IND AS 38 Intangible Assets By Hanmandas Bajaj B.Com; ACA, LLB
IAS 38:Intangible Assets Agenda Objective and Scope Key Definitions Recognition and Measurement Disclosures IND AS vs IFRS
Objective of IND AS 38 The objective of IND AS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another IND AS. The Standard requires an entity to recognise an intangible asset if, and only if, certain criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets.
Scope: IND AS 38 applies to all intangible assets other than: financial assets exploration and evaluation assets (extractive industries) expenditure on the development and extraction of minerals, oil, natural gas, and similar resources intangible assets arising from insurance contracts issued by insurance companies intangible assets covered by another IND AS, such as: intangibles held for sale deferred tax assets lease assets assets arising from employee benefits plan Goodwill acquired under business combination.
Key Definition Asset A resource controlled by the entity as a result of past events, From which future economic benefits are expected to flow to the entity Intangible asset An identifiable nonmonetary asset without physical substance
Key Definitions Arises from contractual or other legal rights OR Identifiability Is separable Control Legal rights that are enforceable in a court of law Exchange transactions for the same or similar item (= separable) Other
Intangible or fixed? X ltd purchased 100 computers from IBM and granted a turnkey contract of installing them in a networked set up. The contract also included the cost of licensed operating systems, anti virus systems, satellite connectivity etc.. The contract further included a tripartite arrangement with Oracle and IBM where in an Oracle based ERP system would be installed and IBM would facilitate the installation. Here the contract has two broad elements software and support systems that form an integral part of the hardware and those not forming its integral part. ERP system falls in second category. Therefore it is an intangible asset. However those falling as an integral part of the hardware is part of fixed assets.
Is Identifiable asset means separable asset? Not necessarily. If separable, that means the asset is capable of being rented, sold or exchanged, independent of other assets. So identity is easily established. Even if not separable, a legal right to use makes it identifiable.
Intangible assets without absolute legal right. P ltd has been using a brand name tur eri a o for its ayurvedic product which they transferred to another company for a consideration. The application for registration of brand name is not approved by the authorities. The buyer company continues to treat it as an intangible asset.auditor s view lack of control over asset as a reason to derecognize the asset. Comment Legal enforceability of a right is not a necessary condition for control if an enterprise is able to control the future economic benefits in some other way. As long as there is no restriction to use the brand name and there is market for product, economic benefits can assumed to be accruing to the asset holder. Yet, misuse of the brand name by others, in the absence of a legal right, is a threat to o trol over the asset Therefore it is a matter of subjective judgment
Future e o o i e efits - in the definition of an asset X ltd has created an innovative effluent management system, with the help of which it anticipates 2% reduction in its operating cost. Company intends to capitalize the cost of internally developed technology. Auditors are of the view that this is not a case where future economic benefits from revenue is possible and hence defi itio of asset is o plied with. Co e t It is not necessary that future economic benefit has to accrue through income generation alone. It could be from cost saving too. Hence subject to compliance of other conditions, capitalization is possible.
Recognition Recognition criteria. IND AS 38 requires an entity to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if: it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably. Intangible assets acquired separately or in a business combination: The probability criterion (b) is always considered to be satisfied. The reliable measurement criterion (c) is usually satisfied. If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IND AS 38 requires the expenditure on this item to be recognised as an expense when it is incurred.
Recognition Separately acquired Acquisition cost Acquisition in a business combination Cost equals fair value Internally generated intangibles Expenditure incurred in development phase
Recognition-Separately Purchased & Exchanged Intangibles Separately Purchased Cost includes Purchase price + import duties + non-refundable purchase taxes trade discounts - rebates Directly attributable expenditure on preparing the asset for its intended use e.g., employee benefits, professional fees, function testing Cost that cannot be included are advertising cost, Administration cost/staff training cost, Initial operating losses Shares/ Securities At FV of Securities issued Exchanged assets Other assets FV of asset surrendered or FV of Intangible obtained
Intangible Acquired in a Business Combination There is a presumption that the fair value (and therefore the cost) of an intangible asset acquired in a business combination can be measured reliably. An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date.
Internally Generated Intangible Assets Charge all research cost to expense. Development costs are capitalised when entity able to demonstrate : Technical feasibility Intention to complete the intangible asset and use or sell it Ability to use or sell the intangible asset How the intangible asset will generate probable future economic benefits Adequate technical, financial and other resources to complete the development Ability to measure the expenditure attributable to the intangible asset If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only.
