AS-26: INTANGIBLE ASSETS

Non- ❖ Intangible assets that are covered by another Accounting Standard

Applicability • Intangible assets held by an enterprise for sale in ordinary course of business
(AS-2)
• Deferred tax assets AS-22
• Leases that fall within the scope of AS-19
• Goodwill arising on amalgamation AS-14 and goodwill arising on
consolidation AS-21
❖ Financial assets
❖ Mineral rights and expenditure on the exploration for, or development and
extraction of, minerals, oil, natural gas and similar non-regenerative resources and
❖ Intangible assets arising in insurance enterprises from contract with policy holders.

Meaning of It is an
intangible → Identifiable
asset- → Non monetary asset
→ Without any physical substance
→ Held for economic benefits i.e. either for use in production or supply of goods
or services, for rental to others or for administrative purposes.
→ Under the control of entity

Essential ❖ It must be identifiable i.e the asset must be separable from other assets.
components ❖ It must be controlled by the enterprise
❖ Future economic benefits must be associated with an intangible asset

Recognition of An intangible asset should be recognized if and only if

intangible → It meets all the essential elements of an intangible assets
asset → It is probable that future economic benefits will flow to the enterprise
→ Cost of the asset can be measured reliably.

MEASUREMENT OF INTANGIBLE ASSETS

Procurement/ Cost of Intangible Assets include the following :
Separate Purchase price XX
Acquisition Add : Non-refundable taxes & duties XX
Add : Directly attributable expenditure on making the asset XX
ready for its intended use.*
Less: Trade discount & rebates (XX)
Cost of Asset XX
*Example: Professional fees for legal services

In Exchange Cost of Intangible Asset is

For Another ➢ Fair Market Value (FMV) of Asset given / Securities Issued
Asset or or
Shares/ Other ➢ Fair Market Value (FMV) of the Asset acquired
Securities whichever is more clearly evident.

Acquisition
By Way Of Given at concessional rate On the basis of their acquisition costs
Government Given free of cost Record at nominal value
Grant
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 Internally Generated Intangible ASSET

Research phase Development

phase *

× Deferred and Ammortised 

Development

Research Charge to P&L A/c ×
expenditure
*Development Phase:
Expenditure
Amount Capitalised = Lower of Cost or Recoverable Amount
Where Recoverable amount = Present value of Future Cash Flows
Note:
→ If an enterprise cannot distinguish the research phase from the development phase to create an
intangible asset, the expenditure should be treated as if it were incurred in the research phase only.
→ 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.
Development An intangible asset arising from development should be recognized if and only if an
phase enterprise can demonstrate all of the following:
(PARA 44) → Technical feasibility established
→ Marketability proved
→ Identification of cost incurred
→ Realistic expectation that there will be sufficient future revenue to cover cost
→ Intention to complete the asset and use or sell it.
Cost of an The following are not components of the cost of an internally generated intangible asset:
Internally ➢ Selling, administrative and other general overhead expenditure unless this
Generated expenditure can be directly attributed to making the asset ready for use.
Intangible ➢ Clearly identified inefficiencies and initial operating losses incurred before an asset
Asset achieves planned performance and
➢ Expenditure on training the staff to operate the asset
AMORTISATION PERIOD (PARA 63)
Basis of Depreciable amount of an intangible asset should be allocated on a systematic basis
allocation over the best estimate of its useful life.
Presumption It will not exceed 10 years from the date when the asset is available for use unless
as to the there is persuasive evidence that intangible asset has higher useful life.
useful life
When should Amortisation should commence when asset is available for use.
it commence?
Notes Given the history of rapid changes in technology, computer software and other
intangible asset is susceptible to technological obsolescence, it is likely that useful life of
the software etc. will be much shorter, say 3-5 years

AMORTISATION METHOD
Which method ❖ The method used should reflect the pattern in which assets economic benefits are
to follow consumed by the enterprise (In the ratio of future cash flows)
❖ If that pattern cannot be determined reliably, the SLM should be used.

