47

CHAPTER-IV

ACCOUNTING OF INTANGIBLE ASSETS

Accounting of Intangible assets is a complex and important subject in today’s

information and knowledge based economy. For companies, these assets are becoming

basic drivers for achieving competitive success. They constitute a fundamental part of

balance sheet of a company. Accounting of Intangible assets is also vital for their

effective management as there is a famous saying ‘What gets measured gets managed’

(Ayuso, 2003a). With a view to report these assets in the financial statements, various

regulatory bodies have issued accounting standards on intangible assets.

Accordingly this chapter is based on an in-depth study of major accounting

standards dealing with intangible assets. It has been divided into two sections. Section-I

introduces different accounting standards presently used for reporting intangible assets

information across globe. Section-II examines, in detail, the similarities and differences

among these standards.

SECTION-I

4.1 INTRODUCTION OF ACCOUNTING STANDARDS ON INTANGIBLE

ASSETS

Over past decades for the purpose of accounting of intangible assets in the

financial statements, several accounting standards have been issued by professional

accounting bodies in different countries. As mentioned by Canibano et al (2000), the

literature has been discussing the topic of accounting and reporting of intangible assets

for a long time. Provisions of these standards used to vary across countries which would

limit the comparability of financial statements in international context (Brunovs and

Kirsh, 1991)

The globalisation of the world’s capital markets sparked a movement for global

standards on intangible assets. The best example of this was the introduction of

48

International Accounting Standard-38 on intangible assets. Following that other countries

have also issued separate accounting standard on intangible assets like AS-26 in India,

SFAS-142 in US, FRS-10 in UK and ASBE-6 in China. These standards address issues

like how and when intangible assets that are acquired or internally generated should be

accounted in the financial statements. They also lay down provisions on how these

intangible assets should be accounted after they have been initially recognised in the

financial statements. A brief history/description of these standards under IFRS, UK, US,

Indian and Chinese GAAP is given below:

International Financial Reporting Standard (IFRS): Under IFRS, International

Accounting Standard-38 (IAS-38) on intangible assets was issued by the International

Accounting Standards Committee (IASC) in September, 1998. The objective of the

standard was to prescribe the accounting treatment for intangible assets that are not dealt

with specifically in another standard. The standard requires an entity to recognise an

intangible asset if, and only if, specified criteria are met. The Standard also specifies how

to measure the carrying amount of intangible assets and requires specified disclosures

about these assets. Accounting treatment for amortisation, impairment, retirements and

disposals have also been explained. Further IASC has also issued International

Accounting Standard 36-Impairment of Assets which discusses the impairment

provisions for goodwill and intangible assets with indefinite life

In April 2001 the International Accounting Standards Board (IASB) adopted all

International Accounting Standards and continued its development, calling the new

standards as IFRS. Subsequently, International Financial Reporting Standard (IFRS) 3 on

Business Combinations was issued in March 2004. IFRS-3 describes the accounting

treatment for intangible assets acquired as a part of business combination. The

introduction of IFRS-3 resulted in an increase in the number of intangible assets

recognised at the time of acquisition.

IASB has issued many IFRS, which are now being used for public reporting

purposes in almost 100 countries ranging from Australia to the United Kingdom.

49

Regulators in India, China and US are likely to converge their local standards with IFRS

by 2011.

US GAAP: Under US GAAP, the accounting and valuation of intangible assets

for financial reporting purposes is governed by The Financial Accounting Standards

Board (FASB). FASB issued the Statement of Financial Accounting Standards No. 142

on goodwill and other intangible assets, in June 2001. The application of the standard was

made mandatory from December 15, 2001. The statement explains in detail the initial

recognition and measurement of intangible assets, treatment for internally generated

intangible assets, accounting for intangible assets, accounting for goodwill, financial

statement presentation of intangible assets and goodwill, and other disclosures.

In addition, FASB has also issued the Statement of Financial Accounting

Standards No. 141 on Business combinations which describes the accounting treatment of

intangible assets acquired as a part of business combination.

