accounting standard relating to intangibles

Q.7 What is meant by Intangible Assets? Discuss the accounting standard relating to intangibles.

Meaning of Intangible Assets

An intangible asset is a non-monetary asset without physical substance which is:

• held for use in the production or supply of goods or services,
• used for rental to others or for administrative purposes, and
• expected to give future economic benefits to the enterprise.

Examples: goodwill, patents, copyrights, trademarks, franchise rights, computer software, licences, brand names, technical know-how etc. accounting standard relating to intangibles

Main Characteristics of Intangible Assets

1. Lack of physical form
   
   They cannot be seen or touched like buildings or machinery.
2. Identifiable and separable
   
   They can be separately identified and often can be sold, licensed or rented (e.g. patent, copyright).
3. Non-monetary
   
   They do not represent a right to receive a fixed or determinable amount of money.
4. Controlled by the enterprise
   
   The enterprise has power to obtain benefits from the asset and restrict others from using it (through legal rights, contracts etc.).
5. Future economic benefits
   
   They help in generating revenue – for example, a patent allows higher sales or better margins. accounting standard relating to intangibles

Accounting Standard on Intangible Assets (AS-26 / Ind AS-38 – main points)

1. Recognition Criteria

An intangible asset is recognised in the books only when both conditions are satisfied:

• Probable future economic benefits will flow to the enterprise; and
• Cost of the asset can be measured reliably.

If these conditions are not met, the expenditure is charged to Profit and Loss A/c in the year in which it is incurred.

2. Initial Measurement – At Cost

Intangible assets are initially recorded at cost, which includes:

• purchase price (including import duties, non-refundable taxes),
• any directly attributable expenditure to make the asset ready for use (legal fees, registration charges, consultancy fees etc.). accounting standard relating to intangibles

If acquired in exchange for shares or another asset, cost is the fair value of what is given up.

3. Internally Generated Intangible Assets

The standard makes an important distinction between research and development:

• Research phase – original investigation to gain new knowledge.
  
  ➜ All research expenditure is treated as an expense when incurred; it is not capitalised.
• Development phase – application of research findings to plan or design new or improved products, processes etc.
  
  ➜ Development expenditure is capitalised only if an enterprise can demonstrate:
  
  • technical feasibility of completing the asset,
  • intention to complete and use or sell it,
  • ability to use or sell it,
  • probable future economic benefits,
  • availability of adequate resources, and
  • ability to reliably measure the expenditure. accounting standard relating to intangibles

Internally generated goodwill is never recognised as an intangible asset; all related expenditure is written off.

4. Subsequent Measurement – Amortisation and Impairment

1. Amortisation

• Intangible assets are amortised systematically over their useful life.
• Under AS-26, the useful life should not exceed 10 years unless a longer life can be justified.
• Normally, a straight-line method is used.
• The amortisation amount = Cost – Residual value (residual value usually taken as zero). accounting standard relating to intangibles

1. Impairment

• At each balance sheet date, if there is indication that an intangible asset may be impaired (i.e. its recoverable amount is less than its carrying amount), the asset must be written down to its recoverable amount and the loss is recognised in Profit & Loss A/c.

5. Subsequent Expenditure

Any expenditure incurred on an intangible asset after it is first recognised is capitalised only if it increases the future economic benefits beyond the originally assessed standard of performance; otherwise it is treated as an expense. accounting standard relating to intangibles

6. Disclosure Requirements

As per AS-26, the following should be disclosed in the financial statements:

• For each class of intangible asset:
  
  • cost,
  • accumulated amortisation,
  • accumulated impairment losses,
  • amortisation rate / method used,
  • useful life or amortisation period.
• A reconciliation of the carrying amount at the beginning and end of the year.
• If useful life exceeds 10 years, reasons for using such a longer life. accounting standard relating to intangibles

Conclusion

Intangible assets represent valuable rights and advantages of a business which cannot be seen or touched but provide significant future economic benefits.

Accounting Standard AS-26 (Intangible Assets) lays down strict rules for their recognition, measurement, amortisation, impairment and disclosure so that such assets are shown in the financial statements on a prudent and realistic basis, avoiding over-statement of profits and assets. accounting standard relating to intangibles

If you would like to know the syllabus of Mcom-l Contemporary Accounting, you must visit the official website of Gndu.

👉 Important questions of Contemporary Accounting

1. Influence of other disciplines on Accounting
2. Methods of evaluating Human Resources
3. Importance of Accounting for price level changes
4. Issues involved in corporate Reporting
5. Changes incorporated in financial accounts while implementing EVA