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UNIT 6: ACCOUNTING STANDARD 26

INTANGIBLE ASSETS

LEARNING OUTCOMES
After studying this unit, you will be able to comprehend–
 Definition of Intangible Assets
 Parameters for Recognition and Initial Measurement of an Intangible
Asset
• Separate Acquisition
• Acquisition as part of an Amalgamation
• Acquisition by way of a Government Grant
• Exchanges of Assets
• Internally Generated Goodwill and other Intangible Assets
 Measurement Subsequent to Initial Recognition
 Principles for
• Amortisation Period
• Amortisation Method
• Residual Value
• Review of Amortisation Period and Amortisation Method
 Retirements and Disposals
 Disclosures as per the standard.

6.1 INTRODUCTION
The objective of AS 26 is to prescribe the accounting treatment for intangible
assets that are not dealt with specifically in another Accounting Standard. AS 26
requires an enterprise to recognise an intangible asset if, and only if, certain
criteria are met. AS 26 also specifies how to measure the carrying amount of
intangible assets and requires certain disclosures about intangible assets.

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6.2 SCOPE
AS 26 should be applied by all enterprises in accounting for intangible assets,
except:
a. Intangible assets that are covered by another Accounting Standard, such as:
(a) intangible assets held by an enterprise for sale in the ordinary course
of business (AS 2, Valuation of Inventories and AS 7, Construction
Contracts)
(b) deferred tax assets (AS 22, Accounting for Taxes on Income)
(c) leases that fall within the scope of AS 19, Leases; and
(d) goodwill arising on an amalgamation (AS 14 (Revised), Accounting for
Amalgamations) and goodwill arising on consolidation (AS 21
(Revised), Consolidated Financial Statements)
b. Financial assets.
c. Mineral rights and expenditure on the exploration for, or development and
extraction of, minerals, oil, natural gas and similar non-regenerative
resources and
d. Intangible assets arising in insurance enterprises from contracts with
policyholders.
e. expenditure in respect of termination benefits.
However, AS 26 applies to other intangible assets used (such as computer
software), and other expenditure (such as start-up costs), in extractive industries
or by insurance enterprises.
AS 26 also applies to:
(i) expenditure on advertising, training, start - up cost
(ii) Research and development activities
(iii) Right under licensing agreements for items such as motion picture films,
video recordings, plays, manuscripts, patents and copyrights. These items
are excluded from the scope of AS 19.
(iv) the underlying intangible asset in finance lease after its initial recognition.

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6.3 DEFINITIONS
An asset is a resource:

a. Controlled by an enterprise as a result of past events and

b. From which future economic benefits are expected to flow to the enterprise.
Monetary assets are money held and assets to be received in fixed or
determinable amounts of money.
Non-monetary assets are assets other than monetary assets.
Amortisation is the systematic allocation of the depreciable amount of an
intangible asset over its useful life.
Depreciable amount is the cost of an asset less its residual value.
Useful life is either:

(a) the period of time over which an asset is expected to be used by the
enterprise; or
(b) the number of production or similar units expected to be obtained from the
asset by the enterprise.
Fair value of an asset is the amount for which that asset could be exchanged
between knowledgeable, willing parties in an arm's length transaction.
An active market is a market where all the following conditions exist:
a. The items traded within the market are homogeneous.
b. Willing buyers and sellers can normally be found at any time and
c. Prices are available to the public.
An impairment loss is the amount by which the carrying amount of an asset
exceeds its recoverable amount.
Carrying amount is the amount at which an asset is recognised in the balance
sheet, net of any accumulated amortisation and accumulated impairment losses
thereon.

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A financial asset is any asset that is:
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a. Cash;

b. A contractual right to receive cash or another financial asset from another

enterprise;
c. A contractual right to exchange financial instruments with another
enterprise under conditions that are potentially favourable; or
d. An ownership interest in another enterprise.
Termination benefits are employee benefits payable as a result of either:

a. an enterprise’s decision to terminate an employee’s employment before the

normal retirement date; or
b. an employee’s decision to accept voluntary redundancy in exchange for
those benefits (voluntary retirement).
Intangible Asset is
• 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.
Enterprises frequently expend resources, or incur liabilities, on the acquisition,
development, maintenance or enhancement of intangible resources such as
scientific or technical knowledge, design and implementation of new processes or
systems, licences, intellectual property, market knowledge and trademarks
(including brand names and publishing titles). Common examples are computer
software, patents, copyrights, motion picture films, customer lists, mortgage
servicing rights, fishing licences, import quotas, franchises, customer or supplier
relationships, customer loyalty, market share and marketing rights. Goodwill is
another example of an item of intangible nature which either arises on acquisition
or is internally generated.
Not all the items described above will meet the definition of an intangible asset,
that is, identifiability, control over a resource and expectation of future economic

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benefits flowing to the enterprise. If an item covered by AS 26 does not meet the
definition of an intangible asset, expenditure to acquire it or generate it internally
is recognised as an expense when it is incurred.
Some intangible assets may be contained in or on a physical substance such as a
compact disk (in the case of computer software), legal documentation (in the case
of a licence or patent) or film (in the case of motion pictures). The cost of the
physical substance containing the intangible assets is usually not significant.
Accordingly, the physical substance containing an intangible asset, though tangible
in nature, is commonly treated as a part of the intangible asset contained in or on
it.
In some cases, an asset may incorporate both intangible and tangible elements
that are, in practice, inseparable. Judgement is required to assess as to which
element is predominant. For example, computer software for a computer-
controlled machine tool that cannot operate without that specific software is an
integral part of the related hardware and it is treated as a fixed asset. The same
applies to the operating system of a computer. Where the software is not an
integral part of the related hardware, computer software is treated as an
intangible asset.