Indian GAAP: Accounting Standard-26 on intangible assets was issued in 2002

by the Council of Institute of Chartered Accountants of India, under Indian Generally

accepted Accounting Practices. Its application was made mandatory for all types of

enterprises, with accounting periods commencing on or after 1-4-2004. This standard

covered the similar provisions of initial recognition, measurement, subsequent

expenditure, amortisation, impairment losses, retirements and disposals, and disclosure

like IFRS and US GAAP. Further Accounting Standard-28 on Impairment of Assets

discusses the provisions for impairment of intangible assets.

Chinese GAAP: Under Chinese GAAP, Accounting Standard for Business

Enterprises No.6 on intangible assets was issued by the Ministry of Finance of the

People’s Republic of China on 15 February, 2006. The standard was made mandatory for

all listed Chinese companies from 1 January, 2007. The standard was made on the lines

of IFRS standard. It explains the definition, initial recognition, measurement, subsequent

measurement, disposal and discarding and disclosure of intangible assets. It also includes

treatment of internal research and development projects. In conjunction to above, ASBE-

50

8 explains the provisions of impairment of intangible assets and ASBE-20 describes the

treatment of intangible assets acquired as a part of business combination.

UK GAAP: Under UK GAAP, Financial Reporting Standard-10 (FRS-10),

issued by the Accounting Standards Board in December1997, sets out the principles of

accounting for goodwill and intangible assets. The objective of the standard was to ensure

that purchased goodwill and intangible assets are charged in the profit and loss account in

the periods in which they are depleted and also that sufficient information is disclosed in

the financial statements to enable users to determine the impact of goodwill and

intangible assets on the financial position and performance of the reporting entity. FRS-

10 applies to all financial statements that are intended to give a true and fair view of a

reporting entity’s financial position and profit or loss for a period. Reporting entities

applying the Financial Reporting Standard for Smaller entities (FRSSE) are exempt from

the provisions of FRS-10.

SECTION-II

4.2 COMPARISON OF ACCOUNTING STANDARDS ON INTANGIBLE

ASSETS

Accounting Standards issued under IFRS, US GAAP, UK GAAP, Indian GAAP

and Chinese GAAP have been compared in this section in order to understand the

accounting treatment employed for intangible assets. IFRS has been used as a yardstick

for this comparison, as most of the countries are harmonising their national accounting

practices with IFRS. Having IFRS as a basis, is also important as European countries

have adopted IFRS since 1 January, 2005.

Financial Accounting Standard Board of US decided to converge its accounting

standard with IFRS after Norwalk Agreement passed in 2002. This is a very important

step towards global harmonisation of accounting standards which could be achieved by

2011. However until the above convergence (US GAAP with IFRS) is achieved, US

GAAP will continue to have equal significance, and accordingly have been taken as a

category for comparison.

51

Also China’s contribution to world economy cannot be undermined. This

necessitates the need to understand Chinese accounting standard on intangible assets vis a

vis IFRS

Table 4.1 discusses similarities and divergences in US GAAP, UK GAAP, Indian

GAAP and Chinese GAAP in comparison to the benchmark IFRS. The comparison has

been organised primarily according to different sections relating to definition, initial

recognition, measurement of acquired intangible assets, measurement of internally

generated intangible assets, subsequent measurements, amortisation, impairment,

retirement and disposals of intangible assets, treatment of research and development

expenditure, software developed for internal use and sale. The comparison reflects

standards issued as of march 31, 2007.

52

Table 4.1

Comparison of IFRS, US GAAP, UK GAAP, Indian GAAP and Chinese GAAP on accounting treatment of intangible assets

(A). Definition :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) An intangible asset is an identifiable non-monetary asset without physical substance. (IAS 38)

Under U.S. GAAP an intangible assets is an asset (not including a financial asset) that lacks physical substance.

Intangible assets are “non-financial fixed assets that do not have physical substance but are identifiable and are controlled by the entity through custody or legal rights”.

AS 26 defines an intangible assets as an identifiable non-monetary asset without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.

