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Thread: 26 Accounting Standard 26 - Intangible Assets - AS 26

  1. #11
    Accounting Standards
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    Default Separate Acquisition of Accounting Standard (AS) 26 Intangible Assets

    Separate Acquisition of Accounting Standard (AS) 26 Intangible Assets


    24. If an intangible asset is acquired separately, the cost of the intangible asset can usually be measured reliably. This is particularly so when the purchase consideration is in the form of cash or other monetary assets.


    25. The cost of an intangible asset comprises its purchase price, including any import duties and other taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), and any directly attributable expenditure on making the asset ready for its intended use. Directly attributable expenditure includes, for example, professional fees for legal services. Any trade discounts and rebates are deducted in arriving at the cost.


    26. If an intangible asset is acquired in exchange for shares or other securities of the reporting enterprise, the asset is recorded at its fair value, or the fair value of the securities issued, whichever is more clearly evident.

  2. #12
    Accounting Standards
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    Default Separate Acquisition of Accounting Standard (AS) 26 Intangible Assets

    Separate Acquisition of Accounting Standard (AS) 26 Intangible Assets


    24. If an intangible asset is acquired separately, the cost of the intangible asset can usually be measured reliably. This is particularly so when the purchase consideration is in the form of cash or other monetary assets.


    25. The cost of an intangible asset comprises its purchase price, including any import duties and other taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), and any directly attributable expenditure on making the asset ready for its intended use. Directly attributable expenditure includes, for example, professional fees for legal services. Any trade discounts and rebates are deducted in arriving at the cost.


    26. If an intangible asset is acquired in exchange for shares or other securities of the reporting enterprise, the asset is recorded at its fair value, or the fair value of the securities issued, whichever is more clearly evident.

  3. #13
    Accounting Standards
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    Default Acquisition as Part of an Amalgamation of Accounting Standard (AS) 26 Intangible Assets

    Acquisition as Part of an Amalgamation of Accounting Standard (AS) 26 Intangible Assets


    27. An intangible asset acquired in an amalgamation in the nature of purchase is accounted for in accordance with Accounting Standard (AS) 14, Accounting for Amalgamations.Where in preparing the financial statements of the transferee company, the consideration is allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation, paragraphs 28 to 32 of this Statement need to be considered.

    28. Judgement is required to determine whether the cost (i.e. fair value) of an intangible asset acquired in an amalgamation can be measured with sufficient reliability for the purpose of separate recognition. Quoted market prices in an active market provide the most reliable measurement of fair
    value. The appropriate market price is usually the current bid price. If current bid prices are unavailable, the price of the most recent similar transaction may provide a basis from which to estimate fair value, provided that there has not been a significant change in economic circumstances
    between the transaction date and the date at which the asset's fair value is estimated.

    29. If no active market exists for an asset, its cost reflects the amount that the enterprise would have paid, at the date of the acquisition, for the asset in an arm's length transaction between knowledgeable and willing parties, based on the best information available. In determining this amount, an enterprise considers the outcome of recent transactions for similar assets.


    30. Certain enterprises that are regularly involved in the purchase and sale of unique intangible assets have developed techniques for estimating their fair values indirectly. These techniques may be used for initialmeasurement of an intangible asset acquired in an amalgamation in the nature of purchase if their objective is to estimate fair value as defined in this Statement and if they reflect current transactions and practices in the industry to which the asset belongs. These techniques include, where appropriate, applying multiples reflecting current market transactions to certain
    indicators driving the profitability of the asset (such as revenue, market shares, operating profit, etc.) or discounting estimated future net cash flows from the asset.

    31. In accordance with this Statement:

    (a) a transferee recognises an intangible asset that meets the recognition criteria in paragraphs 20 and 21, even if that intangible asset had not been recognised in the financial statements of the
    transferor; and


    (b) if the cost (i.e. fair value) of an intangible asset acquired as part of an amalgamation in the nature of purchase cannot be measured reliably, that asset is not recognised as a separate
    intangible asset but is included in goodwill (see paragraph 55).

    32. Unless there is an active market for an intangible asset acquired in an amalgamation in the nature of purchase, the cost initially recognised for the intangible asset is restricted to an amount that does not create or increase any capital reserve arising at the date of the amalgamation.