Copyright of these notes is with CA. Nitin Goel (IQ Education Worldwide). Contact: 9915005021, 9988451199
Question 1
Desire Ltd. acquired a patent at a cost of Rs. 1,00,00,000 for a period of 5 years and the product life-cycle
is also 5 years. The company capitalized the cost and started amortizing the asset on SLM. After two
years it was found that the product life-cycle may continue for another 5 years from then. The net cash
flows from the product during these 5 years were expected to be Rs. 45,00,000, Rs. 42,00,000, Rs.
40,00,000, Rs. 38,00,000 and Rs. 35,00,000. Patent is renewable and company changed amortization
method from 3rd year (i.e. from SLM to ratio of expected new cash flows).
You are required to compute the amortization cost of the patent for each of the years (1st year to 7th
year).

Solution
Company amortized Rs. 20,00,000 per annum for the first two years. Hence, Amortization for the first
two years (Rs. 20,00,000 X 2) = Rs. 40,00,000.
Remaining carrying cost after two years =Rs. 1,00,00,000 – Rs. 40,00,000 = Rs. 60,00,000
Since after two years it was found that the product life cycle may continue for another 5 years, hence the
remaining carrying cost Rs.60 lakhs will be amortized during next 5 years in the ratio of net cash arising
from the sale of the products
The amortization cost of the patents may be computed as follows:
Year Net cash flows Amortization Ratio Amortization Amount
3 45,00,000 45 13,50,000
4 42,00,000 42 12,60,000
5 40,00,000 40 12,00,000
6 38,00,000 38 11,40,000
7 35,00,000 35 10,50,000
Total 2,00,00,000 200 60,00,000

Question 2
M/s. X Ltd. is developing a new production process. During the Financial Year ended 31st March,
2019, the total expenditure incurred on the process was Rs. 60 lacs. The production process met the
criteria for recognition as an intangible asset on 1st December, 2018. Expenditure incurred till this date
was Rs. 32 lacs.
Further expenditure incurred on the process for the Financial Year ending 31st March, 2020 was Rs. 90
lacs.
From 1st April, 2020, the Company has implemented the new process design and it is likely that this will
result in after tax saving of Rs. 20 lakh per annum for next five years.
The cost of capital is 10%. The present value of annuity factor of Rs. 1 for 5 years @ 10% is 3.79.

You are required to work out:

(i) What is the expenditure to be charged to Profit & Loss Account for the year ended 31st March, 2019?
(ii) What is the carrying amount of the intangible asset as on 31st March, 2019?
(iii)What is the expenditure to be charged to Profit & Loss Account for the year ended 31st March, 2020?
(iv) What is the carrying amount of the intangible asset as on 31st March, 2020?

Solution
As per AS 26 ‘Intangible Assets’
(i) Expenditure to be charged to Profit and Loss account for the year ending 31.03.2019
Rs. 32 lakhs is recognized as an expense because the recognition criteria were not met until 1st
December 2018. This expenditure will not form part of the cost of the production process recognized
as an intangible asset in the balance sheet.

(ii) Carrying value of intangible asset as on 31.03.2019

Copyright of these notes is with CA. Nitin Goel (IQ Education Worldwide). Contact: 9915005021, 9988451199
 At the end of financial year, on 31st March 2019, the production process will be recognized (i.e.
carrying amount) as an intangible asset at a cost of Rs. 28 (60-32) lacs (expenditure incurred since the
date the recognition criteria were met, i.e., from 1st December 2018).

