IND AS – 38 Intangible Assets

1

What do you mean by Intangible Assets An intangible assets “is an identifiable non-

monetary assets without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.”

Three important features :-

1. A resource controlled by the entity;

2. Identifiable non-monetary item without physical substance;

3. Capability of generating future economic benefit.

2

How do we get Intangible Assets? Separate acquisition;

Development phase of internal project;

Acquisition in business combination – Includes internally generated intangible assets of the acquiree and acquisition of goodwill which is termed as purchased goodwill;

Internally generated intangible asset – Not recognized except business combination.

3

Exclusions from IND AS - 38 Intangible assets held by an entity for sale in the

ordinary course of business (Ind AS 2, Inventories);

Deferred tax assets (Ind AS 12, Income Taxes);

Leases that are within the scope of Ind AS 17, Leases;

Assets arising from employee benefits (Ind AS 19, Employee Benefits);

Financial assets as defined in Ind AS 32;

Goodwill acquired in a business combination (Ind AS 103, Business Combinations);

4

Exclusions from IND AS – 38 … Cont

Deferred acquisition costs and intangible assets,

arising from an insurer’s contractual rights under insurance contracts within the scope of Ind AS 104, Insurance Contracts;

Exploration and evaluation assets (Ind AS 106, Exploration for and Evaluation of Mineral Resources);

Expenditure on the development and extraction of minerals, oil, natural gas and similar non-regenerative resources.

5

Same Principles in IND-AS 38 & AS-26

Intangible assets is initially measured

at cost.

Development cost of internal project.

Internally generated goodwill, brands, mastheads, customer lists not recognized.

Past expenses not be recognized as an asset.

6

Overview of Key Differences 1. Separately acquired

2. Acquired as government grants

3. Purchased on deferred payment terms

4. Applicability to assets of specialized nature

5. Acquired as a part of Business Combination

6. Useful Life

7. Subsequent measurement of intangible assets

8. Amortization of intangible assets other than toll roads

7

Overview of Key Differences …. Cont 9. Amortization of toll roads under Service

Concession Agreement (“SCA”)

10.Review of amortization method and residual values

11. Impairment of intangible assets

12. Income from incidental operations while an assets is being developed

8

1. Separately acquired

Criteria of probable inflow of expected future economic benefits is always considered to be satisfied, even if there is uncertainty about timing or amount of inflow. (Para 25)

AS-26 does not contain explicit provision.

9

2. Acquired as government grants

Acquired as free of charge or for nominal consideration by way of government grants, recognize both grant and intangible assets at fair value. (Para 44)

Under Indian GAAP, this are recognized at nominal value or at acquisition cost plus directly attributable expenditure.

10

3. Purchased on deferred payment terms

Difference between cash price equivalent and total payment is recognized as interest over the period of credit. (Para 32)

AS-26 does not require to separate finance element.

11

4. Applicability to assets of specialized nature

AS-26 (Para 5) does not apply to accounting for discount or premium relating to borrowing and ancillary cost, share issue expenses or discount allowed on the issue of shares. Acceptable practice to amortize these expenses over the period of benefits i.e. normally 3 to 5 Years.

As per Ind AS 109, in case of debt securities are amortized to profit/loss using effective interest method.

Ind AS 32 requires that equity transaction costs accounted for as deduction from equity.

12

5. Acquired as a part of Business Combination

Fair value at the acquisition date. (Para 33)

Recorded by the acquirer irrespective of whether the asset had been recognized by the acquiree before business combination.

Consequently, purchased brands, customer lists, trade mark, etc which can not be recognized, is recognized as intangible assets.

13

5. Acquired as a part of Business Combination

Bk Value ( rore) M Value (Crore)

Land and Building 120 300

Plant & Machinery 500 350

Inventories/Investment/Receivable 400 205

Total 1020 855

Liabilites-12% Debenture 100 100

Current Liabilities 200 190

Total 300 290

Net Assets 720 565

Equity Shares 640 640

Cash 80 80

Total Purchase consideration 720 720

Difference 0 155

Identifiable Assets Patents, License, Trademark 135

Goodwill – Residual 20

14

5. Acquired as a part of Business Combination

According to AS-26:-

Intangible Assets can not be recognized by acquirer if not recognized by acquiree.