Differentiation of R& D expenses X ltd has been developing a new production process and on 31-10-2006, it has been able to demonstrate that it is likely to enjoy future economic benefits from the research. It incurred Rs. 50 lakhs on this account till 31-10-06 and Rs24 lakhs afterwards up to 31-03-07.As on 31-3-07 it estimates the recoverable amount of know how embodied in the process at Rs. 22.00 lakhs Rs 50.00 lakhs is research expense to be charged to P/L Rs 24.00 lakhs is development expenses intangible asset Rs 2.00 lakhs impairment loss to be debited and asset to be reduced.
Internally Generated Intangible Assets Cost includes: Direct costs Costs of materials and services Costs of employee benefits Fees to register a legal right Amortisation of patents and licences Indirect costs Overheads to the extent necessary to generate the asset and can be allocated on a reasonable and consistent basis Borrowing costs in certain cases Costs not to recognise Selling, administrative and other general overhead expenditure unless it can be directly attributed to preparing the asset for use Inefficiencies and initial operating losses Expenditure on training staff to operate the asset Costs already expensed are never recognised
Costs to be expensed off Cost that do not meet the recognition criteria (including not meeting the definition of an intangible asset), e.g. Internally generated goodwill Internally generated brands, mastheads, publishing titles, usto er lists a d ite s si ilar i su sta e Research Start-up costs (establishment, pre-opening and preoperating costs) Training Advertising and promotional activities Relocating and re-organising (restructuring)
Subsequent Expenditure Subsequent expenditure is capitalised when the item meets Definition of an intangible asset General recognition criteria for intangible assets Recognition of subsequent expenditure will be rare Expense subsequent expenditure on brands, mastheads, publishing titles, customers lists and items similar in substance
Measurement Measurement Initial Measurement Recognise at Cost Active Market required! Subsequent Measurement Cost model Cost less amortisation (if any) and impairment losses (if any) Revaluation Model Revalued amount less amortisation (if any) and impairment losses (if any)
Effects of Revaluation Revaluation Increase in carrying amount To the extent of previous reval decrease Recognise to P&L Decrease in Carrying amount To the extent of previous reval increase Recognise to Other Comprehensive Income Remaining Remaining Recognise to Other Comprehensive Income Recognise to P&L
Useful life Useful life of an Intangible assets Finite Life A limited period of benefit to the entity. Indefinite does not mean infinite Indefinite life No foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
Amortisation and Impairment Intangible assets Finite useful lives amortise over useful life Test impairment, when there is an indication Indefinite useful lives Test impairment annually, and whenever there is an indication that the intangible asset may be impaired
Retirement and Disposal An asset is derecognised: On disposal (e.g., sale or finance lease); or When no future economic benefits are expected from its use or disposal Recognise the consideration received at Fair value Any gain or loss on de recognition Recognise to P&L account Amortisation not to stop unless when asset is no longer used unless : It is fully depreciated or Classified as held for sale
Disclosures For each class of intangible asset, disclose: [IAS 38.118 and 38.122] useful life or amortisation rate amortisation method gross carrying amount accumulated amortisation and impairment losses line items in the income statement in which amortisation is included
Disclosures reconciliation of the carrying amount at the beginning and the end of the period showing: additions (business combinations separately) assets held for sale retirements and other disposals revaluations impairments reversals of impairments amortisation foreign exchange differences other changes basis for determining that an intangible has an indefinite life description and carrying amount of individually material intangible assets certain special disclosures about intangible assets acquired by way of government grants information about intangible assets whose title is restricted contractual commitments to acquire intangible assets
Disclosure Additional Additional disclosures are required about: intangible assets carried at revalued amounts the amount of research and development expenditure recognised as an expense in the current period
IFRIC 12 Service Concession Arrangements A service concession arrangement is an arrangement whereby a government or other public sector body contracts with a private operator to develop (or upgrade), operate and maintain the grantor's infrastructure assets such as roads, bridges, tunnels, airports, energy distribution networks, prisons or hospitals. The grantor controls or regulates what services the operator must provide using the assets, to whom, and at what price, and also controls any significant residual interest in the assets at the end of the term of the arrangement
Types Service Concession Arrangements In one, the operator receives a financial asset, specifically an unconditional contractual right to receive a specified or determinable amount of cash or another financial asset from the government in return for constructing or upgrading a public sector asset, and then operating and maintaining the asset for a specified period of time. This category includes guarantees by the government to pay for any shortfall between amounts received from users of the public service and specified or determinable amounts. In the other, the operator receives an intangible asset a right to charge for use of a public sector asset that it constructs or upgrades and then must operate and maintain for a specified period of time. A right to charge users is not an unconditional right to receive cash because the amounts are contingent on the extent to which the public uses the service.
