AS 26 Accounting for Intangibles : A review with respect to Patents and Trademarks
More often brands created are not recognized in the Balance Sheet. Companies invest huge amounts in advertisement and sales promotion which were earlier treated as deferred expenditure or were written off as expenditure in the Pl account.
AS-26 is applicable only if the expense is incurred on intangible assets. A bird’s view of treatment of Patents and Trademarks is spelt out below.
Criteria for recognition:
There are 4 criteria for recognition of Patents and Trademarks
1. Identifiability and Separatability :The Patent and Trademark should be clearly identifiable and distinguishable. Even if the Asset generates future economic benefits only in combination with other assets , the asset is identifiable if the enterprise can identify the future economic benefits that will flow from the asset.
2. Control : An enterprise controls an asset if the enterprise has the power to obtain the future economic benefits flowing from the Patents and Trademarks. The capacity of an enterprise to control the future economic benefits from an intangible asset stems from the legal rights that are enforceable in a court of law. In the absence of legal rights it is difficult to demonstrate control.
3. Future economic Benefits : An intangible asset should be recognized if, and only if it is probable that the future economic benefits that are attributable to the Patents and Trademarks will flow to the enterprise.
4. Cost can be measured reliably : The cost of Patents and Trademarks should be measured reliably. If the Patents and Trademarks are acquired separately , the cost can be usually measured reliably. This is particularly possible if the consideration is in form of cash or other monetary assets. The cost comprises of purchase price, import duties and other expenses directly attributable to Patents and Trademarks. Directly attributable expense means the expenses incurred on making the asset ready for use. If the Patents and Trademarks are acquired in exchange of shares and securities , the asset is recorded at its fair value or the fair value of the securities issued , whichever is more clearly evident.
A deviation from the above criteria is applicable in case of Patent. An internally generated Patent can be capitalized if the recognition criteria is fulfilled.
However an internally generated Trademark cannot be capitalized.
Acquired Patents and Trademarks can be capitalized if they fulfill the above criteria.
Case Law : Asian Paints India Ltd has acquired the Trade mark from Ms Hardcastle & Waud Manufacturing Co Ltd during the year for a total consideration of 11.92 crores . The said amount is being amortized over a period of five years from the date of acquisition and the same is being shown under schedule of Fixed Assets.
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