Recognition of an expense of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26) - Intangible Assets
Recognition of an expense of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26)
Intangible Assets
Recognition of an expense
68. Expenditure on an intangible item shall 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 18–67); or
(b) the item is acquired in a business combination and cannot be recognised as an intangible asset. If this is the case, it forms part of the amount recognised as goodwill at the acquisition date (see Ind AS 103).
69. In some cases, expenditure is incurred to provide future economic benefits to an entity, but no intangible asset or other asset is acquired or created that can be recognised. In the case of the supply of goods, the entity recognises such expenditure as an expense when it has a right to access those goods. In the case of the supply of services, the entity recognises the expenditure as an expense when it receives the services. For example, expenditure on research is recognised as an expense when it is incurred (see paragraph 54), except when it is acquired as part of a business combination. Other examples of expenditure that is recognised as an expense when it is incurred include:
(a) expenditure on start-up activities (ie start-up costs), unless this expenditure is included in the cost of an item of property, plant and equipment in accordance with Ind AS 16. Start-up costs may consist of establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or business (ie pre-opening costs) or expenditures for starting new operations or launching new products or processes (ie pre-operating costs).
(b) expenditure on training activities.
(c) expenditure on advertising and promotional activities (including mail order catalogues).
(d) expenditure on relocating or reorganising part or all of an entity.
69A. An entity has a right to access goods when it owns them. Similarly, it has a right to access goods when they have been constructed by a supplier in accordance with the terms of a supply contract and the entity could demand delivery of them in return for payment. Services are received when they are performed by a supplier in accordance with a contract to deliver them to the entity and not when the entity uses them to deliver another service, for example, to deliver an advertisement to customers.
70. Paragraph 68 does not preclude an entity from recognising a prepayment as an asset when payment for goods has been made in advance of the entity obtaining a right to access those goods. Similarly, paragraph 68 does not preclude an entity from recognising a prepayment as an asset when payment for services has been made in advance of the entity receiving those services.
Past expenses not to be recognised as an asset of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26) - Intangible Assets
Past expenses not to be recognised as an asset of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26)
Intangible Assets
Past expenses not to be recognised as an asset
71. Expenditure on an intangible item that was initially recognised as an expense shall not be recognised as part of the cost of an intangible asset at a later date.
Measurement after recognition of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26) - Intangible Assets
Measurement after recognition of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26)
Intangible Assets
Measurement after recognition
72. An entity shall choose either the cost model in paragraph 74 or the revaluation model in paragraph 75 as its accounting policy. If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same model, unless there is no active market for those assets.
73. A class of intangible assets is a grouping of assets of a similar nature and use in an entity’s operations. The items within a class of intangible assets are revalued simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial statements representing a mixture of costs and values as at different dates.
Cost model of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26) - Intangible Assets
Cost model of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26)
Intangible Assets
Cost model
74. After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortisation and any accumulated impairment losses.
Revaluation model of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26) - Intangible Assets
Revaluation model of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26)
Intangible Assets
Revaluation model
75. After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be determined by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value.
76. The revaluation model does not allow:
(a) the revaluation of intangible assets that have not previously been recognised as assets; or
(b) the initial recognition of intangible assets at amounts other than cost
77. The revaluation model is applied after an asset has been initially recognised at cost. However, if only part of the cost of an intangible asset is recognised as an asset because the asset did not meet the criteria for recognition until part of the way through the process (see paragraph 65), the revaluation model may be applied to the whole of that asset.
78. It is uncommon for an active market with the characteristics described in paragraph 8 to exist for an intangible asset, although this may happen. For example, in some jurisdictions, an active market may exist for freely transferable taxi licences, fishing licences or production quotas. However, an active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique. Also, although intangible assets are bought and sold, contracts are negotiated between individual buyers and sellers, and transactions are relatively infrequent. For these reasons, the price paid for one asset may not provide sufficient evidence of the fair value of another. Moreover, prices are often not available to the public.
79. The frequency of revaluations depends on the volatility of the fair values of the intangible assets being revalued. If the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is necessary. Some intangible assets may experience significant and volatile movements in fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for intangible assets with only insignificant movements in f air value.
80. If an intangible asset is revalued, any accumulated amortisation at the date of the revaluation is either:
(a) restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluat ion equals its revalued amount; or
(b) eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset.
81. If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset, the asset shall be carried at its cost less any accumulated amortisation and impairment losses.
82. If the fair value of a revalued intangible asset can no longer be determined by reference to an active market, the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the active market less any subsequent accumulated amortisation and any subsequent accumulated impairment losses.
83. The fact that an active market no longer exists for a revalued intangible asset may indicate that the asset may be impaired and that it needs to be tested in accordance with Ind AS 36.
84. If the fair value of the asset can be determined by reference to an active market at a subsequent measurement date, the revaluation model is applied from that date.
85. If an intangible asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.
86. If an intangible asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.
87. The cumulative revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realised. The whole surplus may be realised on the retirement or disposal of the asset. However, some of the surplus may be realised as the asset is used by the entity; in such a case, the amount of the surplus realised is the difference between amortisation based on the revalued carrying amount of the asset and amortisation that would have been recognised based on the asset’s historical cost. The transfer from revaluation surplus to retained earnings is not made through profit or loss.
Useful life of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26) - Intangible Assets
Useful life of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26)
Intangible Assets
Useful life
88. An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of production or similar units constituting, that useful life. An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
89. The accounting for an intangible asset is based on its useful life. An intangible asset with a finite useful life is amortised (see paragraphs 97 –106), and an intangible asset with an indefinite useful life is not (see paragraphs 107–110). The Illustrative Examples accompanying this Standard illustrate the determination of useful life for different intangible assets, and the subsequent accounting for those assets based on the useful life determinations.