IFRIC 12 Contd Accounting Financial asset model The operator recognises a financial asset to the extent that it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services. The operator has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator (a) specified or determinable amounts or (b) the shortfall, if any, between amounts received from users of the public service and specified or determinable amounts, even if payment is contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements. The operator measures the financial asset at fair value.
IFRIC 12 Contd Accounting Intangible asset model The operator recognises an intangible asset to the extent that it receives a right (a licence) to charge users of the public service. A right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service. The operator measures the intangible asset at fair value.
Key Differences IND AS VS IGAAP (OLD) Useful life Intangibles acquired as a part of business Combination In process R&D, acquired in business Combination Subsequent Measurement Revaluation Method NO diff between IFRS and I
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IND AS 36 Impairment of Assets By CA Hanumandas Bajaj
IND AS 36: Impairment of Assets Agenda Objective and Scope Key terms Key aspects Disclosures IND AS vs IFRS
Objective and Purpose Objective Assets should be carried at no more than their recoverable amount, i.e. the amount expected to be recovered through use of the asset, or its fair value less cost to sell. Purpose Specify procedures to be followed to ensure that assets are not carried at more than recoverable amount Specify when an impairment loss should be reversed Specify required disclosures
Scope Applies to all assets except Inventories Assets arising from construction contracts Deferred tax assets Financial assets Assets arising from employee benefits Investment property measured at fair value Biological assets measured at fair value less estimated point-ofsale costs Assets arising from insurance contracts Non-current assets classified as held for sale] Applicable to impairment of financial assets like subsidiaries, associates, joint ventures
Key terms Impairment Loss Recoverable Amount Carrying Amount Fair Value less cost to sell Value in Use Cash Generating unit
Key Aspects Indicators of Impairment Goodwill - Allocation Frequency and timing of testing Measurement of Recoverable Amount Allocation of Impairment and Reversal
Indications of impairment External sources Significant decline in market value Technological, market, economic, legal environment Increases in interest rates or rates of return Lower market capitalisation than equity book value Internal sources Evidence of obsolescence or physical damage Discontinuance, disposal, restructuring plans Asset performance declining or expected to decline
Measurement of Recoverable Amount Recoverable amount is the greater of: Fair value less costs to sell Value in use Key Elements in measurement of Fair value less costs to sell Value in use
Fair value less costs to sell Fair value is based on best available evidence, which is (from most reliable to least): Binding sale agreement Active market (current bid price) Best information available Less costs of disposal, excluding Finance costs and income tax expense Costs already recognised as liabilities
Value in use The calculation of value in use should reflect the following elements: an estimate of the future cash flows the entity expects to derive from the asset expectations about possible variations in the amount or timing of those future cash flows the time value of money, represented by the current market risk-free rate of interest the price for bearing the uncertainty inherent in the asset other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset Less costs of disposal, excluding Finance costs and income tax expense Costs already recognised as liabilities
Discount rates The calculation of value in use should reflect the following elements: an estimate of the future cash flows the entity expects to derive from the asset expectations about possible variations in the amount or timing of those future cash flows the time value of money, represented by the current market risk-free rate of interest the price for bearing the uncertainty inherent in the asset other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset Less costs of disposal, excluding Finance costs and income tax expense Costs already recognised as liabilities
Discount rates Pre-tax rate Current market assessments of time value of money and risks specific to the asset/cgu Where not available, start from other discount rates and adjust Should not reflect risks for which cash flow estimates have been adjusted
Cash-generating unit Definition Determine recoverable amount for the individual asset if possible Apply the CGU concept if the asset does not generate cash inflows independent from other assets CGU is smallest identifiable group of assets that generates cash inflows that are largely independent from other (groups of) assets.
