The Invisible Treasures (IND AS 38)

In the realm of enterprises, some assets were visible, like factories, machines, or inventory.

But there were also invisible treasures - assets you couldn't touch but which added immense value to businesses. These were things like patents, copyrights, brand value, or software.

Businesses struggled to measure and account for these intangible assets. Some overvalued them, while others ignored them entirely.

Maya ran a tech company that developed innovative software solutions. She recently created a revolutionary AI-powered app. She wondered, "Can I call my app an asset? How do I value it?"

IND AS 38 said, "Let me guide you on the journey of intangible assets."

What Are Intangible Assets?

IND AS 38 explained, "An intangible asset is

1. Identifiable - It can be separated or arise from a contractual or legal right.

2. Non-Physical - It has no physical substance.

3. Future Benefits - It will provide economic benefits to your business in the future.

For example, your AI app qualifies as an intangible asset if:

• You control it (e.g., you own the intellectual property).
• It will generate future revenue for your business."

Recognition Criteria

Maya asked, "Can I record every idea or prototype as an intangible asset?"

IND AS 38 shook his head and replied, "Not so fast. To recognize an intangible asset, you must meet these criteria:

• Cost Can Be Measured - You know how much it costs to develop or acquire the asset.
• Future Benefits Are Probable - You can demonstrate how the asset will earn revenue or reduce costs."

Development vs. Research Costs

IND AS 38 taught Maya the difference:

1. Research Phase

• Costs incurred during the idea exploration stage are expensed.
• Example: Brainstorming or experimenting to find AI algorithms doesn't create an asset.

2. Development Phase

• Costs incurred to create a viable product can be capitalized.
• Example: Coding, testing, and patent registration for the app can be recorded as an intangible asset if the product is technically and commercially viable.

Maya realized she had been expensing all her costs, but now she could capitalize the development phase expenses.

Initial Measurement

IND AS 38 explained, "Intangible assets are initially measured at cost, which includes:

• Purchase price (if acquired externally).
• Development costs (for self-created assets).

For your AI app, include the salaries of developers, testing costs, and fees for patent filing."

Subsequent Measurement

IND AS 38 offered two options for future measurement:

1. Cost Model

• Carry the asset at its cost less accumulated amortization and impairment.

2. Revaluation Model

• Carry the asset at its fair value (if an active market exists).

Maya chose the cost model because her app didn't have an active market.

Amortization and Impairment

Maya asked, "What if the app's value reduces over time?"

IND AS 38 replied, "You must:

1. Amortize

• Spread the cost of the intangible asset over its useful life.
• If the app has a useful life of 5 years, divide its cost equally over this period.

2. Test for Impairment

• If the asset loses value (e.g., due to competition), recognize an impairment loss."

Internally Generated Goodwill

Maya inquired, "Can I record the goodwill my app creates, like its reputation?"

IND AS 38 firmly replied, "No. Internally generated goodwill, like brand value or customer loyalty, cannot be recognized. Only goodwill from acquisitions can appear on the balance sheet."

Presentation and Disclosure

IND AS 38 emphasized the importance of transparency:

• Disclose the nature, useful life, and amortization methods of intangible assets.
• Explain the basis of capitalization and key assumptions.

Maya included detailed notes in her financial statements, ensuring stakeholders understood how the app was accounted for.

With IND AS 38's guidance, Maya's financial statements reflected the true value of her app.

She:

• Capitalized development costs, showing the app as an asset.
• Amortized its cost over its useful life.
• Disclosed all assumptions and methods transparently.

Her investors were pleased to see the app's contribution to her business clearly reflected.

The Hidden Treasures Shine

IND AS 38's principles spread across the kingdom, helping businesses uncover and account for their intangible assets. From patents to software, these invisible treasures were now treated with the care and precision they deserved.