LMT SCHOOL OF MANAGEMENT, THAPAR UNIVERSITYMasters of Business Administration

Course: Financial Reporting and AnalysisFaculty: Dr. Sonia Garg (Email: sonia.garg@thapar.edu)

Session 13: Accounting for Intangible Fixed Assets

Duration: 60 minsSlides: 8

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AS-26 weblink

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.

Applies to all intangible assets other than acquired goodwill (which is still governed by AS-10)

Intangible assets can be acquired in a business purchase or can be internally generated

In a business acquisition, excess price paid is goodwill; however part of this excess price paid is on account of other intangible assets which have to be identified and their cost ascertained

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Assets acquired in a business purchaseIdentification of Intangible assets

– Enterprise’s control over the resource– Expectation of future economic benefits flowing to the enterprise– The cost, that is, fair value of the asset can be measured reliably

Separately acquired intangible asset– Cost can be measured reliably since purchase consideration paid

is definite and specific to the asset acquired– Cost comprises purchase price net of trade discounts and inclusive

of duties, taxes and other directly attributable costs incurred in making the asset ready for intended use

– Example: Professional legal fees in the process of acquiring patents

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Internally generated intangible assetsGoodwill: internally generated goodwill is not recognised as an asset; it is not an identifiable resource controlled by the firm that can be measured reliably at cost

Other assets: for asset to qualify for recognition it should, difficulty arises in identifying• Generation of probable future economic benefits• Point of time of generation these benefits• Cost of asset reliably

Generation of asset is divided into two phases: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.

No intangible asset arising from research should be recognised

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Intangible asset from developmentIt should be recognised if the firm can demonstrate the following

• the technical feasibility of completing the intangible asset so that it will be available for use or sale;

• its intention to complete the intangible asset and use or sell it;• its ability to use or sell the intangible asset;• how the intangible asset will generate probable future economic benefits (the

existence of a market) and usefulness of the intangible asset;• the availability of adequate technical, financial and other resources to

complete the development and to use or sell the intangible asset; and• its ability to measure the expenditure attributable to the intangible asset

during its development reliably.

Cost of an internally generated intangible asset is the sum of expenditure incurred from the time when the intangible asset first meets the recognition criteria.

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Specific non-recognition of certain assets

AS 26 prescribes that in addition to internally generated goodwill, internally generated • Brands• Publishing titles• Customer listsshould not be recognised as intangible assets, since the expenditure incurred on them cannot be distinguished from the cost of developing the business as a whole

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Amortisation of intangible assets

• It is a systematic allocation of the depreciable amount of an intangible asset over its useful life

• As per AS 26 it should not be more than 10 years unless persuasive evidence is provided

• Amortisation commences when the asset is available for use

• Residual value of an intangible asset should be zero unless– There is commitment from a third party to purchase the asset– There is an active market for the asset and its residual value can

be determined

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Disclosures in F/S