Introduction to Ind AS 38
The objective of Ind AS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Ind AS. The standard requires an entity to recognize an intangible asset, if and only if, certain criteria are met. The standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets.
Ind AS 38 applies to all intangible assets other than:
- financial assets
- exploration and evaluation assets
- expenditure on the development and extraction of minerals, oil, natural gas, and similar resources
- intangible assets arising from insurance contracts issued by insurance companies
- intangible assets covered by another Ind AS, such as:
- intangibles held for sale
- deferred tax assets
- lease assets
- assets arising from employee benefits plan
- Goodwill acquired under business combination.
Definition of Intangible Assets
An identifiable non-monetary asset without physical substance controlled by the entity, from which future economic benefits are expected to flow towards the entity.
Recognition criteria: Ind AS 38 requires an entity to recognize an intangible asset, when purchased or self created if, and only if:
- it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and
- the cost of the asset can be measured reliably.
If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, Ind AS 38 requires the expenditure on this item to be recognized as an expense when it is incurred.
If asset is acquired separately, then it shall be recognized at acquisition cost.
If asset is acquired in a business combination or through a government grant, then recognition shall be at fair value of the asset.
If asset is generated internally, then the expenditure incurred in development phase shall be the recognition value.
Effects of revaluation
The increase in carrying amount to the extent of previous revaluation decrease shall be recognized in Profit & Loss A/c and the balance amount of revaluation to Other Comprehensive Income statement.
The decrease in carrying amount to the extent of previous revaluation increase shall be recognized to Other Comprehensive Income and the balance amount of revaluation to Profit & Loss A/c.
Two types of life have been mentioned in the standard:
Finite Life: A limited period of benefit to the entity from the asset.
Indefinite Life: No foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
Indefinite life does not mean infinite life at all.
Amortization and Impairment
In case of finite useful lives, intangible assets should be amortized over their useful life and test for impairment should be done, when there is an indication. In case of indefinite useful lives, test for impairment should be made annually and whenever there is an indication that the intangible asset may be impaired.
An asset should be derecognized:
- on disposal or
- when no future economic benefits are expected from its use or disposal.
Any gain or loss on de-recognition shall be recognized in Profit & Loss A/c.
For each class of intangible asset, disclose:
- useful life or amortization rate
- amortization method
- gross carrying amount
- accumulated amortization and impairment losses
- line items in the income statement in which amortization is included.