement with the meanings specified :
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.
An asset is a resource:
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.
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.
Monetary assets are money held and assets to be received in
fixed or determinable amounts of money.Non-monetary assets are assets other than monetary assets.
Research is original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and understanding.
Development is
the application of research findings or other knowledge to a plan or design for
the production of new or substantially improved materials, devices, products,
processes, systems or services prior to the commencement of commercial
production or use.
Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life.
Depreciable amount is the cost of an asset less its residual value.
Useful life is either :
Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life.
Depreciable amount is the cost of an asset less its residual value.
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.
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.
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.
An active market is a market where all the following conditions exist :
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.
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.
An impairment loss is the amount
by which the carrying amount of an asset exceeds its recoverable amount.
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.
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 implementation 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 expectation of future economic
benefits flowing to the enterprise. If an item covered by this Statement 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 of the amalgamation (see
paragraph 55).
9. Some intangible assets may be contained
in or on a physical substance such as a compact disk (in the case of computer
software), legal documentation (in the case of a licence or patent) or film (in
the case of motion pictures). The cost of the physical substance containing the
intangible assets is usually not significant. Accordingly, the physical
substance containing an intangible asset, though tangible in nature, is
commonly treated as a part of the intangible asset contained in or on it.
10. In some cases, an asset may incorporate both intangible and tangible elements that are, in practice, inseparable. In determining whether such an asset should be treated under AS 10, Accounting for Fixed Assets, or as an intangible asset under this Statement, judgement is required to assess as to which element is predominant. For example, computer software for a computer 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.
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 Statement, judgement is required to assess as to which element is predominant. For example, computer software for a computer 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
for 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 asset would normally stem from legal rights that are
enforceable in a court of law. In the absence of legal rights, it is more
difficult to demonstrate control. However, legal enforceability of a right is
not a necessary condition for control since an enterprise may be able to
control the future economic benefits in some other way.
15. Market and technical knowledge may give
rise to future economic benefits. An enterprise controls those benefits if, for
example, the knowledge is protected by legal rights such as copyrights, a
restraint of trade agreement (where permitted) or by a legal duty on employees
to maintain confidentiality.
16. An enterprise may have a team of skilled
staff and may be able to identify incremental staff skills leading to future
economic benefits from training. The enterprise may also expect that the staff
will continue to make their skills available to the enterprise. However,
usually an enterprise has insufficient control over the expected future
economic benefits arising from a team of skilled staff and from training to
consider that these items meet the definition of an intangible asset. For a
similar reason, specific management or technical talent is unlikely to meet the
definition of 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.
Recognition and Initial Measurement of an Intangible Asset
Recognition and Initial Measurement of an Intangible Asset
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
Statement (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, 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
Statement 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 Statement 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.
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 Statement 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.
31. In accordance with this Statement:
a.
a transferee recognises an intangible
asset that meets the recognition criteria in paragraphs 20 and 21, even if that
intangible asset had not been recognised in the financial statements of the
transferor ; and
b.
if the cost (i.e. fair value) of an
intangible asset acquired as part of an amalgamation in the nature of purchase
cannot be measured reliably, that asset is not recognised as a separate
intangible asset but is included in goodwill (see paragraph 55).
32. Unless there is an active market for an
intangible asset acquired in an amalgamation in the nature of purchase, the
cost initially recognised for the intangible asset is restricted to an amount
that does not create or increase any capital reserve arising at the date of the
amalgamation.
Acquisition by way of a Government
Grant
33. In some cases, an intangible asset may be
acquired free of charge, or for nominal consideration, by way of a government
grant. This may occur when a government transfers or allocates to an enterprise
intangible assets such as airport landing rights, licences to operate radio or
television stations, import licences or quotas or rights to access other
restricted resources. AS 12, Accounting for 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.
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 Statement. 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 internally generated goodwill or of running day-to-day operations.
Therefore, in addition to complying
with the general requirements for the recognition and initial measurement of an
intangible asset, an enterprise applies the requirements and guidance in
paragraphs 39-54 below to all internally generated intangible assets.
To assess whether
an internally generated intangible asset meets the criteria for recognition, an
enterprise classifies the generation of the asset into:
a.
a research phase; and
b.
a development phase.
Although the terms 'research' and
'development' are defined, the terms 'research phase' and 'development phase'
have a broader meaning for the purpose of this Statement.
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 Statement 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
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 development phase of an
internal project) 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.
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 Assets5. 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 Statement 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.
51. This Statement 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:
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, Borrowing Costs, establishes criteria for the
recognition of interest as a component of the cost of a qualifying asset. These
criteria are also applied for the recognition of interest as a component of the
cost of an internally generated intangible asset.
54. The following are not components of the
cost of an internally generated intangible asset:
a.
selling, administrative and other
general overhead expenditure unless this expenditure can be directly attributed
to making the asset ready for use;
b.
clearly identified inefficiencies and
initial operating losses incurred before an asset achieves planned performance;
and
c.
expenditure on training the staff to
operate the asset.
Example Illustrating Paragraph 52An 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.
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 Assets6, 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 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
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 asset.
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
Amortisation Period
63. The depreciable amount of an intangible
asset should be allocated on a systematic basis over the best estimate of its
useful life. There is a rebuttable presumption that the useful life of an
intangible asset will not exceed ten years from the date when the asset is
available for use. Amortisation should commence when the asset is available for
use.
64. As the future economic benefits embodied
in an intangible asset are consumed over time, the carrying amount of the asset
is reduced to reflect that consumption. This is 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 I ntangible
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 Statement 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 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:
amortises the intangible asset over the best estimate
of its useful life;
a.
estimates the recoverable amount of
the intangible asset at least annually in order to identify any impairment loss
(see paragraph 83); and
b.
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, 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 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.
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 andChanges 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
Assets7. That Standard explains how an enterprise reviews the carrying amount
of its assets, how it determines the recoverable amount of an asset and when it
recognises or reverses an impairment loss.
82. If an impairment loss occurs before the end of the first annual accounting period commencing after acquisition for an intangible asset acquired in an amalgamation in the nature of purchase, the impairment loss is recognised as an adjustment to both the amount assigned to the 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.
82. If an impairment loss occurs before the end of the first annual accounting period commencing after acquisition for an intangible asset acquired in an amalgamation in the nature of purchase, the impairment loss is recognised as an adjustment to both the amount assigned to the 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 impaired:
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 Statement 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
Statement 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 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 Assets, and recognises any impairment loss accordingly.
Disclosure
General
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;
a reconciliation of the carrying amount at the
beginning and end of the period showing:
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;
g)
and 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 Assets9
in addition to the information required by paragraph 90(d)(iii) and (iv).
93. An enterprise discloses the change in an
accounting estimate or accounting policy such as that arising from changes in
the amortisation method, the amortisation period or estimated residual values,
in accordance with AS 5, Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies.
94. The
financial statements should also disclose:
a.
of intangible assets whose title is
restricted and the carrying amounts of intangible 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
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 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).
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 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 Statement 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 Statement and the period determined under paragraph 63 has expired
on the date of this Statement coming into effect, the carrying amount appearing
in the balance sheet in respect of that item should be eliminated with a
corresponding adjustment to the opening balance of revenue reserves.
In the event the period determined under paragraph 63 has not expired on the date of this Statement coming into effect and :
In the event the period determined under paragraph 63 has not expired on the date of this Statement 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 Statement, 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,
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 Statement, 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.