(iii)Expenditure to be charged to Profit and Loss account for the year ended 31.03.2020
(Rs. in lacs)
Carrying Amount as on 31.03.2019 28
Expenditure during 2019 – 2020 90
Book Value 118
Recoverable Amount (20 * 3.79) (75.80)
Impairment loss 42.20
Rs. 42.20 lakhs to be charged to Profit and loss account for the year ending 31.03.2020

(iv) Carrying value of intangible asset as on 31.03.2020

(Rs. in lacs)
Book Value 118
Less: Impairment loss (42.20)
Carrying amount as on 31.03.2020 75.80

Amortisation - The company can amortise Rs. 75.80 lakhs over a period of five years by charging Rs.
15.16 lakhs per annum from the financial year 2020-2021 onwards

Question 3
RC Ltd. is showing an intangible asset at Rs. 72 lakhs as on 31-3-20. This asset was acquired for Rs. 120
lakhs as on 01-04-14 and the same was used from that date. The company has been following the policy
of amortization of the intangible assets over a period of 15 years, on straight line basis.
Comment on the accounting treatment of asset with reference to AS- 26 and also give the necessary
rectification journal entry.

Solution
As per Para 63 AS 26 'Intangible Assets', the depreciable amount of an intangible asset should be
allocated on 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. The Company has been following the policy of amortization of the intangible asset over
a period of 15 years on straight line basis. The period of 15 years is more than the maximum period of 10
years specified as per AS 26.
Accordingly, the company would be required to restate the carrying amount of intangible asset as on
31.3.2020 at Rs. 48 lakhs i.e. Rs. 120 lakhs less Rs. 72 lakhs ( Rs. 120 Lakhs / 10 years x 6 years = 72
Lakhs). The difference of Rs. 24 Lakhs (Rs. 72 lakhs – Rs. 48 lakhs) will be adjusted against the opening
balance of revenue reserve. The carrying amount of Rs. 48 lakhs will be amortized over remaining 4
years by amortizingRs. 12 lakhs per year.

The necessary journal entry (for rectification) will be

Revenue Reserves Dr. Rs. 24 Lakhs
To Intangible Assets Rs. 24 Lakhs
(Adjustment to reserves due to restatement of the carrying amount of intangible asset)

Question 4
K Ltd. launched a project for producing product X in October, 2019. The Company incurred Rs. 40
lakhs towards Research and Development expenses upto 31st March, 2020. Due to prevailing market
conditions, the Management came to conclusion that the product cannot be manufactured and sold in
the market for the next 10 years. The Management hence wants to defer the expenditure write off to
future years. Advise the Company as per the applicable Accounting Standard.

Copyright of these notes is with CA. Nitin Goel (IQ Education Worldwide). Contact: 9915005021, 9988451199
Solution
As per AS 26 “Intangible Assets”, expenditure on research should be recognized as an expense when it is
incurred. An intangible asset arising from development (or from the development phase of an internal
project) should be recognized if, and only if, an enterprise can demonstrate all of the conditions
specified in para 44 of the standard.
An intangible asset (arising from development) should be derecognised when no future economic benefits
are expected from its use according to the standard. Thus, the manager cannot defer the expenditure
write off to future years in the given case.
Hence, the expenses amounting Rs. 40 lakhs incurred on the research and development project has to be
written off in the current year ending 31st March, 2020.

Question 5
A Company with a turnover of Rs. 375 crores and an annual advertising budget of Rs. 3 crores had taken
up the marketing of a new product. It was estimated that the company would have a turnover of Rs. 37.5
croes from the new product. The company had debited to i ts Profit and Loss account the total
expenditure of Rs. 3 crores incurred on extensive special initial advertisement campaign for the new
product.
Is the procedure adopted by the Company correct?

Solution
According to AS 26 ‘Intangible Assets’, “expenditure on an intangible item should be recognized as an
expense when it is incurred unless it forms part of the cost of an intangible asset”.
In the given case, advertisement expenditure of Rs. 3 crores had been taken up for the marketing of a
new product which may provide future economic benefits to an enterprise by having a turnover of
Rs.37.5 crores. Here, no intangible asset or another asset is acquired or created that can be recognized.
Therefore, the accounting treatment by the company of debiting the entire advertising expenditure of
Rs.3 crores to the Profit and Loss account of the year is correct

Copyright of these notes is with CA. Nitin Goel (IQ Education Worldwide). Contact: 9915005021, 9988451199