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

  1. #21
    Accounting Standards
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    Default Recognition of an Expense of Accounting Standard (AS) 26 Intangible Assets

    Recognition of an Expense of Accounting Standard (AS) 26 Intangible Assets

    55. Expenditure on an intangible item should be recognised as an expense when it is incurred unless:

    (a) it forms part of the cost of an intangible asset that meets the recognition criteria (see paragraphs 19-54); or

    (b) the item is acquired in an amalgamation in the nature of purchase and cannot be recognised as an intangible asset. If this is the case, this expenditure (included in the cost of acquisition) should form part of the amount attributed to goodwill (capital reserve) at the date of acquisition (see AS
    14, Accounting for Amalgamations).


    56. In some cases, expenditure is incurred to provide future economic benefits to an enterprise, but no intangible asset or other asset is acquired or created that can be recognised. In these cases, the expenditure is recognised as an expense when it is incurred. For example, expenditure on
    research is always recognised as an expense when it is incurred (see paragraph 41). Examples of other expenditure that is recognised as an expense when it is incurred include:

    (a) expenditure on start-up activities (start-up costs), unless this expenditure is included in the cost of an itemof fixed asset under AS 10. Start-up costs may consist of preliminary expenses
    incurred in establishing a legal entity such as legal and secretarial costs, expenditure to open a newfacility or business (pre-opening costs) or expenditures for commencing new operations or
    launching new products or processes (pre-operating costs);

    (b) expenditure on training activities;

    (c) expenditure on advertising and promotional activities; and

    (d) expenditure on relocating or re-organising part or all of an enterprise.


    57. Paragraph 55 does not apply to payments for the delivery of goods or services made in advance of the delivery of goods or the rendering of services. Such prepayments are recognised as assets.

  2. #22
    Accounting Standards
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    Default Past Expenses not to be Recognised as an Asset of Accounting Standard (AS) 26 Intangible Assets

    Past Expenses not to be Recognised as an Asset of Accounting Standard (AS) 26 Intangible Assets


    58. Expenditure on an intangible item that was initially recognised as an expense by a reporting enterprise in previous annual financial statements or interim financial reports should not be recognised as part of the cost of an intangible asset at a later date.

  3. #23
    Accounting Standards
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    Default Subsequent Expenditure of Accounting Standard (AS) 26 Intangible Assets

    Subsequent Expenditure of Accounting Standard (AS) 26 Intangible Assets


    59. Subsequent expenditure on an intangible asset after its purchase or its completion should be recognised as an expense when it is incurred unless:

    (a) it is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance; and

    (b) the expenditure can be measured and attributed to the asset reliably.

    If these conditions are met, the subsequent expenditure should be added to the cost of the intangible asset.

    60. Subsequent expenditure on a recognised intangible asset is recognised as an expense if this expenditure is required to maintain the asset at its originally assessed standard of performance. The nature of intangible assets is such that, inmany cases, it is not possible to determinewhether subsequent expenditure is likely to enhance or maintain the economic benefits that will flow to the enterprise from those assets. In addition, it is often difficult to attribute such expenditure directly to a particular intangible asset rather than the business as a whole. Therefore, only rarely will expenditure incurred after the initial recognition of a purchased intangible asset or after
    completion of an internally generated intangible asset result in additions to the cost of the intangible asset.

    61. Consistent with paragraph 50, subsequent expenditure on brands, mastheads, publishing titles, customer lists and items similar in substance (whether externally purchased or internally generated) is always recognised as an expense to avoid the recognition of internally generated goodwill.

  4. #24
    Accounting Standards
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    Default Measurement Subsequent to Initial Recognition of Accounting Standard (AS) 26 Intangible Assets

    Measurement Subsequent to Initial Recognition of Accounting Standard (AS) 26 Intangible Assets

    62. After initial recognition, an intangible asset should be carried at its cost less any accumulated amortisation and any accumulated impairment losses.

  5. #25
    Accounting Standards
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    Default Amortisation Period of Accounting Standard (AS) 26 Intangible Assets

    Amortisation Period of Accounting Standard (AS) 26 Intangible Assets

    63. The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use.
    Amortisation should commence when the asset is available for use.


    64. As the future economic benefits embodied in an intangible asset are consumed over time, the carrying amount of the asset is reduced to reflect that consumption. This is achieved by systematic allocation of the cost of the asset, less any residual value, as an expense over the asset's useful life.
    Amortisation is recognised whether or not there has been an increase in, for example, the asset's fair value or recoverable amount. Many factors need to be considered in determining the useful life of an intangible asset including:

    (a) the expected usage of the asset by the enterprise and whether the asset could be efficiently managed by another management team;

    (b) typical product life cycles for the asset and public information on estimates of useful lives of similar types of assets that are used in a similar way;

    (c) technical, technological or other types of obsolescence;

    (d) the stability of the industry in which the asset operates and changes in themarket demand for the products or services output from the asset;

    (e) expected actions by competitors or potential competitors;

    (f) the level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the company's ability and intent to reach such a level;

    (g) the period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases; and

    (h) whether the useful life of the asset is dependent on the useful life of other assets of the enterprise.

