AS 26 Intangible Assets Applicability Summary Notes PDF. In previous articles, we have given AS 9 (Revenue Recognition) and AS 10 (Fixed Assets). Today we are providing complete details of Accounting standard – 26 intangible assets objective, scope, definitions, which factors we should keep in mind while calculating useful life intangible asset, disclosure etc. You can also download AS 26 intangible assets notes by ICAI at the end of this article. This notes is also useful for IPCC students.
AS 26 Intangible Assets Summary Notes PDF
The objective of this Standard is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Standard. This Standard requires an entity to recognize an intangible asset if, and only if, specified criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires specified disclosures about intangible assets.
This Standard shall be applied in accounting for intangible assets, except:
(a) intangible assets that are within the scope of another Standard;
(b) financial assets, as defined in Ind AS 32, Financial Instruments: Presentation;
(c) the recognition and measurement of exploration and evaluation assets (see Ind AS 106, Exploration for and Evaluation of Mineral Resources); and
(d) expenditure on the development and extraction of minerals, oil, natural gas and similar non-regenerative resources.
The following terms are used in this Standard with the meanings specified:
Amortization is the systematic allocation of the depreciable amount of an intangible asset over its useful life.
An asset is a resource:
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.
Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any accumulated amortisation and accumulated impairment losses thereon.
Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction, or, when applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other Indian Accounting Standards, eg Ind AS 102, Share-based Payment
Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. 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 before the start of commercial production or use.
Entity-specific value is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See Ind AS 113, Fair Value Measurement.)
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
An intangible asset is an identifiable non-monetary asset without physical substance.
Monetary assets are money held and assets to be received in fixed or determinable amounts of money.
Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
The residual value of an intangible asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.
Useful life is:
(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by an entity.
Every accounting standard makes a reputable presumption about the useful life of an intangible asset. Indian Accounting Standard-26 has made a presumption that life of an intangible asset will not exceed 10 years from the date when the asset is available for use. This assumption has been made on the ground that estimates of useful life become less reliable as useful life increases. However, useful life may be more or less than 10 years depending on the factors affecting the intangible asset.
While deciding the useful life, the company must keep the following factors in mind :
- The expected usage of the asset.
- Technical obsolescence.
- Expected actions by competitors.
- Period of control over the asset i.e. legal limits on the use of the asset such as leases.
- Typical product life cycles for the asset.
- The stability of the industry in which the asset operates.
- Changes in the market demand for the output (product or service) of the asset.
Recognition of Intangible Asset
An intangible asset can be recognized if it meets the definition and recognition criteria given in the standard. This standard has laid down a proper recognition criteria for intangible assets. According to this standard an intangible asset should be recognized if
- It is probable that the future economic benefits generated by an intangible asset will flow to the enterprise and
- The cost of the asset can be measured reliably.
Considerable amount of judgement is required by the firm to ascertain the degree of certainty attached with the flow of economic benefits. After understanding when we can recognize an intangible asset, the next step is how to recognize these assets i.e. how to value them. An intangible asset should be measured initially at cost. Standard has divided the recognition part of intangibles into two parts ─ primary recognition and secondary recognition. Under primary recognition intangible assets are valued on the basis on which they have acquired or internally generated. Acquisition can be
- By way of purchase.
- By way of amalgamation.
- By way of government grant
- By way of exchange for another asset and
- By way of exchange for shares.
Standard has given different treatment under different types of acquisition which is discussed in the following section.
Separate acquisition – Under this type of acquisition the measurement of cost of intangible is most reliable. According to the standard, cost of an intangible asset is purchase price + taxes on purchase +installation expenses + any other directly attributable expense – trade discount – refundable taxes. After the estimation of cost, it is capitalized in the books of accounts.
Acquisition as part of an amalgamation – Intangible assets acquired in an amalgamation in the nature of purchase are to be accounted according to AS-14, Accounting for Amalgamation. According to AS – 14 standard, value allocated to identifiable intangible asset should be done on the basis of their fair value at the date of amalgamation (presence of active market) or at the amount that the enterprise would have paid in an arm’s length transaction (non-presence of active market). An enterprise whose value cannot be measured reliably should not be recognized separately. It is to be included in Goodwill.
