IND AS 38, IAS 38, and SIC 32 - Intangible Assets

Each Accounting Standard offers a wide variety of practical applications to the stakeholders in respect of full disclosure and transparency. Therefore, I hereby try to summarize various dimensions with regard to the following Accounting Standard.

1. The Accounting Standards related to “Intangible Assets."

• A. Ind AS -38
• B. IAS 38, SIC 32

2. Some Important Differences between IAS 38, SIC 32, and INDAS 38

No Major differences between INDAS -38and IAS -38. Therefore, the following paragraphs relate to both INDAS -38and IAS 38

3. Objective

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.

4. Scope

Intangible assets are the subject of INDAS 38. Rights under licensing agreement for items such as films, video recordings, plays, manuscripts, patents, and copyrights are within the scope of this standard. INDAS 38 specifies that internally generally goodwill, should not be recorded as 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 INDAS 32 Financial Instruments: Presentation;

(c) the recognition and measurement of exploration and evaluation assets (see INDAS 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.

If another Standard prescribes the accounting for a specific type of intangible asset, an entity applies that Standard instead of this Standard. For example, this Standard does not apply to:

(a) intangible assets held by an entity for sale in the ordinary course of business ( INDAS 2 Inventories).

(b) deferred tax assets (IND AS 12 Income Taxes).

(c) leases of intangible assets accounted for in accordance with INDAS 116 Leases.

(d) assets arising from employee benefits (IND AS 19 Employee Benefits).

(e) financial assets as defined in INDAS 32. The recognition and measurement of some financial assets are covered by INDAS 110 Consolidated Financial Statements, INDAS 27 Separate Financial Statements, and INDAS 28 Investments in Associates and Joint Ventures.

(f) goodwill acquired in a business combination (see INDAS 103 Business Combinations).

(g) non‑current intangible assets classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with INDAS105 Non‑current Assets Held for Sale and Discontinued Operations.

5. Definitions

A. An intangible asset is an identifiable non‑monetary asset without physical substance.

B. Monetary assets are money held and assets to be received in fixed or determinable amounts of money.

Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life.

Carrying amount is the amount at which an asset is recognized in the statement of financial position after deducting any accumulated amortization and accumulated impairment losses thereon.

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.

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.

An impairment loss is an amount by which the carrying amount of an asset exceeds its recoverable amount.

Research is an 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.

6. Initial Recognition of Intangible Asset

Recognition and measurement

The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:

A. The definition of an intangible asset ( FIRST RECOGNITION CRITERIA

Definition--An intangible asset is an identifiable non‑monetary asset without physical substance.

An Intangible asset is identifiable

if it either: (a) is separable, ie is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset, or liability, regardless of whether the entity intends to do so; or

(b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligation

B. The recognition criteria (SECOND RECOGNITION CRITERIA)

As follows

An intangible asset shall be recognized if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.

An intangible asset shall be measured initially at cost.

The cost of a separately acquired intangible asset comprises:

(a) its purchase price, including import duties and non‑refundable purchase taxes, after deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing the asset for its intended use

Acquisition as part of a business combination

In accordance with IND AS 3 Business Combinations, if an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value at the acquisition date

Internally generated goodwill

Internally generated goodwill shall not be recognized as an asset.

Internally generated intangible assets

It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition because of problems in:

(a) identifying whether and when there is an identifiable asset that will generate expected future economic benefits; and
(b) determining the cost of the asset reliably

Therefore, in addition to complying with the general requirements for the recognition and initial measurement of an intangible asset, an entity applies the requirements and guidance in paragraphs 52–67 to all internally generated intangible assets.

Summary of paragraphs 52–67 starts

To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into:

(a) a research phase; and
(b) a development phase.

Although the terms ‘research' and ‘development' are defined, the terms ‘research phase' and ‘development phase' have a broader meaning for the purpose of this Standard.

If an entity cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the entity treats the expenditure on that project as if it were incurred in the research phase only.

Research phase

No intangible asset arising from research (or from the research phase of an internal project) shall be recognized. Expenditure on research (or on the research phase of an internal project) shall be recognized as an expense when it is incurred.