    65. Given the history of rapid changes in technology, computer software and many other intangible assets are susceptible to technological obsolescence. Therefore, it is likely that their useful life will be short.

    66. Estimates of the useful life of an intangible asset generally become less reliable as the length of the useful life increases. This Statement adopts a presumption that the useful life of intangible assets is unlikely to exceed ten years.

    67. In some cases, there may be persuasive evidence that the useful life of an intangible asset will be a specific period longer than ten years. In these cases, the presumption that the useful life generally does not exceed ten years is rebutted and the enterprise:

    (a) amortises the intangible asset over the best estimate of its useful life;

    (b) estimates the recoverable amount of the intangible asset at least annually in order to identify any impairment loss (see paragraph 83); and

    (c) discloses the reasons why the presumption is rebutted and the factor(s) that played a significant role in determining the useful life of the asset (see paragraph 94(a)).


    Examples

    A. An enterprise has purchased an exclusive right to generate hydro-electric power for sixty years. The costs of generating hydroelectric power are much lower than the costs of obtaining power
    from alternative sources. It is expected that the geographical area surrounding the power station will demand a significant amount of power from the power station for at least sixty years.
    The enterprise amortises the right to generate power over sixty years, unless there is evidence that its useful life is shorter.

    B. An enterprise has purchased an exclusive right to operate a toll motorway for thirty years. There is no plan to construct alternative routes in the area served by the motorway. It is expected that this motorway will be in use for at least thirty years.

    The enterprise amortises the right to operate the motorway over thirty years, unless there is evidence that its useful life is shorter.

    68. The useful life of an intangible asset may be very long but it is always finite. Uncertainty justifies estimating the useful life of an intangible asset on a prudent basis, but it does not justify choosing a life that is unrealistically short.

    69. If control over the future economic benefits from an intangible asset is achieved through legal rights that have been granted for a finite period, the useful life of the intangible asset should not exceed the period of the legal rights unless:


    (a) the legal rights are renewable; and

    (b) renewal is virtually certain.

    70. There may be both economic and legal factors influencing the useful life of an intangible asset: economic factors determine the period overwhich future economic benefits will be generated; legal factors may restrict the period over which the enterprise controls access to these benefits. The
    useful life is the shorter of the periods determined by these factors.

    71. The following factors, among others, indicate that renewal of a legal right is virtually certain:

    (a) the fair value of the intangible asset is not expected to reduce as the initial expiry date approaches, or is not expected to reduce by more than the cost of renewing the underlying right;

    (b) there is evidence (possibly based on past experience) that the legal rights will be renewed; and

    (c) there is evidence that the conditions necessary to obtain the renewal of the legal right (if any) will be satisfied.

  6. #26
    Accounting Standards
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    Default Amortisation Method of Accounting Standard (AS) 26 Intangible Assets

    Amortisation Method of Accounting Standard (AS) 26 Intangible Assets

    72. The amortisation method used should reflect the pattern in which the asset's economic benefits are consumed by the enterprise. If that pattern cannot be determined reliably, the straight-line method should be used. The amortisation charge for each period should be recognised as an expense unless another Accounting Standard permits or requires it to be included in the carrying amount of another asset.


    73. A variety of amortisation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the unit of production method. The method used for an asset is
    selected based on the expected pattern of consumption of economic benefits and is consistently applied from period to period, unless there is a change in the expected pattern of consumption of economic benefits to be derived from that asset. There will rarely, if ever, be persuasive evidence to support an amortisationmethod for intangible assets that results in a lower amount of accumulated amortisation than under the straight-line method.

    74. Amortisation is usually recognised as an expense. However, sometimes, the economic benefits embodied in an asset are absorbed by the enterprise in producing other assets rather than giving rise to an expense. In these cases, the amortisation charge forms part of the cost of the other asset
    and is included in its carrying amount. For example, the amortisation of intangible assets used in a production process is included in the carrying amount of inventories (see AS 2, Valuation of Inventories).

  7. #27
    Accounting Standards
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    Default Residual Value of Accounting Standard (AS) 26 Intangible Assets

    Residual Value of Accounting Standard (AS) 26 Intangible Assets


    75. The residual value of an intangible asset should be assumed to be zero unless:

    (a) there is a commitment by a third party to purchase the asset at the end of its useful life; or

    (b) there is an active market for the asset and:

    (i) residual value can be determined by reference to that market; and

    (ii) it is probable that such a market will exist at the end of the asset's useful life.


    76. A residual value other than zero implies that an enterprise expects to dispose of the intangible asset before the end of its economic life.