Acquisition by way of government grant – Sometimes government allocates intangible assets such as airport landing rights; import licenses etc. to enterprises at nominal consideration or free of charge. These intangibles come under the category of intangible assets acquired by way of government grants. Accounting of these types of intangible assets is done on the basis of AS-12, Accounting for governmentgrants. According to this standard, intangible assets acquired free of charge by way of government grants are to be recognized at nominal value and intangible assets acquired for nominal consideration by way of government grants are to be recognized at the acquisition cost. Additional expenditure incurred for making the asset ready for use is also to be included.
Acquisition by exchange of assets – In this case intangible asset is acquired in full or part exchange of another asset. Cost of these types of intangible assets is determined on the basis of AS-10, Accounting for Fixed Assets. According to this standard, the value to be ascertained at fair value of asset obtained or at fair value of asset surrendered whichever is more clearly evident. If fair value is not clearly evident then consider lower value as value of intangible assets.
Acquired goodwill – The goodwill which is generated due to acquisition is known as an acquired goodwill. Acquired goodwill can be positive or negative. Positive goodwill is to be capitalized and shown as an asset in the balance sheet. Under this standard, goodwill is to be tested for impairment annually with an exception of goodwill arising due to amalgamation. This goodwill is to be amortized over 3-5 years (AS-14, Accounting for Amalgamation). Negative goodwill is simply credited to the capital reserve account which is a part of shareholder’s equity.
Internally generated goodwill – Internally generated goodwill includes those expenditures which are incurred by the enterprise for generating future economic benefits but cannot be recognized as intangible assets as they do not meet the recognition criteria. Because of this it cannot be measured reliably. Therefore, internally generated goodwill should not be recognized as an asset.
Subsequent expenditure are those which are done in later years of usage of an intangible asset. Standard has recognized that if the subsequent expenditure improves the performance of the asset beyond a standard performance then that expenditure should be capitalized if it can be measured. Otherwise, that expenditure should be transferred to profit and loss account. Expenditures which are not measurable should not be recognized. Consistent with above discussion, subsequent expenditure on brands, mastheads, publishing titles, customer list is always recognized as an expense.
According to AS-26
Amortization is the systematic allocation of the depreciable amount (original cost – scrap value) of an intangible asset over its useful life.
Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
To understand the concept of “subsequent recognition” further understanding is required about the method of amortization, life of an intangible asset and scrap value. All these concepts are discussed with rules specified by this standard in the following section.
According to AS-26
“Amortization method used should reflect the pattern in which the asset‟s economic benefits are to be consumed by the enterprise”.
Standard has specifically given that a straight line method to be used if pattern of economic benefits cannot be ascertained reliably. Methods which can be used for amortization are straight line method, diminishing balance method and production unit method. The method to be selected should be consistent with the pattern of consumption of economic benefits and should be consistently followed year after year unless there is a change in pattern of economic benefits. Like depreciation, amortization is recognized as an expense. If an intangible asset is used in the production process then amortization of that asset is included in carrying amount of that asset for example in case of inventories.
Residual value/ Scrap value According to the standard, scrap value should be assumed to be zero unless there is a commitment of purchase by the third party at the end of useful life or there is an active market. But if company adopts written down value method, then it has to provide 5% of cost as scrap value as per Sec205 of Companies Act 1956.
Amortization period “Amortization period is the period over which the depreciable amount of an intangible asset should be allocated”.
Retirement and Disposal
An Intangible Asset should be removed from the balance sheets from the date of disposal or when no future economic benefits are expected from it. Profit or loss (net proceeds – carrying amount of the asset) arising at the time of disposal or retirement should be transferred to profit and loss account.
Standard has given specific guidelines on disclosure of information related to intangible assets. First, intangible assets are required to be differentiated between internally generated intangible assets and other intangible assets. Then, as per AS-26 the financial statements should disclose the following information about Intangible assets:-
- Useful life.
- Amortization method.
- Gross carrying amount and the accumulated amortization at the beginning and end of the period.
- Change in accounting policy related to intangible assets and effect on financial statements.
- Disclosure of reasons when amortization period is more than 10 years.
- Aggregate amount of R&D recognized as an expense during the period
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