Examples of research activities are:

(a) activities aimed at obtaining new knowledge;

(b) the search for, evaluation, and final selection of, applications of research findings or other knowledge;

(c) the search for alternatives for materials, devices, products, processes, systems or services; and

(d) the formulation, design, evaluation, and final selection of possible alternatives for new or improved materials, devices, products, processes, systems, or services.

Development phase

An intangible asset arising from development (or from the development phase of an internal project) shall be recognized if, and only if, an entity can demonstrate all of the following:

(a) the technical feasibility of completing the intangible asset so that it will be available for use or sale. (b) its intention to complete the intangible asset and use or sell it.

(c) its ability to use or sell the intangible asset.

(d) how the intangible asset will generate probable future economic benefits.

(e) the availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset.

(f) its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Cost of an internally generated intangible asset

The cost of an internally generated intangible asset is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria depicted below

An intangible asset shall be recognized if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.

And

An intangible asset arising from development (or from the development phase of an internal project) shall be recognized if, and only if, an entity can demonstrate all of the following:

(a) the technical feasibility of completing the intangible asset so that it will be available for use or sale. (b) its intention to complete the intangible asset and use or sell it.

(c) its ability to use or sell the intangible asset.

(d) how the intangible asset will generate probable future economic benefits.

(e) the availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset.

(f) its ability to measure reliably the expenditure attributable to the intangible asset during its development.

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management.

Examples of directly attributable costs are:

(a) costs of materials and services used or consumed in generating the intangible asset;

(b) costs of employee benefits (as defined in IAS 19) arising from the generation of the intangible asset; (c) fees to register a legal right; and

(d) amortization of patents and licenses that are used to generate the intangible asset.

The following are not components of the cost of an internally generated intangible asset:

(a) selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use;

(b) identified inefficiencies and initial operating losses incurred before the asset achieves planned performance; and

(c) expenditure on training staff to operate the asset.

Summary of paragraphs 52–67 ends

Recognition of an expense

Expenditure on an intangible item shall be recognized as an expense when it is incurred unless:

(a) it forms part of the cost of an intangible asset that meets the recognition criteria

(b) the item is acquired in a business combination and cannot be recognized as an intangible asset. If this is the case, it forms part of the amount recognized as goodwill at the acquisition date (INDAS 103).

Past expenses not to be recognized as an asset Expenditure on an intangible item that was initially recognized as an expense shall not be recognized as part of the cost of an intangible asset at a later date.

7. Measurement after recognition

An entity shall choose either the cost model or the revaluation model as its accounting policy.

If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same model, unless there is no active market for those assets.

Cost model

After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortization and any accumulated impairment losses.

Revaluation model

After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, the fair value shall be measured by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value.

If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset, the asset shall be carried at its cost less any accumulated amortization and impairment losses.

If an intangible asset's carrying amount is increased as a result of a revaluation, the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

If an intangible asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of that asset. The decrease recognized in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.

Useful life

An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or the number of production or similar units constituting that useful life. An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

Intangible assets with finite useful lives

Amortization period and amortization method

The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life.

Residual value

The residual value of an intangible asset with a finite useful life shall be assumed to be zero unless:

(a) there is a commitment by a third party to purchase the asset at the end of its useful life; or

(b) there is an active market (as defined in INDAS 113) for the asset and:

(i) residual value can be determined by reference to that market; and
(ii) it is probable that such a market will exist at the end of the asset's useful life.

Review of amortization period and amortization method

The amortization period and the amortization method for an intangible asset with a finite useful life shall be reviewed at least at each financial year‑end

Intangible assets with indefinite useful lives

An intangible asset with an indefinite useful life shall not be amortized.

In accordance with IAS 36, an entity is required to test an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount with its carrying amount

(a) annually, and
(b) whenever there is an indication that the intangible asset may be impaired.

Retirements and disposals

An intangible asset shall be derecognized:

(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal.

The gain or loss arising from the derecognition of an intangible asset shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset. It shall be recognized in profit or loss when the asset is derecognized (unless INDAS 116 requires otherwise on a sale and leaseback.) Gains shall not be classified as revenue.