Intangible assets as per ASBE no.6 refer to the identifiable non-monetary assets possessed or controlled by enterprises which have no physical shape.

2) To meet the definition of an intangible assets, an item must lack physical substance and must be: identifiable; non-monetary; and controlled by the entity and expected to provide

future economic benefits to the entity (i.e., it must meet the definition of an asset).

An intangible assets is identifiable if it: is separable, i.e., capable of being separated or

divided and sold, transferred, licensed, rented or exchanged either individually or together with a related contract, asset or liability, regardless of whether there is an intent to do so; or

arises from contractual or other legal rights,

regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

Similar to IFRS

Similar to IFRS

Similar to IFRS

Similar to IFRS

Contd…

53

(B). Initial Recognition :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) An intangible assets is recognised when: it is probable that future economic

benefits that are attributable to the asset will flow to the entity; and

the cost of the asset can be

measured reliably. The cost of an intangible assets acquired in a separate transition is the fair value of any consideration given.

Under U.S. GAAP an acquired identifiable intangible assets is recognised when: • it is probable that future

economic benefits that are attributable to the asset will flow to the entity, like IFRS; however, unlike IFRS, this is part of the definition of an asset rather than a recognition criterion; and

• fair value can be

measured with sufficient reliability

Like IFRS, direct-response advertising software developed for internal use and software developed for sale to third parities are recognised initially at cost. Other intangible assets generally are recognised at fair value, which usually equals the fair value of the consideration given.

Similar to IFRS

Similar to IFRS

Similar to IFRS

Contd…

54

(C). Measurement – Acquired Intangibles :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) The cost of a separately acquired

intangible asset at the date of acquisitions

is usually self-evident, being the fair value

of the consideration paid.

Similar to IFRS

Similar to IFRS

Similar to IFRS

Similar to IFRS

(D). Measurement – Internally Generated Intangibles :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) The cost comprises all expenditures that

can be directly attributed or allocated to

creating producing and preparing the

asset from the date when the recognition

criteria are met.

Costs of internally developing,

maintaining or restoring

intangible assets that are not

specifically identifiable, that

have indeterminable lives, or

that are inherent in a continuing

business and related to an entity

as a whole, are recognised as

an expense when incurred.

Internally generated

intangibles, excluding

development costs, may be

capitalised only if they have

a readily ascertainable

market value.

Similar to IFRS

Similar to IFRS

Contd…

55

(E). Subsequent Measurement – Acquired And Internally Generated Intangibles :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) Intangible assets subject to amortisation

are carried at historical costs less

accumulated amortisation/ impairment, or

at fair value less subsequent

amortisation/ impairment. Intangible

assets not subject to amortisation are

carried at historical costs unless impaired.

A subsequent revaluation of intangible

asset to their fair value is based on prices

in an active market. Revaluations are

performed regularly and for the entire

class of intangible assets at the same

time if an entity adopts this treatment

(extremely rare in practice).

Initial recognition is similar to IFRS.

Revaluation is not allowed.

Intangible assets subject to

amortisation are carried at

amortised costs less impairment.

Intangible assets not subject to

amortisation are carried at historical

costs less impairment.

Similar to IFRS Initial recognition is similar

to IFRS. Revaluation is not

allowed. All intangible

assets are carried at

amortised costs less

impairment.

Initial recognition is

similar to IFRS.

Revaluation is not

allowed.

Contd…

56

(F). Amortisation :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) Acquired goodwill is not amortised, but instead is subject to impairment testing at least annually

Like IFRS, acquired goodwill is not amortised, but instead is subject to impairment testing at least annually; the method of impairment testing differs in certain respects from IFRS.

Acquired goodwill is amortised within 20 years unless indefinite useful life is permitted in which case annual impairment testing is required.

Goodwill arising on amalgamation in the nature of purchase is amortised over five years. Goodwill arising on acquisition is not amortised but is tested for impairment.

