How to identify an intangible asset and capitalize?


Para 8 of Ind AS 38 specifies that 'An intangible asset is an identifiable non-monetary asset without physical substance.'

Also as per para 8 "An asset is a resource:

(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity."

To highlight an intangible asset has 3 main characteristics:

  1. It is controlled by the entity
  2. No physical substance
  3. It is identifiable.

1. Controlled by the entity

As per para 13 of Ind AS 38 'An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits in some other way'

From the above it can be said that if one can get the future economic benefits from the use of the asset and at the same time, can prevent others to get these benefits, ie. legal rights, then one can control the asset.

For example, licensed contract or franchisee rights.

Control can also be achieved in internally developed assets like software's which an entity controls and sales. Human resources on the other hand cannot be considered as intangible assets, because one cannot control them. 

2. No physical substance

If some asset has physical substance, then its tangible asset covered in Ind AS 2 or Ind AS 16.

However Para 4 specifies that 'Some intangible assets may be contained in or on a physical substance such as a compact disc (in the case of computer software), legal documentation (in the case of a licence or patent) or film. In determining whether an asset that incorporates both intangible and tangible elements should be treated under Ind AS 16, Property, Plant and Equipment, or as an intangible asset under this Standard, an entity uses judgement to assess which element is more significant. For example, computer software for a computer-controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. The same applies to the operating'

This means that sometimes intangible asset is attached to something physical in order to carry it or store it. In this case, the asset is still intangible because the value of the related tangible asset is very small when compared to the value of intangible asset. 

3. It is identifiable.

Para 12 'An asset is identifiable if it either:

(a) is separable, i.e. 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 obligations.'

Above para specifies that the asset is identifiable in one of these 2 cases:

  1. It is separable - so, you can actually separate the asset and sell it, transfer it, license etc.
  2. Arises from the legal rights - either from contract, legislation etc. even if not separable.

Capitalization of the intangible asset

Para 21 specifies that '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.'

Intangible asset can only be capitalized if following conditions are satisfied: 

1. The future economic benefits of the asset expected to flow to the entity

Para 17 specifies that 'The future economic benefits flowing from an intangible asset may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the entity. For example, the use of intellectual property in a production process may reduce future production costs rather than increase future revenues.'

This means that Future economic benefits can be either increase in revenues or reduction in expenses, ie. potential to increase profits.

2. Cost can be measured reliably

If one cannot measure the cost, then capitalization of intangible asset cannot take place.

Example: internally generated brand, trademark, publishing title, customer list cannot be capitalized because you cannot determine cost to develop it. 

Examples of intangible assets

IPL cricket teams

There is a  price paid to create such team or team players. Is this cricket team and contracts with players an intangible asset?

Can we control them,  players might be prohibited to play in another teams by the legal rules placed by cricket authority. Also, the contracts with individual players legally bind the player to stay with the same team for a series of match. So one would be able to demonstrate control and yes, recognize team as intangible asset.

(Remember they are not employees) 

Advertising campaign

Companies invest heavy cash into their advertising campaigns. Management always argues that this campaign would build and strengthen brand and position in many years to come so they should capitalize advertising campaign as it brings the future economic benefits.

Advertising campaign is not an Intangible Asset because it is NOT identifiable – one cannot separate it and sell it to others. Such expense should be recognized as expenditures.

Internet websites

Companies like Flipkart, Myntra, Jabong, Zomato have their branded website.

They are famous and attract a lot of customers. These websites are an intangible asset, because the company controls it, it has no physical substance and it is identifiable (i.e. company can sell it).

Can you recognize it as an asset?

Yes, it brings the future economic benefits, but, for measurement of cost one has to apply the rules as per Appendix A covered in Ind AS 38: website costs to determine the capitalization.\ 

Licenses to trade

Imagine you own a petrol pump. So, as a part of your business you acquire petrol pump license from the government. This licenses used by you is intangible asset;

Software licenses

Purchased a number of computers with Windows Operating system or MS office or maybe ERP. One has to also pay the annual fee for upgrades of the software. One may continue using the license for accounting software also without annual upgrade fees, but won't receive any updates.

Here, we have 3 items:

1. Operating system and ERP and MS office

Yes, it is an intangible asset because it meets all the criteria. However, operating system is an integral part of the computers, because the computers can't run without the system. Therefore, would be recognized with computers as property, plant and equipment, so no separate intangible asset.

2. Annual upgrades

Annual upgrades do not meet the definition of an intangible asset, because they are not separable. They are expensed in profit or loss when incurred. They are similar to maintenance and repair costs of property, plant and equipment.

Customer lists

Customer list may be bought from telecom company or insurance company with names of their clients, addresses and phone numbers.

They may be classified as Intangible asset because:

  • No physical substance,
  • Identifiable (because you were able to buy it),
  • Control,
  • Cost can be measured reliably (you paid for it) and,
  • Expected future economic benefits (increased sales as a result of new list of potential customers).

(Note it does not include customer list purchased illegally)

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CA Sumit Sarda 
on 09 May 2019
Published in Accounts
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