IND AS 38 Intangible Assets 1
What do you mean by Intangible Assets An intangible assets is an identifiable nonmonetary assets without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. Three important features :- 1. A resource controlled by the entity; 2. Identifiable non-monetary item without physical substance; 3. Capability of generating future economic benefit. 2
How do we get Intangible Assets? Separate acquisition; Development phase of internal project; Acquisition in business combination Includes internally generated intangible assets of the acquiree and acquisition of goodwill which is termed as purchased goodwill; Internally generated intangible asset Not recognized except business combination. 3
Exclusions from IND AS - 38 Intangible assets held by an entity for sale in the ordinary course of business (Ind AS 2, Inventories); Deferred tax assets (Ind AS 12, Income Taxes); Leases that are within the scope of Ind AS 17, Leases; Assets arising from employee benefits (Ind AS 19, Employee Benefits); Financial assets as defined in Ind AS 32; Goodwill acquired in a business combination (Ind AS 103, Business Combinations); 4
Exclusions from IND AS 38 Cont Deferred acquisition costs and intangible assets, arising from an insurer s contractual rights under insurance contracts within the scope of Ind AS 104, Insurance Contracts; Exploration and evaluation assets (Ind AS 106, Exploration for and Evaluation of Mineral Resources); Expenditure on the development and extraction of minerals, oil, natural gas and similar nonregenerative resources. 5
Same Principles in IND-AS 38 & AS-26 Intangible assets is initially measured at cost. Development cost of internal project. Internally generated goodwill, brands, mastheads, customer lists not recognized. Past expenses not be recognized as an asset. 6
Overview of Key Differences 1. Separately acquired 2. Acquired as government grants 3. Purchased on deferred payment terms 4. Applicability to assets of specialized nature 5. Acquired as a part of Business Combination 6. Useful Life 7. Subsequent measurement of intangible assets 8. Amortization of intangible assets other than toll roads 7
Overview of Key Differences. Cont 9. Amortization of toll roads under Service Concession Agreement ( SCA ) 10.Review of amortization method and residual values 11. Impairment of intangible assets 12. Income from incidental operations while an assets is being developed 8
1. Separately acquired Criteria of probable inflow of expected future economic benefits is always considered to be satisfied, even if there is uncertainty about timing or amount of inflow. (Para 25) AS-26 does not contain explicit provision. 9
2. Acquired as government grants Acquired as free of charge or for nominal consideration by way of government grants, recognize both grant and intangible assets at fair value. (Para 44) Under Indian GAAP, this are recognized at nominal value or at acquisition cost plus directly attributable expenditure. 10
3. Purchased on deferred payment terms Difference between cash price equivalent and total payment is recognized as interest over the period of credit. (Para 32) AS-26 does not require to separate finance element. 11
4. Applicability to assets of specialized nature AS-26 (Para 5) does not apply to accounting for discount or premium relating to borrowing and ancillary cost, share issue expenses or discount allowed on the issue of shares. Acceptable practice to amortize these expenses over the period of benefits i.e. normally 3 to 5 Years. As per Ind AS 109, in case of debt securities are amortized to profit/loss using effective interest method. Ind AS 32 requires that equity transaction costs accounted for as deduction from equity. 12
5. Acquired as a part of Business Combination Fair value at the acquisition date. (Para 33) Recorded by the acquirer irrespective of whether the asset had been recognized by the acquiree before business combination. Consequently, purchased brands, customer lists, trade mark, etc which can not be recognized, is recognized as intangible assets. 13
5. Acquired as a part of Business Combination Bk Value ( rore) M Value (Crore) Land and Building 120 300 Plant & Machinery 500 350 Inventories/Investment/Receivable 400 205 Total 1020 855 Liabilites-12% Debenture 100 100 Current Liabilities 200 190 Total 300 290 Net Assets 720 565 Equity Shares 640 640 Cash 80 80 Total Purchase consideration 720 720 Difference 0 155 Identifiable Assets Patents, License, Trademark 135 Goodwill Residual 20 14
5. Acquired as a part of Business Combination According to AS-26:- Intangible Assets can not be recognized by acquirer if not recognized by acquiree. 15
