CA Updates: AS

Intangible Assets

Meaning

Intangible Asset is an identifiable Asset, without any physical substance of its own, non-monetary in nature, held for production purpose or for renting services.

Identifiable – Capable of being sold

Asset – A resource owned by the entity which is capable of generating future economic benefit.

Intangible Asset should be recorded only if it has a cost to the entity

Non-monetary asset – These are those asset whose realization is neither fixed nor determinable ( e.g. debtors, B/R etc. )

Treatment of Storage Cost

Storage Cost refers to the cost of device in which the Intangible Asset is incorporated. If the Storage Cost is immaterial then ignore such cost.

If the cost is material then we have to see whether such cost is separable or not, if such cost is separable then record the Intangible and tangible item separately.

If such cost is inseparable then record that Asset that has been primarily acquired.

Cost of Intangible Asset bought under exchanged will be Fair value of the asset acquired or value of the asset exchanged, whichever is lower.

Recognition criteria

Intangible Asset shall be recognized only –

· When it has a cost to the entity

· And such cost should is capable of being measured reliably.

Assets which are non-monetary in nature acquire free of cost should be recorded at Nominal value.

*Purchase of Intangible Asset*
Purchase price	xxx
add : Taxes ( Non recoverable)	xxx
add : Commission	xxx
add : Legal exp	xxx
Cost of intangible Asset	xxx
*Intangible Asset acquired in the scheme of Amalgamation*
Amalgamation in nature of Merger	- Record Asset/Liability at Book Value

Amalgamation in nature of Purchase - Record Asset/Liability at fair value and if fair value is not available, then take Book value to be fair value but note that Capital Reserve should neither be created nor increased. (Don’t worry we have an eg. below)

E.g Assume fair value of the Asset/liability is not available w.r.t intangible Asset.

	Book Value	Fair Value
Land and building	400000	500000
Plant and machinery	300000	400000
Website	40000	-
Software	10000	-
Patent	50000	-
Creditors	100000	100000

Find Intangible Asset assuming Business purchase as – Rs.700000/600000/1100000

Solution

	700000	600000	1100000
Land & bldng	500000	500000	500000
Plant & machinery	400000	400000	400000
Website			40000
Software			10000
Patent			50000
To Creditor	100000	100000	100000
To Business	700000	600000	1100000
purchase
To Capital	100000	200000
Reserve

What we see in the above eg. is that when Business purchase was 700000/600000 we saw that Capital reserve was automatically generated and if we would have debited the intangible assets then they would have increased the capital reserve so we did not record them but when the purchase consideration was 1100000 there was no capital reserve that was generated so we had to liberty to record Intangible Asset as they neither created nor they increased the Capital Reserve

Eg. Value of Intangible Asset acquired in nature of purchase = 50 lac and pc paid = 50 lac. Examine

Solution

In this case we find that there is no creation of Intangible Asset. If any Intangible Asset say Patent, creates Capital reserve for say 10 lac then Patent should be recorded only if there is active market for Intangible Asset else, ignored.

Self- generated Intangible Asset

Goodwill, title, brand-name, copy-right, if self-generated, then it shall not be recognized in accounts because they don’t have a cost to the entity.

Expenditure on Research should be recorded as Expense while expenditure on development should be capitalized.

If all the following conditions are met then we consider the beginning of development and the cost so incurred shall be capitalized:

· Technical feasibility of the product exist

· Availability of product for use and sale

· Identification of cost incurred

· Probability of external market

· Realistic expectation that there will be sufficient future expense to cover the cost.

Once an expenditure is in research stage, it can never be capitalized later

Following expenditure shall never be capitalized

· Administration expense

· Selling and distribution expense

· Staff training

· Abnormal Loss

Amount to be capitalized should not exceed the future benefits available in totality from Intangible Asset

Following expenses should be charged to P/L in the year in which it has been incurred:

· Advertisement exp

· Start-up exp.

· Relocation exp.

· Preliminary exp.

· Staff training

E.g Expenditure on know-how = Rs.50 lac. Production exp. met it’s criteria on 1/12/03. Expenditure incurred till date (i.e. 1/12/03) 22 lac. Further exp. incurred 80 lac. Recoverable amount = 72 lac. Discuss the treatment.

Solution

Expenditure to be charged to P/L = 22 lacs

Amount to be capitalized for the year 31/3/05 = 72 lac and impairment loss shall be (carrying amount – Recoverable amount) 108 – 72 = 36.

We would have capitalized 108 lac ( 28+80) but we know that amount to be capitalized should not exceed the future benefits available from Intangible asset so we have capitalized 72 lac and balance charged to P/L as impairment Loss ( 36 lac ).

Amortisation of Intangible Asset

Intangible Asset should be recorded at = Cost – Accumulated Amortisation

Amortisation to be started when Asset ready for use

Depreciable Amount

	Cost of Intangible Asset	xxx
-	Residual Value	xxx
		xx
	This shall be allocated over useful life of intangible Asset
*Period of Amortisation*
·	Over the expected benefit or
·	Over the expected benefit or		*Para 63*

· 10 years ( 5 years in case of Purchased Goodwill or software )

Life lower than above can also be taken. Life higher than that specified in para 63 can be taken but it should not be infinite i.e. it should be finite and justifiable.

Translation provisions

When AS 26 is applied for the first time then:

1) Calculate value of Intangible item in balance sheet ( i.e find the book value )

2) Calculate value of Intangible asset as per

· Company policy ( if life shorter than para 63 ) or

· As per para 63 ( if life more than para 63 )

3) Write off Intangible Asset with opening Revenue Reserve if book value is more than the value calculated in step 2.

Eg. 1/4/2000

Goodwill purchased 1/4/2000			150000
Goodwill book value on 1/4/03
a)	105000	Company policy 10 year
b)	127500	Company policy 20 year
c)	150000	-
d)	60000	Company policy 5 year

Solution
			Case A	Case B	Case C	Case D
	Policy		10 yr	20yr	-	5 yr
Book Value		105000		127500	150000	60000
Para 63		105000		105000	105000	60000

Amount to be w/ff Opⁿ Revenue reserve -				22500	45000	-