Intangible Assets - AS-26

MEANING

An Intangible Asset is an identifiable asset which is non-monetary in nature that has no physical substance held for use in production or supply of goods or services. They exist in opposition to tangible assets like plant, machinery, etc and Financial Assets like government securities, etc.

Some Examples of Intangible Asset are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software

APPLICABILITY OF AS 26

AS 26 comes into effect on or after 01-04-2003. It is mandatory from that date for the following –

• Enterprises whose equity or debt securities are listed on a recognised stock exchange in India

• Enterprises that are in the process of issuing equity or debt securities that will be listed on a recognised stock exchange in India as evidenced by the board of directors' resolution in this regard.

• All other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs. 50 crores.

In respect of all other enterprises, the Accounting Standard will come into effect in respect of expenditure incurred on intangible items during accounting periods commencing on or after 1-4-2004 and will be mandatory in nature from that date.

EXCLUSIONS FROM AS-26:

AS-26 should be applied in accounting to all Intangible assets except-

• Intangible assets covered by another Accounting Standard
• Financial Assets
• Mineral Rights
• Expenditure on the exploration for, or development and extraction of minerals, oil, natural gas and similar non-regenerative resources and
• Intangible assets arising in insurance enterprises from contracts with policyholders.

RECOGNITION AND INITIAL MEASUREMENT OF INTANGIBLE ASSET

Recognition Criteria

An intangible asset should be recognized only if:

• It is probable to expect future economic benefits from the assets.
• The cost can be measured reliably.

Measurement Criteria

• An Intangible Asset should be recognised initially at cost.
• The cost of separately acquired intangible comprises its purchase price paid including duties paid, taxes paid and any other expenses incurred directly to bring it into usable condition.
• If acquired in exchange for an asset, recognise that asset as a fair value of the asset given up.

Internally Generated Intangible Asset

To assess whether an internally generated intangible asset meets the criteria for recognition, an enterprise classifies the generation of the asset into two phases:

• a research phase; and
• a development phase.

Expenditure of the Research Phase

Such expenditure is to be charged off in the statement of profit and loss as an expense as and when incurred.

Examples of research activities are – activities aimed at obtaining new knowledge, the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

Expenditure on the Development Phase

An intangible asset arising from development phase can be recognised if and only if the following conditions can be satisfied:

• The technical feasibility.
• Intention to complete it.
• Ability to sale or use it.
• Capability to generate economic benefit like the existence of a market for it or for products generated from it.
• Availability of technical, financial & other resources to complete the development.
• Ability to reliably measure the expenditure during development.

It is important to note that all of the above conditions should be met to permit recognition of intangible asset in the development phase.

Cost of an Internally generated intangible asset includes

• Expenditure on materials and services
• Salaries, wages & other employment-related costs
• Any expenditure that is directly attributable to the generation of intangible asset
• Overheads necessary for the generation of the asset and that can be allocated on a reasonable basis.

Amortisation Period

• The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life.
• A presumption is taken that the useful life of an intangible asset will not exceed ten years. In some cases, it may exceed 10 years.
• As there are frequent changes in technology, computer software and many others, it is likely that the life of intangible assets will be short.

Amortisation Method

• The amortisation method used should reflect the pattern in which the asset's economic benefits are consumed by the enterprise, or else the straight-line method should be used.
• The amortisation charge for each period should be recognised as an expense unless another Accounting Standard permits or requires it to be included in the carrying amount of another asset.

For Example, the amortisation of intangible assets used in a production process is included in the carrying amount of inventories.

Residual Value

The residual value of an intangible asset should be assumed to be zero unless:

• There is a commitment by a third party or
• There is an active market for the asset.

Retirements and Disposals

• An intangible asset should be derecognized (eliminated from the balance sheet) on disposal or when no future economic benefits are expected from its use

• Any gain and loss (the difference between the net disposal proceeds and the carrying amount of the asset) arising should be recognized as income or expenses in the statement of P & L.

• An Intangible asset that is retired from active use and held for disposal is carried at its carrying amount at the date when the asset is retired from active use. At least at each financial year end, an enterprise tests the asset for impairment under AS-28 on Impairment of Assets and recognises any impairment loss accordingly.

Major Differences between AS 26 and Ind AS 38