Similar to IFRS

2) The useful life of intangible assets other than goodwill is either finite or indefinite. Intangibles with indefinite useful lives are not amortised, but instead are subject to impairment testing at least annually. An intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

Like IFRS, the useful life of intangible assets other than goodwill is either finite or indefinite. Like IFRS, intangibles with indefinite useful lives are not amortised, but instead are subject to impairment testing at least annually; the method of impairment testing differs in certain respects from IFRS. Like IFRS, an intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

Unlike IFRS and US GAAP, the useful life of an intangible assets cannot exceed 20 years from the date the asset is available for use

Unlike IFRS and US GAAP, the useful life of an intangible asset cannot exceed 10 years from the date the asset is available for use.

Similar to IFRS

3) An intangible asset with a finite life is amortised on a systematic basis over its useful life.

Similar to IFRS Similar to IFRS Similar to IFRS Similar to IFRS

Contd…

57

S. No. IFRS US GAAP UK GAAP

Indian GAAP

Chinese GAAP

4) A change in useful life is accounted for prospectively as a change in accounting estimate. The amortisable amount of an intangible asset with a finite useful life is determined after deducting its residual value. The residual value of an intangible assets is the amount that could be obtained at the reporting date for an intangible assets currently in the condition that the subject intangible assets is expected to be in on its expected disposal date, less the estimated costs of disposal.

Similar to IFRS Similar to IFRS

Similar to IFRS

Similar to IFRS

5) The residual value of an intangible assets with a finite useful life is assumed to be zero unless a third party has committed to buy the asset at the end of its useful life, or there is an active market from which a residual value can be obtained and it is probable that such a market will exist at the end of the asset's useful life.

Unlike IFRS, the residual value of an intangible asset with a finite useful life can be demonstrated to be an amount other than zero when there are transactions observed with sufficient frequency, even if it does not constitute an active market.

Similar to IFRS

Similar to IFRS

Similar to IFRS

6) When control of an intangible assets is based on legal rights that have been granted for a finite period, the useful life cannot exceed that period unless: • the legal rights are renewable; • there is evidence to support that they will be renewed; and • the cost of renewal of such rights is not significant

The useful life of an intangible assets is based on an analysis of all pertinent factors, including: • whether the legal rights are renewable; • the expected use of the asset by the entity; • the expected useful life of another asset or group of assets to which the intangible assets may relate; • legal, regulatory, or contractual requirements that may limit the life; • any legal, regulatory, or contractual requirements that enable renewal or extension of the asset's legal or contractual life without substantial cost or material modifications; • the effects of obsolescence, demand, competition or other economic factors; and • the level of maintenance expenditure required to obtain the expected future cash flows from the asset. These factors, while consistent with the requirements of IFRS, are more detailed and therefore differences may arise in practice.

Similar to IFRS

Similar to IFRS

Similar to IFRS

Contd..

58

S. No. IFRS US GAAP UK GAAP

Indian GAAP

Chinese GAAP

7) The method of amortisation, which should be reviewed at each reporting date, reflects the pattern of consumption of the economic benefits. If the pattern in which the asset's economic benefits are consumed cannot be determined, then the straight-line method is used. There rarely will be persuasive evidence to support an amortisation method that results in a lower amount of accumulated amortisation than would have been recognised had the straight-line method been used.

Unlike IFRS, there is no requirement to review the method of amortisation at each reporting date; rather, it is reviewed whenever events or changes in circumstances indicate that the current estimate is no longer appropriate. Like IFRS, the method of amortisation should reflect the pattern of consumption of the economic benefits. Like IFRS, if that pattern cannot be determined reliably, then the straight-line method is used. Unlike IFRS, U.S. GAAP does not have a presumption that amortisation should at least equal to the amount that would be recognised using the straight-line method.

Similar to IFRS

Similar to IFRS

Similar to IFRS

8) The amortisation of intangible assets with finite lives begins when the intangible assets is available for use (i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management), which may be prior to the asset being brought into use.

Similar to IFRS

Similar to IFRS

Similar to IFRS

Similar to IFRS

9) Amortisation ceases at the earlier of the date that the asset is classified as held for sale or is derecognised.