CGU Factors to be considered Key factor: ability to generate independent cash inflows If an active market exists for the output of an asset group, then it is a CGU even if the output is only sold to another division with the entity The focus is on cash inflows, not net cash flows Consider how management makes decisions about continuing or disposing of assets / operations Consider how management monitors operations
Goodwill Future economic benefits arising from assets that are not capable of being individually identified and separately recognised Does not generate independent cash flows
Allocation of Goodwill Goodwill Other assets/liabilities + synergies CGU A Synergies CGU B Basic principle: Goodwill is allocated to the acquirer s CGU (or group of CGUs) that are expected to benefit from the synergies of the business combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units
Allocation of Goodwill Initial allocation of goodwill to CGUs: Finalised before the end of the first annual reporting period beginning after the acquisition date Completed on provisional basis before the end of the reporting period in which acquisition took place Each unit or group of units shall: Represent the lowest level within the entity at which goodwill is monitored for internal management purposes Not be larger than an operating segment (IFRS 8) Disposal of operations: goodwill allocated to the carrying amount of the operation when calculating gain/loss
Frequency and timing of testing CGU to which goodwill has been allocated Intangible assets with an indefinite useful life Intangible assets not yet available for use Impairment test Any time within an annual reporting period Annually; Needs to be consistent (same time and every year) At each reporting date, if there is an impairment indicator; Before the end of the period of initial recognition
Frequency - Summary CGU with GW, intangible assets with indefinite lives or not available for use Asset / CGU other than above yes impairment test recent calculation can be used if criteria are met no impairment test at least annually yes impairment test - any time within an annual reporting period - consistency - initial recognition no impairment test Indication? Indication?
Allocating impairment loss Step by Step Are there: impairment indicators for assets/ CGUs intangible assets with indefinite useful lives intangible assets not available for use? Test assets / CGUs for impairment Recognise impairment loss on assets / CGUs NO Test for impairment larger CGU containing goodwill Book impairment loss First allocate to GW Other assets in CGU on pro-rata basis
Reversal of impairment loss Assess if impairment loss may no longer exist Individual asset Reverse to the extent of increase in RA and not > CA in the absence of impairment loss Cash generating unit Without GW With GW No loss reversal on GW Charge to P&L or Reserve Adjust future depreciation Allocate pro-rata with the CA of other assets
Key Disclosures By category of asset Amount of impairment losses recognised / reversed during the period in Income statement and Directly to equity If recognised in income statement disclosure of where items are included Segment reporting information
Key Disclosure By category of asset Disclosures when impairment losses are material for an individual asset Information on basis used for determining recoverable amount Discount rate used
IND AS 36 vs AS 28 Impairment loss allocation Under IND AS36, impairment loss is first allocated to goodwill in a cash-generating unit with balance allocated over other assets pro-rata. Under AS28, for allocation of goodwill to a cash-generating unit, bottom-up and then top-down test performed leading to differences in measurement. Acquired & Internally generated intangibles Under IND AS36, irrespective of an indication of impairment, annual impairment reviews are required for intangible assets with indefinite useful lives and for assets not yet ready to use as well as goodwill acquired in a business combination. Under AS28, annual impairment review is required for intangible assets amortized over ten years from the date when the asset is available for use and for assets not yet ready for use.
IND AS 36 vs AS 28 Reversal of Impairment Loss on Goodwill Reversal of impairment loss on goodwill is not permitted under IND AS36. AS28 requires reversal of impairment loss on goodwill when impairment loss was caused by a specific external event of exceptional nature that is not expected to recur and subsequent external events have occurred that reverse the effect of that event Applicability to Discontinued Operations Impairment IND AS36 is not applicable to impairment on assets under discontinuing operations which is covered under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. AS-28 includes section on impairment in case of Discontinuing Operations
Illustrations Illustration 1 External Sources Businesses in the European telecom sector invested over $100 bn in third generation (3G ) mobile phone operating licences but had to reduce the reported value of the licences very quickly when they realized that the market for the related services was significantly lower than expected. The reduction in the reported value had a major impact on their income statements, their overall value and, in some cases, their ability to continue in business. Illustration 2 Impairment loss impact on depreciation A piece of machinery was originally acquired for Rs.1,00,000.It was expected to have a useful life of 10 years and no residual value. At the start of year six, there was a downturn in demand due to a competitor product entering the market, which has led to an impairment of the asset. The impairment has been calculated as being Rs.20,000. Although it is expected that the asset will continue to have a remaining 5-year life. At the end of year 5, the asset had a carrying value of Rs.50,000 ( Rs.1,00,000 X 5/ 10 yrs). The impairment reduces the carrying amount of the assets to Rs.30,000 ( Rs.50,000 less Rs.20,000) which should be depreciated over the remaining life of 5 years.
