Mega Offer Avail 65% Off in CA IPCC and 50% Off in all CA CS CMA subjects.Coupon- IPCEXAM65 & EXAM50. Call: 088803-20003

CA Final Online Classes
CA Classes

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

Recognition Of Intangible Assets, Its Accounting Treatment

ESHA AGRAWAL 
on 05 March 2014

LinkedIn


Being a commerce professional the term Intangible Asset is so common, generally we think intangible asset is that asset which we cannot touch, feel, see etc. so according to this meaning prepaid advances is intangible assets as we cannot feel, touch or see, but it is not so prepaid advances are not intangible assets it is tangible, So friends discussing with you all in detail the concept of Intangible Asset and its accounting treatment

Meaning of Intangible Asset: Intangible asset is identifiable, non monetary asset, without physical substance held for use in production of goods, rendering of services, rentals to others or for administrative purpose.

1)  Meaning of Identifiable:- it means item which is capable for sale

2) Non Monetary:- it means item which are not monetary, monetary items are those items whose realisation is fixed under contract example debtors, B/R, prepaid advances, investments held for realisation under contract.

3) Asset:- means

a) resource and

b) which are under control of entity and

c) having future economic benefit

Example:- the company had to pay Rs 50 lakhs to the state government as part of the cost of roads built by the state government for the purpose of carrying machinery and material to the site and to provide better commutation facility to employees which in results give him future economic benefit also, does that road becomes a asset for the company? NO because the company do not have any control on the road, the control is with the government.

4.) Without physical substance of its own:- Intangible asset should not have substance of its own. It means substance can be of storage asset/ device.

Treatment of storage device

a) Expenditure on storage device is material

a) i) such expenditure can be separated from Intangible asset:- record intangible asset and storage device as separate assets

software purchased Rs 30000 including H.D.D. Rs 5000 we should record intangible asset for Rs 25000 computer Rs 5000(assumed 5000 is material)

a)ii) storage device cannot be separated from Intangible asset:- record Intangible asset or storage device which has been primarily purchased

b) Expenditure on storage device is not material:- ignore such cost record Intangible asset only

Example:- Tally software purchased Rs 25000 including C.D Rs 100 , we should record software at Rs 25000

5.) Held for use:- it means which is acquired with intention of using it and not for resale

Recognition of Intangible Assets

Intangible assets should be recognised in books of accounts if following conditions are satisfied:-

a) Such Intangible asset have cost and

b) Such cost can be measured reliabily

Acquisition of Intangible Asset

Intangible asset can be either acquired or Self generated

If Intangible asset is acquired it is called acquisition of Intangible asset

i) Purchased  Intangible asset

Purchase price                                         xxx

Add:-taxes on purchase(non recoverable)               xxx

Add:- expenses to obtain Intangible Asset              xxx

Add:- legal expenses to obtain title                        xxx

Add:- valuation expense                                        xxx

Value of Intangible asset                          xxx

ii) Exchange:- new Intangible asset should be recorded at fair value of asset given or fair value of intangible asset obtained whichever is more clearly evident.

iii) Intangible asset as Govt.Grant:- if any intangible asset is received as govt grant, then such intangible asset is recorded as per AS 12

iv) Intangible acquired under scheme of amalgamation, if in the nature of merger it should be recorded at book value of vendor company. If in the nature of purchase it should be recorded at fair value, if such fair value is not available then at book value of vendor co. Provided capital reserve is not generated or increased( Para 32)

llustration

A ltd took over B ltd in a scheme of amalgamation. Following are details of assets and liabilities taken over

Fair value

Book value in books of Transforer Company

Land and building

500000

400000

Plant & machinery

400000

300000

Website

    100000

   40000

Software

50000          

10000

Patents

  40000             

   50000

Creditor

   100000             

   100000

         

Assume purchase consideration to be:

situation 1    Rs 700000

situation 2    Rs 1100000

situation 3    Rs 850000

Assume amalgamation in the nature of merger

case 1 - merger     case 2 -   purchase

what would be your answer in above situation if fair value of intangible asset is missing

Solution

Case 1 Merger (same for both when fair value is available and missing as in case of merger concept of fair value is not applied Intangible assets should be recorded at book value )

P.C. 850000

Land and building a/c Dr

400000

400000

400000

Plant & machinery a/c Dr

300000

300000

300000

Website a/c Dr

40000

40000

40000

Software a/c Dr

10000

10000

10000 

Patents a/c Dr

50000

50000

50000

Goodwill a/c Dr

Nil

400000

150000

To Creditor a/c

100000

100000

100000

To B. Merger

700000

1100000

850000

To capital reserve

Nil

Nil

Nil

Case 2   purchase (when fair value of intangible asset is not missing)

P.C. 850000

Land and building a/c Dr

500000

500000

500000

Plant & machinery a/c Dr

400000

400000

400000

Website a/c Dr

100000

100000

100000

Software a/c Dr

50000

50000

50000 

Patents a/c Dr

40000

40000

40000

Goodwill a/c Dr

nil

110000

Nil

To Creditor a/c

100000

100000

100000

To B. Merger

700000

1100000

850000

To capital reserve

290000

nil

140000

Case 3  purchase method (when fair value of intangible asset is missing)

                                                      P.C. 700000             P.C. 1100000             P.C. 850000

Land and building a/c Dr

500000

500000

500000

Plant & machinery a/c Dr

400000

400000

400000

Website a/c Dr

Nil

40000(B.V)

(50000)*4/10=20000

Software a/c Dr

Nil

10000(B.V.)

(50000)*1/10=5000

Patents a/c Dr

Nil

50000(B.V.)

(50000)*5/10=25000

Goodwill a/c Dr

Nil

200000

Nil

To Creditor a/c

100000

100000

100000

To B. Merger

700000

1100000

850000

To capital reserve

 100000

Nil

  Nil

In the above case 3 amalgamation in the nature of purchase when fair value of intangible asset is missing , Intangible asset should be recorded at book value provided capital reserve is not generated or increased in situation 1 when PC is Rs 700000 capital reserve is generated so value of intangible asset should not be recorded, in situation 2 when PC is Rs 1100000 without recording the value of intangible asset goodwill is generated Rs 300000 so we can record the value of intangible asset at book value upto the amount of Rs 300000, in situation 3 when PC is Rs 850000 goodwill is generated without taking value of intangible asset Rs 50000 so we can record intangible asset at book value upto Rs 50000, here as the value of intangible asset is Rs 100000 which isexceeds Rs 50000  so value is recorded as per weights of the assets upto Rs 50000

So i have discussed part 1 of this accounting standard, Hope you  enjoyed reading the article and gain some knowledge from this. If you have any queries please ask me i will try to solve it, you can mail me at agrawalesha6@gmail.com.

Thanks for reading!

Esha Agrawal


Tags :



Category Accounts
Other Articles by -
ESHA AGRAWAL 

Report Abuse

LinkedIn



Comments


update