Similar to IFRS

Similar to IFRS

Similar to IFRS

Similar to IFRS

Contd…

59

(G). Impairment – Acquired And Internally Generated Intangibles : S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) IAS 38 does not require any impairment testing unless there are indications of impairment. Impairment reviews are required whenever changes in events or circumstances indicate that an intangible asset‟s carrying amount may not be recoverable. Annual reviews are required for intangible assets with indefinite useful lives and for assets not yet ready for use. Reversals of impairment losses are allowed under specific circumstances.

Similar to IFRS, except reversal of impairment losses are not allowed, and in-definitive lived intangible assets are tested for impairment separately from the reporting unit.

Similar to IFRS, except that annual impairment is required for assets with amortised life exceeding 20 years or indefinite life

Similar to IFRS, except that AS 26 requires test of impairment to be applied even if there are no indications of that asset is impaired for following assets: Intangible assets not

yet available for use; Intangible assets

amortised over more than 10 years.

Similar to IFRS except reversal of impairment losses are prohibited.

(H). Retirement And Disposals :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) When an intangible assets is disposed of or when no further economic benefits are expected from its use, the gain or loss is the difference between any net proceeds received and the carrying amount of the asset. Any attributable revaluation surplus may be transferred to retained earnings or may remain in the revaluation reserve, but is not recognised in profit or loss.

Like IFRS, when an intangible assets is disposed of or when no further economic benefits are expected from its use, the gain or loss is the difference between any net proceeds received and the carrying amount of the asset. Unlike IFRS, the revaluation model is not permitted and therefore no revaluation surplus arises.

Silent on this

Similar to US GAAP

Similar to US GAAP

2) Under IAS 38 if an intangible asset is „held for sale‟ then amortisation should stop.

Like IFRS, amortisation should stop if intangible assets is „held for sale‟

There is no such stipulation under AS26

There is no such stipulation under AS26.

There is no such stipulation under ASBE 6.

Contd…

60

(I). Research And Development:

S. No.

IFRS US GAAP UK GAAP Indian GAAP

Chinese GAAP

1) Research is original and planned investigation undertaken with the prospect of gaining new knowledge and understanding. Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, products, processes etc. Development does not include the maintenance or enhancement of ongoing operations.

Research is planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about a significant improvement to an existing product, service, process or technique. Development is the translation of research findings or other knowledge into a plan or design for a new product, service, process or technique whether intended for sale or use.

Research is experimental or theoretical work undertaken primarily to acquire new scientific or technical knowledge for its own sake. Development is use of scientific or technical knowledge to produce new or substantially improved materials, devices, products or services prior to commercial production or commercial applications or to improving substantially those already produced or installed.

Similar to

IFRS

The term "research" refers to the creative and planned investigation to acquire and understand new scientific or technological knowledge. The term "development" refers to the application of research achievements and other knowledge to a certain plan or design, prior to the commercial production or use, so as to produce any new material, device or product, or substantially improved material, device and product.

2) Research costs generally are expensed as incurred.

Like IFRS, research costs generally are expensed as incurred.

Similar to IFRS

Similar to

IFRS

Similar to IFRS

3) If an internally generated intangible assets arises from the development phase of a project, then directly attributable expenditure is capitalised from the date that the entity is able to demonstrate: • the technical feasibility of completing the intangible assets so that it will be available for use or sale; • its intention to complete the intangible assets and use or sell it;

Unlike IFRS, with the exception of certain internally developed computer software and direct-response advertising, all other development costs are expensed as incurred.

Similar to IFRS except that capitalisation of development expenditure is voluntary.

Similar to IFRS

Similar to IFRS

Cont…

61

S. No.

IFRS US GAAP UK GAAP Indian GAAP

Chinese GAAP

• its ability to use or sell the intangible assets; • how the intangible assets will generate probable future economic benefits; the entity must demonstrate the existence of a market for the output of the intangible assets or the intangible assets itself or, if it is to be used internally, the usefulness of the intangible assets; • the availability of adequate technical, financial and other resources to complete the development of, and to use or sell, the intangible assets; and • its ability to measure reliably the expenditure attributable to the intangible assets during its development. Development Costs initially recognised as an expense cannot be capitalised in a subsequent period.