15

6. Useful Life (Para 88 - 96)

Assess whether useful life is finite or indefinite.

If finite useful life then it is amortised.

No amortization of indefinite useful life, rather tested for impairment at least on annual basis.

According to AS-26, assumption that useful life is always finite. Rebuttable presumption that it can not exceed ten years, unless persuasive evidence for amortizing over a longer period.

16

7. Subsequent measurement of intangible assets

Cost model (Para 74)

Cost less amortization less impairment

Revaluation model – (Para 75)

o Only in case an active market exists.

o Other Intangible Assets in that class shall also use same model unless there is no active market.

o Revaluation not permitted if that assets not previously recognized as an assets and initial recognition at amounts other than cost.

oFrequency of revaluation depends on volatility of fair value.

17

7. Subsequent measurement of intangible assets ….. Cont

In case intangible assets’s carrying amount increases as a result of revaluation – increase shall be recognized in other comprehensive income. However, increase in profit or loss to the extent it reverse revaluation, decrease of same assets previously recognized in profit or loss.

In case of decrease – to profit or loss, unless such decrease shall be recognized in other comprehensive income to the extent of any credit balance in revaluation surplus of that assets.

AS – 26 requires that after initial recognition it should be carried at cost less amortization less impairment. Revaluation is prohibited.

18

8. Amortization of intangible assets other than toll roads

Straight line, diminishing balance and unit of

production method based on expected pattern of consumption.

Para 98A contains a rebuttable presumption that an amortization method that is based on revenue generated by an activity that includes the use of an intangible assets is inappropriate.

AS-26 does not contain any rebuttable presumption for amortization based on revenue. However, contains similar requirements.

19

9. Amortization of toll roads under Service Concession Agreement (“SCA”)

According to Para 7 AA, amortization method as per

this standard does not apply to toll road recognized in financial statements for the period immediately before the beginning of first IND-AS FS.

Option to continue for old toll roads, however, not allowed for new toll road arising under SCA entered (i.e. 1st April 2016) into after implementation of Ind AS. (Para D22 of IND-AS101)

Schedule II to the Cos Act, 2013 allows revenue based amortization for toll roads created under SCA.

20

10. Review of amortization method and residual values

Change in amortization method would be change in accounting estimate to be applied prospectively, in accordance AS-26 the same would be change in accounting policy.

Residual value is reviewed at least at each financial year end.

AS-26 specifically requires that residual value is not subsequently increased.

21

11. Impairment of intangible assets Finite useful life – it is amortized and

tested for impairment, if indicator exists.

Indefinite useful life – not amortized but tested for impairment annually and whenever there is indicator exists. (Para 107 & 108)

22

12. Income from incidental operations while an assets is being developed (Para 31)

Decide whether activity is necessary to bring the assets to condition necessary for it to capable of operating in the manner intended by management.

Example – New process for production of chemical where company is confident to patent the process.

Activity necessary to bring Intangible Assets into intended use, income deducted from cost.

Example – Sale of sample produced during testing of new process.

23

Web Site Cost – Corresponding to SIC 32

Website is partly tangible and partly intangible.

Hardware cost is considered as PPE and website development and operation as intangible.

Recognized as intangible, If only if :-

o Probable that future benefits will flow and cost can be measured reliably; and

o Six conditions of development phase is to be satisfied.

24

Web Site Cost – Corresponding to SIC 32

Stages of web site developments:-

1. Planning – Expense

2. Application and Infrastructure Development

3. Graphical design development

4. Content Development

5. Operating stage – Expense

Useful life should be short.

25

First time adoption Ind AS 101 – Voluntary exemptions for

deemed Cost

o Fair value or

o Previous GAAP carrying amount

Not mandatory to use same exemption for PPE and Intangible Assets

Amortization of toll road based on revenue under Service Concession Agreement (“SCA”) only and not all assets under SC A.

26

Additional Disclosures In case of Revaluation model, by class of

intangible assets:-

o Effective date of revaluation;

o Carrying amount of revalued Intangible Assets ; and

o Carrying amount if cost model would have been followed.

Movement in revaluation surplus relating to intangible assets.

27

THANK YOU

28