90. Many factors are considered in determining the useful life of an intangible asset, including:
(a) the expected usage of the asset by the entity and whether the asset could be managed efficiently by another management team;
(b) typical product life cycles for the asset and public information on estimates of useful lives of similar assets that are used in a similar way;
(c) technical, technological, commercial or other types of obsolescence;
(d) the stability of the industry in which the asset operates and changes in the market 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 entity’s ability and intention 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 entity.
91. The term ‘indefinite’ does not mean ‘infinite’. The useful life of an intangible asset reflects only that level of future maintenance expenditure required to maintain the asset at its standard of performance assessed at the time of estimating the asset’s useful life, and the entity’s ability and intention to reach such a level. A conclusion that the useful life of an intangible asset is indefinite should not depend on planned future expenditure in excess of that required to maintain the asset at that standard of performance.
92. 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 is short.
93. The useful life of an intangible asset may be very long or even indefinite. 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.
94. The useful life of an intangible asset that arises from contractual or other legal rights shall not exceed the period of the contractual or other legal rights, but may be shorter depending on the period over which the entity expects to use the asset. If the contractual or other legal rights are conveyed for a limited term that can be renewed, the useful life of the intangible asset shall include the renewal period(s) only if there is evidence to support renewal by the entity without significant cost. The useful life of a reacquired right recognised as an intangible asset in a business combination is the remaining contractual period of the contract in which the right was granted and shall not include renewal periods.
95. There may be both economic and legal factors influencing the useful life of an intangible asset. Economic factors determine the period over which future economic benefits will be received by the entity. Legal factors may restrict the period over which the entity controls access to these benefits. The useful life is the shorter of the periods determined by these factors.
96. Existence of the following factors, among others, indicates that an entity would be able to renew the contractual or other legal rights without significant cost:
(a) there is evidence, possibly based on experience, that the contractual or other legal rights will be renewed. If renewal is contingent upon the consent of a third party, this includes evidence that the third party will give its consent;
(b) there is evidence that any conditions necessary to obtain renewal will be satisfied; and
(c) the cost to the entity of renewal is not significant when compared with the future economic benefits expected to f low to the entity from renewal.
If the cost of renewal is significant when compared with the future economic benefits expected to flow to the entity from renewal, the ‘renewal’ cost represents, in substance, the cost to acquire a new intangible asset at the renewal date.
Intangible assets with finite useful lives of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26) - Intangible Assets
Intangible assets with finite useful lives of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26)
Intangible Assets
Intangible assets with finite useful lives
Amortisation period and amortisation method
97. The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortisation shall begin when the asset is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Amortisation shall cease at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with Ind AS 105 and the date that the asset is derecognised. The amortisation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight -line method shall be used. The amortisation charge for each period shall be recognised in profit or loss unless this or another Standard permits or re quires it to be included in the carrying amount of another asset.
98. 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 is selected on the basis of the expected pattern of consumption of the expected future economic benefits embodied in the asset and is applied consistently from period to period, unless there is a change in the expected pattern of consumption of those future economic benefits.
99. Amortisation is usually recognised in profit or loss. However, sometimes the future economic benefits embodied in an asset are absorbed in producing other assets. In this case, the amortisation charge constitutes 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 Ind AS 2 Inventories).
Residual value of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26) - Intangible Assets
Residual value of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26)
Intangible Assets
Residual value
100. The residual value of an intangible asset with a finite useful life shall 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.
101. The depreciable amount of an asset with a finite useful life is deter mined after deducting its residual value. A residual value other than zero implies that an entity expects to dispose of the intangible asset before the end of its economic life.
102. An estimate of an asset’s residual value is based on the amount recoverable from disposal using prices prevailing at the date of the estimate for the sale of a similar asset that has reached the end of its useful life and has operated under conditions similar to those in which the asset will be used. The residual value is reviewed at least at each financial year-end. A change in the asset’s residual value is accounted for as a change in an accounting estimate in accordance with Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors .
103. The residual value of an intangible asset may increase to an amount equal to or greater than the asset’s carrying amount. If it does, the asset’s amortisation charge is zero unless and until its residual value subsequently decreases to an amount below the asset’s carrying amount.
Review of amortisation period and amortisation method of Indian Accounting Standard (Ind AS) 38 -Earlier Accounting standard -(26) - Intangible Assets
Review of amortisation period and amortisation method of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26)
Intangible Assets
Review of amortisation period and amortisation method
104. The amortisation period and the amortisation method for an intangible asset with a finite useful life shall be reviewed at least at each financial year-end. If the expected useful life of the asset is different from previous estimates, the amortisation period shall be changed accordingly. If there has been a change in the expected pattern of consumption of the future economic benefits embodied in the asset, the amortisation method shall be changed to reflect the changed pattern. Such changes shall be accounted for as changes in accounting estimates in accordance with Ind AS 8.
105. During the life of an intangible asset, it may become apparent that the estimate of its useful life is inappropriate. For example, the re cognition of an impairment loss may indicate that the amortisation period needs to be changed.
106. Over time, the pattern of future economic benefits expected to flow to an entity 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 benef its that flow from the asset may not be received until later periods.
Intangible assets with indefinite useful lives of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26) - Intangible Assets
Intangible assets with indefinite useful lives of Indian Accounting Standard (Ind AS) 38 - Earlier Accounting standard - (26)
Intangible Assets
Intangible assets with indefinite useful lives
107. An intangible asset with an indefinite useful life shall not be amortised.
108. In accordance with Ind AS 36, an entity is required to test an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount with its carrying amount
(a) annually, and
(b) whenever there is an indication that the intangible asset may be impaired.
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