4) If an entity acquires in-process research and development separately or in a business combination, then it is recognised as an intangible asset if it meets the definition of an intangible assets and its fair value can be measured reliably.

Like IFRS, in-process research and development acquired in a business combination is recognised initially at fair value in the consolidated financial statements of the acquirer. However, unlike IFRS, the in-process research and development is recognised as an expense immediately after the acquisition unless the asset has alternative future use, either in other research and development projects or otherwise.

FRS-10 is silent on this AS 26 is silent on this.

ASBE no. 6 is silent on this.

5) Expenditure on internally generated intangible assets such as brands, mastheads, publishing titles, customer lists and similar items cannot be capitalised.

Similar to IFRS

Similar to IFRS

Similar to IFRS

Similar to IFRS

Contd…

62

(J). Software Developed For Sale :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) There are no special requirements for

software developed for sale. Costs of

software developed for sale are

accounted for following the general

principles for internally generated

intangible assets

Unlike IFRS, there are special requirements for software

developed to be sold. Costs incurred internally in creating a

computer software product to be sold, leased or otherwise

marketed as a separate product or as part of a product or

process are research and development costs that are

expensed as incurred until technological feasibility has been

established for the product. Technological feasibility is

established upon completion of a detailed programme and

product design, or in the absence of the former, completion of

a working model whose consistency with the product design

has been confirmed through testing. Thereafter all software

development costs incurred up to the point of general release

of the product to customers are capitalised and reported

subsequently at the lower of amortised cost and net realisable

value. Although the technological feasibility capitalisation

threshold is similar to the general recognition principles for

internally generated intangible assets under IFRS, because the

precise language under U.S. GAAP differs from IFRS, it is

possible that differences may arise in practice.

Similar to IFRS

Similar to IFRS

Similar to IFRS

Contd…

63

(K). Internal Use Software :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) There are no special requirements for

the development of internal-use

software. The costs of internal-use

software are accounted for under the

general principles for internally

generated intangible assets or, in the

case of purchased software, following

the general requirements for

intangible assets.

Unlike IFRS, there are special requirements for the development

of internal-use software. Costs incurred for internal-use software

that is acquired, internally developed or modified solely to meet

the entity's internal needs are capitalised depending on the stage

of development. The stages of software development are the

preliminary project stage, application development stage and post-

implementation / operation stage. Costs incurred during the

preliminary project stage and the post-implementation / operation

stage are expensed as incurred.

Costs incurred in the application development stage that are

capitalised include only:

• external direct costs of materials and services consumed in

developing or obtaining internal-use software;

• payroll and payroll-related costs for employees who are directly

associated with and who devote time to the internal-use software

project; and

• interest incurred during development.

General administrative and overhead costs are expensed as

incurred.

The application development stage, which is necessary to

commence capitalising costs under U.S. GAAP, often will occur

sooner than the date that the criteria for capitalising development

costs under IFRS are met. Therefore both the timing of

commencing capitalisation and the amounts capitalised are likely

to be different from IFRS.

Similar to IFRS

Similar to IFRS

Similar to IFRS

Contd…

64

(L). Website Development Costs :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1)

Costs associated with Web sites

developed for advertising or

promotional purposes are expensed

as incurred. For other Web sites,

expenditure incurred during the

application and infrastructure

development stage, the graphical

design stage and the content

development stage are capitalised if

the criteria for capitalising

development costs are met. The costs

of developing content for advertising

or promotional purposes are

expensed as incurred.

Unlike IFRS, Web site development

costs are subject to the same

general capitalisation criteria as

internal-use software. Therefore

costs incurred during the application

development stage are capitalised.

U.S. GAAP provides detailed

guidance on the activities deemed to

be within the application

development stage for Web site

development. Unlike IFRS, U.S.

