CA Vivek Agarwal
It has to be an asset (resource controlled by an entity as a result of past events and from which future benefits are expected to flow to the entity)
Definition of an intangible assets
1) Identifiability – As asset is identifiable if it either is separable or arises from contractual or other legal rights. For eg: A company takes access rights of operating a page on any website which is customized as per the requirements of the Company. Hence the Company has legal rights to the usage of the page of the website.
2) Control – An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. Entity should be able to control the future economic benefits in some way even it does not have legal enforceability.
3) Future economic benefits – Economic benefits include sale of products or services, cost savings or other benefits resulting from use of the assets.
Recognition of intangible assets at cost
If and only if
a) It is probable (should be established with reasonable and supportable assumptions that represents management’s best estimate of the set of economic conditions that will exist over the useful life of the assets) that the expected future economic benefits that are attributable to the assets will flow to the entity; and
b) Cost of the assets can be measured reliably
1) Purchase price (includes import duties and non refundable purchase taxes, after deducting trade discounts and rebates)
2) directly attributable cost of preparing the asset for its intended use.
a. costs of employee benefits arising directly from bringing the asset to its working condition;
b. professional fees arising directly from bringing the asset to its working condition; and
c. costs of testing whether the asset is functioning properly
Non cost elements
1) Cost of introducing a new product
2) Cost of conducting business in a new location or with a new class of customer
3) Administration and general overheads
Once the asset is in a condition to be capable of operating in the manner intended by the management and yet to be brought to use, no cost attributable to the assets will be capitalized. The same will be expensed off. i.e., Cost associated with subsequent modification after the assets is ready for intended use by the management, wont be capitalized and subsequently expensed off.
Intangible assets arising from research phase shall not be recognized. The same shall be expensed off.
Assets arising from development shall be recognized if all of the following can be demonstrated:
(a) the technical feasibility of completing the intangible asset so that it will be available for use or sale.
(b) its intention to complete the intangible asset and use or sell it.
(c) its ability to use or sell the intangible asset.
(d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
(e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
(f) its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Useful life and amortization
Entity to assess the useful life of an asset depending upon the number of production or similar units, to analyze the life over which the assets is expected to generate net cash inflows for the entity. The life can be definite (cannot exceed the contractual period) or indefinite.
1) If definite, the amortization to happen over the definite period
2) If indefinite, no amortization. But the management to annually analyze the impairment of the assets or whenever there is an indication that the asset may be impaired.