LATEST AND SIMPLE VERSION OF IND AS 38 As Amended by Companies (Indian Accounting Standards) Second Amendment Rules, 2019
The relevant Accounting Standards relating to Intangible Assets are the following:-
a. INDAS 38
b. IAS 38
c. AS 26.
There is no major difference between INDAS 38 AND IAS 38.So the following details relate to both INDAS 38 and IAS 38.
Statements of Profit and loss and other Comprehensive income, Statement of changes in Equity and Statement of Financial position are the new names of Financial Statements as per IND AS and IAS .
Amortization is like depreciation of PPE. Amortization is applicable in the case of Intangible asset
1.Definition.
Intangible asset is an identifiable non- monetary asset without physical substance. Therefore the Intangible asset has the following characteristics:
a. Identifiability
The intangible asset must be separate i.e, it should be capable of being separated from the entity ,and sold/transferred.
Ex:-
i. Licence to operate buses on a route.
ii. Mining rights granted by the Government to a mining Co.
b. As asset controlled by an entity
c. Future economic benefits.
Common Examples of Intangible assets are the following:-
i. Computer software
ii. Copyrights
iii. Patents
iv. Films
v. Client lists
vi. Licences
vii. Franchises
viii. Market share
ix. Mortgage-servicing rights
x. Import quotas
xi. Marketing rights.
II. Initial Recognition and measurement, Subsequent Measurement, Revaluation, Amortization,Useful life, Retirements and disposals and Disclosures are the most important concepts relating to this standard.
III. Initial Recognition and Measurement
The Intangible assets may be acquired through the following modes. Therefore Initial measurement depends upon the mode through which it is acquired by the entity.
a. Separate acquisition
i. At Cost.
Cost includes the following
Purchase price
Less: (i).Trade discounts.
(ii). Rebates
Add: (i). Import duties
(ii).Non-refundable purchase taxes
(iii).Legal fees for purchase contract and recording ownership
(iv).Stamp duty
(v). Deferred consideration at the cash price
(vi). Other directly attributable costs
b. Acquired in Business Combination
i. At Fair value at the acquisition date
c. Government Grant
In some cases an Intangible asset may be acquired free of charge, or for nominal consideration ,by way of a government grant.
a. Entity may choose to recognize the Intangible asset at fair value
b. Otherwise the entity may recognize the intangible asset
i. at a nominal amount(the other treatment as per INDAS 20)
Add: Any expenditure that is directly attributable to preparing the asset for its intended use.
d. Internally Generated Goodwill
Self -generated goodwill is not measured and recognized.
e. Exchange of Asset
Common Valuation —-At fair value.
f. Internally generated Intangible assets other than Goodwill .
At cost.
Cost means Development costs .Following points are important at this juncture.
The process of Intangible Asset generation is classified into
i. Research Phase
ii. Development Phase
Research phase.
No Intangible asset is recognized at this stage. Research costs are recognized as Expenses in the Statement of Profit and loss.
Development Costs
Development costs are added and recognized as Intangible Asset.
They are the following
i.Design cost
ii.Construction cost
iii. Salaries and wages of employees engaged
iv. Testing of pre-production prototypes
v. Design of tools
vi. Jigs
vii. Moulds involving new technology
viii. Register a legal right
ix. Amortization of patents and licenses that are used to generate the intangible asset
x. Other coding costs after establishment of technological feasibility
xi. Other testing costs after establishment of technological feasibility
xii. Cost of producing product masters for training materials
xiii. Other directly attributable costs to the generation of Intangible asset.
IV. Subsequent measurement
It may be either
i. At Cost Model.
Or
ii. At Revaluation Model.
Cost Model
At cost less accumulated amortization less accumulated impairment loss .
Revaluation Model.
At Fair value
Less accumulated amortization less accumulated impairment loss.
Fair value is determined by referring to active market.
The revaluation model does not allow:
a. the revaluation of intangible assets that have not previously been recognized as asset or
b.the initial recognition of intangible assets at amount other than cost
Also,the revaluation model may be applied to an intangible asset that was received by way of a Government Grant and recognized at a nominal amount
IV. Treatment of Revaluation .
i.Revaluation Increase
Increase should be shown in
a. Other Comprehensive Income
Plus
i. In Statement of Financial Position under the head equity
ii. However ,the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss.
iii. Revaluation decrease should be shown as expense in profit and loss Account
iv. When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings .
V. Amortization
Process of providing depreciation is called amortization in case of Intangible assets
i. Finite useful life
Amortization =Accounted value − Residual value ÷Useful life.
Factors considered in estimating useful life
– Expected usage
– Product life cycle
– Technical, commercial or other type of obsolescence
– Stability of the industry
– Legal or similar other limits on the use of the asset.
Amortization charges should be in profit and loss
Straight line method may be followed.
ii.Infinite useful life.
i.Not to be amortized .
ii.Impairment testing compulsory at least annually.
VI.Retirement and disposals .
An intangible asset shall be derecognized
i.on disposal
ii.When no future economic benefits are expected from use or disposal.
- When the Intangible asset is to be derecognized, a gain or loss on disposal is to be calculated by comparing the difference between:
– Carrying value on date of disposal
And Disposal proceeds
- If disposal proceeds > carrying value; profit
- If disposal proceeds < carrying value; loss
It shall be recognized in profit and loss when the asset is derecognized (unless INDAS 116 requires otherwise on a sale and leaseback).
Gains shall not be classified as revenue.
VIII. Web site Costs
It is an Intangible Asset as per Appendix A of IND AS 38
IX. Disclosures
Disclosures are to be under the following headings.
i.General Disclosure
ii. Intangible Asset measured after recognition using revaluation model
iii. Research and development expenditure
iv. Other Information .
X. Difference between AS 26 and INDAS 38
| AS- 26 | IND AS-38 |
| Definition requires the assets to be used in production or supply of goods or services or for rentals to others | No such specific requirement |
| Separability not a pre-condition for identifiability | Recognition criteria include Separability as a pre-condition |
| Silent on subsequent expenditure incurred on in-process R & D project | Includes a detailed guidance on subsequent expenditure |
| Assumes the useful life is always finite (max 10 years) | Considers that life could be infinite & in such case no amortization required |
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