Intangible Assets are being recognized when it falls under the category of an Asset which has no physical substance and it is a non-monetary item and having identifiability (can be recognized separately).
As per the existing IGAAP in India, the useful life of such Intangible Assets will be certain and in any case there is a rebuttable presumption that the useful life of an Intangible asset will not exceed TEN years from the date of its first use. However the situation has significantly different after the applicability of Ind-AS in India which talks about the lives of such Intangibles could be either finite or indefinite. Here the indefinite mean an asset has long life which is not INFINITE (upto infinity).
Let's have a look at the guidance on such lives of Intangible assets and then we can talk about in details-
Ind-As-38 - Intangible Assets
"An intangible asset is an identifiable non-monetary asset without physical substance".
Para-88 - "An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or 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".
Para-89- "The accounting for an intangible asset is based on its useful life. An intangible asset with a finite useful life is amortized (see paragraphs 97-106), and an intangible asset with an indefinite useful life is not (see paragraphs 107-110)".
Para-109 - "The useful life of an intangible asset that is not being amortised shall be reviewed each period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite shall be accounted for as a change in an accounting estimate in accordance with Ind-AS 8".
Now,
Let's have an example to understand what exactly are the changes that have been brought into by these new accounting standards-
Example-
Company A has been taken over by Company X in which it has identified customer relations which have been entered into in a way to ensure that renewal of the agreement will happen each time. How the classification should be made for this intangible asset and what are the other requirement to ensure its classification is correct?
Suggested approach -
Upon the acquisition of a business, Company X has identified these customer relations as one of the separable, identifiable asset which has no physical substance but it will generate future economic benefit which are under the control of the company. The same has been separated from Goodwill being its capability to be separated.
Now, after recognizing this as Intangible, let's have a look to define whether to classify it as finite or indefinite category for the purposes of its amortization.
The facts suggest that the relationship has been established in such a way where it ensures that its renewability of agreement each time which is essentially indefinite (not INFINITE) hence based on certain other relevant aspects, one can document the facts associated with this asset and will be able to classify it being Indefinite because of uncertainty about its period going forward.
Now,
One can argue that the renewal might happen or not or there might be some situation which will change in future so will it be prudent to classify as Indefinite?, The answer is YES , why not….As per para 109 of Ind-As 38 above says that to re-assess such indefinite Intangibles assets each PERIOD (yearly or if FS is prepared for less than 12 months) about the viability of its life and in case there is a change from Indefinite to Finite then it will be treated as change in estimate and will be accounted prospectively in to PL.
Some Important points to remember-
1. The criteria to classify an intangible asset into INDEFINITE could be used to defer amortization for any such intangible assets which might be having FINITE life and it should have been amortised into PL based on its certain useful life,
2. Any time if the amortization is required to be made into PL, it can be done by using para- 109 related provision and one can make Indefinite Intangible asset into finite and can charge PL without violating any provisions,
3. Auditors/ Management must ensure proper documentation for such Intangibles and to refrain such instances where Indefinite useful life asset becomes finite which hits PL of that period,
Readers will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
The author can also be reached at anuj@gyanifrs.com
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