Illustrations Illustration 3 Impairment of Asset within CGU A machine has suffered physical damage but is still working, although not as well as before it was damaged. The machine's FV less costs to sell is less than its carrying amount. The machine does not generate independent cash inflows. The smallest identifiable group of assets that includes the machine and generates cash inflows that are largely independent of the cash inflows from other assets is the production line to which the machine belongs. The recoverable amount of the production line shows that the production line taken as a whole is not impaired. Assumption 1: budgets/forecasts approved by management reflect no commitment of management to replace the machine. Recoverable amount of machine alone cannot be estimated because machine's value in use: (a) may differ from its FV less costs to sell; and (b) can be determined only for CGU to which the machine belongs (the production line) The production line is not impaired. Therefore, no impairment loss is recognised for the machine. Nevertheless, the entity may need to reassess the depreciation period or the depreciation method for the machine. Perhaps a shorter depreciation period or a faster depreciation method is required to reflect the expected remaining useful life of the machine or the pattern in which economic benefits are expected to be consumed by the entity.
Illustrations Assumption 2: budgets/forecasts approved by management reflect a commitment of management to replace the machine and sell it in the near future. Cash flows from continuing use of the machine until its disposal are estimated to be negligible. The machine's value in use can be estimated to be close to its fair value less costs to sell. Therefore, the recoverable amount of the machine can be determined and no consideration is given to the CGU to which the machine belongs (ie the production line). Because the machine's fair value less costs to sell is less than its carrying amount, an impairment loss is recognised for the machine. Illustration 4 Cash Generating Unit A bus company has a contract with a local education authority to transport children to and from school. There are ten routes contracted to this particular bus company. One of the routes is making losses because it collects children from remote areas and as a result, the number of children collected is much lower than on the highly populated routes. The bus company does not have the ability to withdraw from individual routes. The ten routes are contracted for as a group. The ten routes should therefore be grouped together as one cash- generating unit.
Illustrations Illustration 5 Goodwill Allocation An entity sells for Rs.100,000 an operation that was part of a cash-generating unit to which goodwill has been allocated. The goodwill allocated to the unit cannot be identified or associated with an asset group at a level lower than that unit, except arbitrarily. The recoverable amount of the portion of the cash-generating unit retained is Rs.300,000. Because the goodwill allocated to the cash-generating unit cannot be non-arbitrarily identified or associated with an asset group at a level lower than that unit, the goodwill associated with the operation disposed of is measured on the basis of the relative values of the operation disposed of and the portion of the unit retained. Therefore, 25 per cent [100,000 / (100,000+300,000) ] of the goodwill allocated to the cashgenerating unit is included in the carrying amount of the operation that is sold.
Illustrations Illustration 6 Cash Generating Unit A company operates a mine in a country where legislation requires that the owner must restore the site on completion of its mining operations. The cost of restoration includes the replacement of the overburden, which must be removed before mining operations commence. The carrying amount of the provision for restoration costs is Rs.500, which is equal to PV of restoration costs. The entity is testing the mine for impairment. The CGU for mine is the mine as a whole. The entity has received various offers to buy the mine at a price of around Rs.800. For this price, buyer will assume obligation to restore the overburden. Disposal costs for the mine are negligible. The value in use of the mine is approximately Rs.1,200, excluding restoration costs. The carrying amount of the mine is Rs.1,000 CGU s FV less costs to sell is Rs.800 (after considering restoration costs already provided for) Value in Use for CGU will be Rs.700 (Rs.1,200 less Rs.500 restoration costs) Carrying amount of CGU is Rs.500, which is the carrying amount of the mine (Rs.1,000) less the carrying amount of the provision for restoration costs (Rs.500). Therefore, the recoverable amount of CGU exceeds its carrying amount.
Illustrations Illustration 7 Cash Generating Unit Impairment A cash generating unit contains : Property, plant and equipment Patent Goodwill Rs.60 Rs.40 Rs.20 Rs.120 An annual impairment review is required as the cash generating unit contains goodwill. The most recent review assesses the recoverable amount to be Rs.90. An impairment loss of Rs.30 has occurred and is charged to the income statement. Firstly, the entity reduces the carrying amount of the goodwill, As the impairment loss exceeds the value of goodwill within the cash-generating unit, all goodwill is written off. The entity then reduces the carrying amount of other assets in the unit on a pro- rata basis. Hence the remaining loss of Rs.10 will be allocated pro-rata between the property, plant and equipment and the patent, reducing their carrying amounts to Rs.54 and Rs.36 respectively.
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