  4. #14
    Accounting Standards
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    Default Acquisition by way of a Government Grant of Accounting Standard (AS) 26 Intangible Assets

    Acquisition by way of a Government Grant of Accounting Standard (AS) 26 Intangible Assets



    33. In some cases, an intangible asset may be acquired free of charge, or for nominal consideration, by way of a government grant. This may occur when a government transfers or allocates to an enterprise intangible assets such as airport landing rights, licences to operate radio or television stations, import licences or quotas or rights to access other restricted resources. AS 12, Accounting for Government Grants, requires that government grants in the form of non-monetary assets, given at a concessional rate should be accounted for on the basis of their acquisition cost. AS 12 also requires that in case a non-monetary asset is given free of cost, it should be recorded at a nominal value. Accordingly, intangible asset acquired free of charge, or for nominal consideration, by way of government grant is recognised at a nominal value or at the acquisition cost, as appropriate; any expenditure that is directly attributable to making the asset ready for its intended use is also
    included in the cost of the asset.

  5. #15
    Accounting Standards
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    Default Exchanges of Assets of Accounting Standard (AS) 26 Intangible Assets

    Exchanges of Assets of Accounting Standard (AS) 26 Intangible Assets

    34. An intangible asset may be acquired in exchange or part exchange for another asset. In such a case, the cost of the asset acquired is determined in accordancewith the principles laid down in this regard inAS 10,Accounting for Fixed Assets.

  6. #16
    Accounting Standards
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    Default Internally Generated Goodwill of Accounting Standard (AS) 26 Intangible Assets

    Internally Generated Goodwill of Accounting Standard (AS) 26 Intangible Assets


    35. Internally generated goodwill should not be recognised as an asset.

    36. In some cases, expenditure is incurred to generate future economic benefits, but it does not result in the creation of an intangible asset thatmeets the recognition criteria in this Statement. Such expenditure is often described as contributing to internally generated goodwill. Internally generated goodwill is not recognised as an asset because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost.


    37. Differences between the market value of an enterprise and the carrying amount of its identifiable net assets at any point in time may be due to a range of factors that affect the value of the enterprise. However, such differences cannot be considered to represent the cost of intangible assets controlled by the enterprise.

  7. #17
    Accounting Standards
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    Default Internally Generated Intangible Assets of Accounting Standard (AS) 26 Intangible Assets

    Internally Generated Intangible Assets of Accounting Standard (AS) 26 Intangible Assets

    38. It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition. It is often difficult to:

    (a) identify whether, and the point of time when, there is an identifiable asset that will generate probable future economic benefits; and

    (b) determine the cost of the asset reliably. In some cases, the cost of generating an intangible asset internally cannot be distinguished from the cost of maintaining or enhancing the enterprise’s
    internally generated goodwill or of running day-to-day operations. Therefore, in addition to complying with the general requirements for the recognition and initial measurement of an intangible asset, an enterprise applies the requirements and guidance in paragraphs 39-54 below to all
    internally generated intangible assets.

    39. To assess whether an internally generated intangible asset meets the criteria for recognition, an enterprise classifies the generation of the asset into:

    (a) a research phase; and

    (b) a development phase.

    Although the terms ‘research’ and ‘development’ are defined, the terms ‘research phase’ and ‘development phase’ have a broader meaning for the purpose of this Statement.

    40. If an enterprise cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the enterprise treats the expenditure on that project as if it were incurred in the research phase only.

  8. #18
    Accounting Standards
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    Default Research Phase of Accounting Standard (AS) 26 Intangible Assets

    Research Phase of Accounting Standard (AS) 26 Intangible Assets

    41. No intangible asset arising from research (or from the research phase of an internal project) should be recognised. Expenditure on research (or on the research phase of an internal project) should be recognised as an expense when it is incurred.

    42. This Statement takes the view that, in the research phase of a project, an enterprise cannot demonstrate that an intangible asset exists from which future economic benefits are probable. Therefore, this expenditure is recognised as an expense when it is incurred.

    43. Examples of research activities are:

    (a) activities aimed at obtaining new knowledge;

    (b) the search for, evaluation and final selection of, applications of research findings or other knowledge;

    (c) the search for alternatives for materials, devices, products, processes, systems or services; and

    (d) the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

  9. #19
    Accounting Standards
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    Default Development Phase of Accounting Standard (AS) 26 Intangible Assets

    Development Phase


    44. An intangible asset arising from development (or from the development phase of an internal project) should be recognised if, and only if, an enterprise can demonstrate all of the following:

    (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 enterprise should 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; and

    (f) its ability to measure the expenditure attributable to the intangible asset during its development reliably.

    45. In the development phase of a project, an enterprise can, in some instances, identify an intangible asset and demonstrate that future economic benefits fromthe asset are probable. This is because the development phase of a project is further advanced than the research phase.
    46. Examples of development activities are:

    (a) the design, construction and testing of pre-production or pre-use prototypes and models;

    (b) the design of tools, jigs, moulds and dies involving new technology;

    (c) the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and

    (d) the design, construction and testingof a chosen alternative fornew or improved materials, devices, products, processes, systems or services.

