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AS 26

Intangible Assets

For - CA Final
By - A.B.Sonpal

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.

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Purchase of Intangible Asset
Purchase price
add : Taxes ( Non recoverable)
add : Commission
add : Legal exp
Cost of intangible Asset

xxx
xxx
xxx
xxx
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. (Dont 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

Land & bldng


Plant & machinery
Website
Software
Patent
To Creditor
To Business
purchase
To Capital
Reserve

700000
500000
400000

600000
500000
400000

100000
700000

100000
600000

100000

200000

1100000
500000
400000
40000
10000
50000
100000
1100000

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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 dont 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

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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 its 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


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

Para 63

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.

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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)
b)
c)
d)

105000
127500
150000
60000

Company policy 10 year


Company policy 20 year
Company policy 5 year

Solution

Policy
Book Value
Para 63

Case A

Case B

10 yr
105000
105000

20yr
127500
105000

Amount to be w/ff Opn Revenue reserve -

22500

Case C
150000
105000
45000

Case D
5 yr
60000
60000
-

Subsequent Expenditure
To be capitalized only

If such expenditure can be measured and attributable to the asset reliably


Such expenditure will enable the Asset to generate future economic benefit

If life higher than that prescribed in para63 is taken then it should undergo impairment test to be
conducted at the end of every year.

Thats it Class Over