6. Useful Life (Para 88-96) Assess whether useful life is finite or indefinite. If finite useful life then it is amortised. No amortization of indefinite useful life, rather tested for impairment at least on annual basis. According to AS-26, assumption that useful life is always finite. Rebuttable presumption that it can not exceed ten years, unless persuasive evidence for amortizing over a longer period. 16
7. Subsequent measurement of intangible assets Cost model (Para 74) Cost less amortization less impairment Revaluation model (Para 75) o Only in case an active market exists. o Other Intangible Assets in that class shall also use same model unless there is no active market. o Revaluation not permitted if that assets not previously recognized as an assets and initial recognition at amounts other than cost. ofrequency of revaluation depends on volatility of fair value. 17
7. Subsequent measurement of intangible assets.. Cont In case intangible assets s carrying amount increases as a result of revaluation increase shall be recognized in other comprehensive income. However, increase in profit or loss to the extent it reverse revaluation, decrease of same assets previously recognized in profit or loss. In case of decrease to profit or loss, unless such decrease shall be recognized in other comprehensive income to the extent of any credit balance in revaluation surplus of that assets. AS 26 requires that after initial recognition it should be carried at cost less amortization less impairment. Revaluation is prohibited. 18
8. Amortization of intangible assets other than toll roads Straight line, diminishing balance and unit of production method based on expected pattern of consumption. Para 98A contains a rebuttable presumption that an amortization method that is based on revenue generated by an activity that includes the use of an intangible assets is inappropriate. AS-26 does not contain any rebuttable presumption for amortization based on revenue. However, contains similar requirements. 19
9. Amortization of toll roads under Service Concession Agreement ( SCA ) According to Para 7 AA, amortization method as per this standard does not apply to toll road recognized in financial statements for the period immediately before the beginning of first IND-AS FS. Option to continue for old toll roads, however, not allowed for new toll road arising under SCA entered (i.e. 1 st April 2016) into after implementation of Ind AS. (Para D22 of IND-AS101) Schedule II to the Cos Act, 2013 allows revenue based amortization for toll roads created under SCA. 20
10. Review of amortization method and residual values Change in amortization method would be change in accounting estimate to be applied prospectively, in accordance AS-26 the same would be change in accounting policy. Residual value is reviewed at least at each financial year end. AS-26 specifically requires that residual value is not subsequently increased. 21
11. Impairment of intangible assets Finite useful life it is amortized and tested for impairment, if indicator exists. Indefinite useful life not amortized but tested for impairment annually and whenever there is indicator exists. (Para 107 & 108) 22
12. Income from incidental operations while an assets is being developed (Para 31) Decide whether activity is necessary to bring the assets to condition necessary for it to capable of operating in the manner intended by management. Example New process for production of chemical where company is confident to patent the process. Activity necessary to bring Intangible Assets into intended use, income deducted from cost. Example Sale of sample produced during testing of new process. 23
Web Site Cost Corresponding to SIC 32 Website is partly tangible and partly intangible. Hardware cost is considered as PPE and website development and operation as intangible. Recognized as intangible, If only if :- o Probable that future benefits will flow and cost can be measured reliably; and o Six conditions of development phase is to be satisfied. 24
Web Site Cost Corresponding to SIC 32 Stages of web site developments:- 1. Planning Expense 2. Application and Infrastructure Development 3. Graphical design development 4. Content Development 5. Operating stage Expense Useful life should be short. 25
First time adoption Ind AS 101 Voluntary exemptions for deemed Cost o o Fair value or Previous GAAP carrying amount Not mandatory to use same exemption for PPE and Intangible Assets Amortization of toll road based on revenue under Service Concession Agreement ( SCA ) only and not all assets under SC A. 26
Additional Disclosures In case of Revaluation model, by class of intangible assets:- o o o Effective date of revaluation; Carrying amount of revalued Intangible Assets ; and Carrying amount if cost model would have been followed. Movement in revaluation surplus relating to intangible assets. 27
THANK YOU 28