    47. To demonstrate how an intangible asset will generate probable future economic benefits, an enterprise assesses the future economic benefits to be received from the asset using the principles in Accounting Standard on Impairment of Assets. If the asset will generate economic benefits only in combination with other assets, the enterprise applies the concept of cashgenerating units as set out in Accounting Standard on Impairment of Assets.


    48. Availability of resources to complete, use and obtain the benefits from an intangible asset can be demonstrated by, for example, a business plan showing the technical, financial and other resources needed and the enterprise's ability to secure those resources. In certain cases, an enterprise demonstrates the availability of external finance by obtaining a lender's
    indication of its willingness to fund the plan.

    49. An enterprise's costing systems can often measure reliably the cost of generating an intangible asset internally, such as salary and other expenditure incurred in securing copyrights or licences or developing computer software.

    50. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance should not be recognised as intangible assets.

    51. This Statement takes the view that expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets.

  10. #20
    Accounting Standards
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    Default Cost of an Internally Generated Intangible Asset of Accounting Standard (AS) 26 Intangible Assets

    Cost of an Internally Generated Intangible Asset of Accounting Standard (AS) 26 Intangible Assets


    52. The cost of an internally generated intangible asset for the purpose of paragraph 23 is the sum of expenditure incurred from the time when the intangible asset first meets the recognition criteria in paragraphs 20-21 and 44. Paragraph 58 prohibits reinstatement of expenditure recognised as an expense in previous annual financial statements or interim financial reports.

    53. The cost of an internally generated intangible asset comprises all expenditure that can be directly attributed, or allocated on a reasonable and consistent basis, to creating, producing and making the asset ready for its intended use. The cost includes, if applicable:

    (a) expenditure on materials and services used or consumed in generating the intangible asset;

    (b) the salaries, wages and other employment related costs of personnel directly engaged in generating the asset;

    (c) any expenditure that is directly attributable to generating the asset, such as fees to register a legal right and the amortisation of patents and licences that are used to generate the asset; and

    (d) overheads that are necessary to generate the asset and that can be allocated on a reasonable and consistent basis to the asset (for example, an allocation of the depreciation of fixed assets,
    insurance premium and rent). Allocations of overheads are made on bases similar to those used in allocating overheads to inventories (see AS 2, Valuation of Inventories). AS 16, Borrowing Costs, establishes criteria for the recognition of interest as a component of the cost of a qualifying asset.

    These criteria are also applied for the recognition of interest as a component of the cost of an internally generated intangible asset.

    54. The following are not components of the cost of an internally generated intangible asset:

    (a) selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to making the asset ready for use;

    (b) clearly identified inefficiencies and initial operating losses incurred before an asset achieves planned performance; and

    (c) expenditure on training the staff to operate the asset. Example Illustrating Paragraph 52
    An enterprise is developing a new production process. During the year 20X1, expenditure incurred was Rs. 10 lakhs, of which Rs. 9 lakhswas incurred before 1 December 20X1 and 1 lakhwas incurred
    between 1 December 20X1 and 31 December 20X1. The enterprise is able to demonstrate that, at 1 December 20X1, the production process met the criteria for recognition as an intangible asset. The
    recoverable amount of the know-how embodied in the process (including future cash outflows to complete the process before it is available for use) is estimated to be Rs. 5 lakhs.

    At the end of 20X1, the production process is recognised as an intangible asset at a cost of Rs. 1 lakh (expenditure incurred since the date when the recognition criteria were met, that is, 1 December
    20X1). The Rs. 9 lakhs expenditure incurred before 1 December 20X1 is recognised as an expense because the recognition criteria were not met until 1 December 20X1. This expenditure will never form part of the cost of the production process recognised in the balance sheet.

    During the year 20X2, expenditure incurred is Rs. 20 lakhs. At the end of 20X2, the recoverable amount of the know-how embodied in the process (including future cash outflows to complete the process before it is available for use) is estimated to be Rs. 19 lakhs.

    At the end of the year 20X2, the cost of the production process is Rs. 21 lakhs (Rs. 1 lakh expenditure recognised at the end of 20X1 plus Rs. 20 lakhs expenditure recognised in 20X2). The enterprise recognises an impairment loss of Rs. 2 lakhs to adjust the carrying amount of the
    process before impairment loss (Rs. 21 lakhs) to its recoverable amount (Rs. 19 lakhs). This impairment loss will be reversed in a subsequent period if the requirements for the reversal of an impairment loss in Accounting Standard on Impairment of Assets, are met.

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