GAAP does not provide guidance on

the accounting for the costs of

developing content for Web sites,

and therefore differences from IFRS

may arise in practice

FRS 10 is Silent on this

Costs incurred during the

planning stage are expensed.

Costs for activities during the

websites application and

infrastructure development

stages are capitalised, and costs

incurred during the operation

stage are expensed as incurred.

ASBE no. 6 is silent on

this.

Contd…

65

(M). Goodwill :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) Goodwill is recognised only in a business

combination and is capitalised. It is

measured as a residual.

Similar to IFRS

Similar to IFRS

Similar to IFRS

Similar to IFRS

(N). Items That Are Expensed As Incurred :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) Expenditure associated with the

following costs are expensed as

incurred regardless of whether the

general criteria for recognition appear to

be met:

• internally generated goodwill;

• start-up costs unless, they qualify for

recognition as part of the cost of

property, plant and equipment ;

• training activities;

• advertising and promotional activities;

and

• expenditure on relocating or

reorganising part, or all, of an entity

Like IFRS, expenditure

associated with the following

costs are expensed as incurred

regardless of whether the general

criteria for recognition appear to

be met:

• internally generated goodwill;

• start-up costs, unless they

qualify for recognition as part of

the cost of property, plant and

equipment; and

• training activities.

Unlike IFRS, direct-response

advertising expenditure is

capitalised if certain criteria are

met

Silent on this

Similar to IFRS

Similar to IFRS

Contd…

66

(O). Direct Response Advertising :

S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP

1) There are no special requirements for

direct-response advertising, and

expenditure is expensed as incurred.

Unlike IFRS, the cost of direct-

response advertising is

capitalised if both of the following

criteria are met:

• the primary purpose is to elicit

sales from customers who can be

shown to have responded

specifically to that advertising;

and

• there is persuasive evidence,

including historical patterns, that

the advertising will result in

probable future economic

benefits.

The amortisation of the deferred

costs should be pro rata to the

related revenue recognition.

Similar to IFRS

Similar to IFRS

Similar to IFRS

67

4.3 CONCLUSION

The following conclusions can be drawn from the above:

1. International Accounting Standard-38 (IAS-38) on intangible assets was

issued by the International Accounting Standards Committee (IASC) in

September, 1998. Other countries have also issued separate accounting

standard on intangible assets like AS-26 in India, SFAS-142 in US, FRS-10 in

UK and ASBE-6 in China.

2. International financial reporting Standard (IAS-38) has been used as a

yardstick for the comparison of accounting standards as most of the countries

are harmonising their national accounting practices with IFRS. All European

countries have adopted IFRS since 1 January, 2005.

3. IAS 38 (IASB), FAS 142 (US GAAP), FRS 10 (UK GAAP), AS 26 (Indian

GAAP) and ASBE 6 (Chinese GAAP), all cover many of the same topics, and

reach the same conclusions on many issues.

4. As per IFRS, US GAAP and Chinese GAAP intangible assets can be of

definite or indefinite life. On the other end Indian GAAP and UK GAAP

differs and has a rebuttable presumption of maximum useful life being 10 and

20 years respectively.

5. Under US GAAP except some software and website development cost all

research and development costs are expensed, unlike IFRS, UK GAAP, Indian

GAAP and Chinese GAAP. On the other hand, IAS 38, FRS 10, AS 26 and

ASEB 6 allow for capitalization of all development costs when specific

criteria are met, contrary to US GAAP.

6. Only IFRS and UK GAAP allow the revaluation of intangible assets out of the

pool of other accounting standards compared.

7. The only significant difference between IAS 38 and FRS-10 relates to

capitalization of development costs. Where the capitalization of development

costs is compulsory under IAS 38 if certain criteria are met, it is optional

under FRS 10. Further, in terms of the treatment of goodwill after initial

measurement, IFRS-3 on Business combinations requires that goodwill should

be subject to annual impairment reviews, but should not be amortized. While

under FRS 10 there is a rebuttable presumption that the useful life of goodwill

does not exceed 20 years, with amortization over the useful life.