    77. The residual value is estimated using prices prevailing at the date of acquisition of the asset, for the sale of a similar asset that has reached the end of its estimated useful life and that has operated under conditions similar to those in which the asset will be used. The residual value is not
    subsequently increased for changes in prices or value.

  8. #28
    Accounting Standards
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    Default Review of Amortisation Period and Amortisation Method of Accounting Standard (AS) 26 Intangible Assets

    Review of Amortisation Period and Amortisation Method of Accounting Standard (AS) 26 Intangible Assets


    78. The amortisation period and the amortisation method should be reviewed at least at each financial year end. If the expected useful life of the asset is significantly different from previous estimates, the amortisation period should be changed accordingly. If there has been a significant change in the expected pattern of economic benefits from the asset, the amortisation method should be changed to reflect the changed pattern. Such changes should be accounted for in accordance with AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

    79. During the life of an intangible asset, it may become apparent that the estimate of its useful life is inappropriate. For example, the useful life may be extended by subsequent expenditure that improves the condition of the asset beyond its originally assessed standard of performance. Also, the
    recognition of an impairment loss may indicate that the amortisation period needs to be changed.
    80. Over time, the pattern of future economic benefits expected to flow to an enterprise from an intangible asset may change. For example, it may become apparent that a diminishing balance method of amortisation is appropriate rather than a straight-line method. Another example is if use of
    the rights represented by a licence is deferred pending action on other components of the business plan. In this case, economic benefits that flow from the asset may not be received until later periods.

  9. #29
    Accounting Standards
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    Default Recoverability of the Carrying Amount Impairment Losses of Accounting Standard (AS) 26 Intangible Assets

    Recoverability of the Carrying Amount Impairment Losses of Accounting Standard (AS) 26 Intangible Assets


    81. To determine whether an intangible asset is impaired, an enterprise applies Accounting Standard on Impairment of Assets1 0 . That Standard explains how an enterprise reviews the carrying amount of its assets, how it determines the recoverable amount of an asset and when it recognises or
    reverses an impairment loss.


    82. If an impairment loss occurs before the end of the first annual accounting period commencing after acquisition for an intangible asset acquired in an amalgamation in the nature of purchase, the impairment loss is recognised as an adjustment to both the amount assigned to the intangible
    asset and the goodwill (capital reserve) recognised at the date of the amalgamation. However, if the impairment loss relates to specific events or changes in circumstances occurring after the date of acquisition, the impairment loss is recognised under Accounting Standard on Impairment of
    Assets and not as an adjustment to the amount assigned to the goodwill (capital reserve) recognised at the date of acquisition.

    83. In addition to the requirements of Accounting Standard on Impairment of Assets, an enterprise should estimate the recoverable amount of the following intangible assets at least at each financial year end even if there is no indication that the asset is impaired:

    (a) an intangible asset that is not yet available for use; and

    (b) an intangible asset that is amortised over a period exceeding ten years from the date when the asset is available for use. The recoverable amount should be determined under Accounting
    Standard on Impairment of Assets and impairment losses recognised accordingly.


    84. The ability of an intangible asset to generate sufficient future economic benefits to recover its cost is usually subject to great uncertainty until the asset is available for use. Therefore, this Statement requires an enterprise to test for impairment, at least annually, the carrying amount of an intangible asset that is not yet available for use.

    85. It is sometimes difficult to identify whether an intangible asset may be impaired because, among other things, there is not necessarily any obvious evidence of obsolescence. This difficulty arises particularly if the asset has a long useful life. As a consequence, this Statement requires, as aminimum, an annual calculation of the recoverable amount of an intangible asset if its useful life exceeds ten years fromthe datewhen it becomes available for use.

    86. The requirement for an annual impairment test of an intangible asset applies whenever the current total estimated useful life of the asset exceeds ten years from when it became available for use. Therefore, if the useful life of an intangible asset was estimated to be less than ten years at initial recognition, but the useful life is extended by subsequent expenditure to exceed ten years from when the asset became available for use, an enterprise performs the impairment test required under paragraph 83(b) and also makes the disclosure required under paragraph 94(a).

  10. #30
    Accounting Standards
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    Default Retirements and Disposals of Accounting Standard (AS) 26 Intangible Assets

    Retirements and Disposals of Accounting Standard (AS) 26 Intangible Assets


    87. An intangible asset should be derecognised (eliminated from the balance sheet) on disposal or when no future economic benefits are expected from its use and subsequent disposal.


    88. Gains or losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the statement of profit and loss.


    89. An intangible asset that is retired from active use and held for disposal is carried at its carrying amount at the date when the asset is retired from active use. At least at each financial year end, an enterprise tests the asset for impairment under Accounting Standard on Impairment of Assets1 1 , and recognises any impairment loss accordingly.

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