AS-26 – Intangible Assets :
The Standard defines an intangible asset 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.”
An intangible asset should be recognised if, and only if:
(a) it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and
(b) the cost of the asset can be measured reliably.
An enterprise should assess the probability of future economic benefits using reasonable and supportable assumptions that represent best estimate of the set of economic conditions that will exist over the useful life of the asset. As per the Standard an intangible asset should initially be measured at cost. Internally generated goodwill should not be recognized as an asset. Intangible asset arising from research (or from the research phase of an internal project) should not be recognized as an asset. Expenditure on research (or on the research phase of an internal project) should be recognized as an expense when it is incurred.
An intangible asset arising from development (or from the development phase of an internal project) should be recognized 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.
This Accounting Standard 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 recognized as intangible assets.
Expenditure on an intangible item that was initially recognized as an expense by a reporting enterprise in previous annual financial statements or interim financial reports should not be recognized as part of the cost of an intangible asset at a later date. Enterprises may incur expenditure on intangible assets after these intangibles are recognized/recorded in the book. The standard prescribes the conditions when such expenses should be capitalized and included in the cost of intangible assets.
(a) Subsequent expenses increase the future economic benefits of intangible assets;
(b) Subsequent expenses can be measured and attributed to the asset reliably.
If these conditions are not met, the subsequent expenses after initial recognition shall be expensed and not be capitalized.
After initial recognition, an intangible asset should be carried at its cost less any accumulated amortisation and an accumulated impairment losses.
The Accounting Standard states that 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.
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.
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 amortistion charge for each period should be recognized as an expense unless another Accounting Standard permits or requires it to be included in the carrying amount of another asset.
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.
The amortisation period and the amortisation method should be reviewed at least at each financial year end.
The financial statements should disclose the following for each class of intangible assets, distinguishing between internally generated intangible assets and other intangible assets:
(a) The useful lives or the amortisation rates used;
(b) The amoritistion methods used;
(c) The gross carrying amount and the accumulated amortisation (aggregated with accumulated impairment losses) at the beginning and end of the period;
(d) A reconciliation of the carrying amount at the beginning and end of the period.