6.4 IDENTIFIABILITY
• The definition of an intangible asset requires that an intangible asset be
identifiable. To be identifiable, it is necessary that the intangible asset is
clearly distinguished from goodwill.

• An intangible asset can be clearly distinguished from goodwill if the asset is

separable which means that enterprise could rent, sell, exchange or
distribute the specific future economic benefits attributable to the asset
without also disposing of future economic benefits that flow from other
assets used in the same revenue earning activity.
• Separability is not a necessary condition for identifiability since an
enterprise may be able to identify an asset in some other way. For example,
if an intangible asset is acquired with a group of assets, the transaction may
involve the transfer of legal rights that enable an enterprise to identify the
intangible asset. Also, even If an asset generates future economic benefits

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only in combination with other assets, the asset is identifiable if the

enterprise can identify the future economic benefits that will flow from the
asset.

6.5 CONTROL
An enterprise controls an asset if the enterprise has the power to obtain the
future economic benefits flowing from the underlying resource and also can
restrict the access of others to those benefits. The capacity of an enterprise to
control the future economic benefits from an intangible asset would normally
stem from legal rights that are enforceable in a court of law. However, legal
enforceability of a right is not a necessary condition for control since an
enterprise may be able to control the future economic benefits in some other
way.
Market and technical knowledge may give rise to future economic benefits. An
enterprise controls those benefits if, for example, the knowledge is protected by
legal rights such as copyrights, a restraint of trade agreement or by a legal duty
on employees to maintain confidentiality.
Future economic benefit is also flown from the skill of labour and customer
loyalty but usually this flow of benefits cannot be controlled by the enterprise as
employees may leave the enterprise anytime or even loyal customers may decide
to purchase goods and services from other suppliers. Hence, these items don’t
even qualify as intangible asset as per the definition given in AS 26.
Example 1:
Moon Limited has provided training to its staff on various new topics like GST, AS,
Ind AS etc. to ensure the compliance as per the required law. Can the company
recognise such cost of staff training as intangible asset?
In this case, it is clear that the company will obtain the economic benefits from the
work performed by the staff as it increases their efficiency. But it does not have
control over them because staff could choose to resign the company at any time.
Hence the company lacks the ability to restrict the access of others to those
benefits. Therefore, the staff training cost does not meet the definition of an
intangible asset.

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6.6 FUTURE ECONOMIC BENEFITS

The future economic benefits flowing from an intangible asset may include
revenue from the sale of products or services, cost savings, or other benefits
resulting from the use of the asset by the enterprise. For example, the use of
intellectual property in a production process may reduce future production costs
rather than increase future revenues.

6.7 RECOGNITION AND INITIAL MEASUREMENT

OF AN INTANGIBLE ASSET
The recognition of an item as an intangible asset requires an enterprise to
demonstrate that the item meets the definition of an intangible asset and
recognition criteria set out as below:
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.
An intangible asset should be measured initially at cost.

6.8 SEPARATE ACQUISITION

If an intangible asset is acquired separately, the cost of the intangible asset can
usually be measured reliably. This is particularly so when the purchase
consideration is in the form of cash or other monetary assets.
The cost of an intangible asset comprises:
• its purchase price,

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• any import duties and other taxes (other than those subsequently
recoverable by the enterprise from the taxing authorities), and

• any directly attributable expenditure on making the asset ready for its
intended use. Directly attributable expenditure includes, for example,
professional fees for legal services.

• Any trade discounts and rebates are deducted in arriving at the cost.
If an intangible asset is acquired in exchange for shares or other securities of the
reporting enterprise, the asset is recorded at its fair value, or the fair value of the
securities issued, whichever is more clearly evident.

6.9 ACQUISITION AS PART OF AN

AMALGAMATION
An intangible asset acquired in an amalgamation in the nature of purchase is
accounted for in accordance with AS 14 (Revised). In accordance with AS 26:
a. A transferee recognises an intangible asset that meets the recognition
criteria, even if that intangible asset had not been recognised in the
financial statements of the transferor and
b. If the cost (i.e. fair value) of an intangible asset acquired as part of an
amalgamation in the nature of purchase cannot be measured reliably, that
asset is not recognised as a separate intangible asset but is included in
goodwill.

Where in preparing the financial statements of the transferee company, the

consideration is allocated to individual identifiable assets and liabilities on the
basis of their fair values at the date of amalgamation.
Hence, judgement is required to determine whether the cost (i.e. fair value) of an
intangible asset acquired in an amalgamation can be measured with sufficient
reliability for the purpose of separate recognition. Quoted market prices in an
active market provide the most reliable measurement of fair value. The
appropriate market price is usually the current bid price. If current bid prices are
unavailable, the price of the most recent similar transaction may provide a basis
from which to estimate fair value, provided that there has not been a significant

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change in economic circumstances between the transaction date and the date at
which the asset's fair value is estimated.

If no active market exists for an asset, its cost reflects the amount that the
enterprise would have paid, at the date of the acquisition, for the asset in an
arm's length transaction between knowledgeable and willing parties, based on
the best information available. The cost initially recognised for the intangible
asset in this case is restricted to an amount that does not create or increase any
capital reserve arising at the date of the amalgamation.

Quoted market price

Determination of Fair value

Current bid price

If active market exists

Price of the most

recently similar
transaction

Amount that the

If active market does
enterprise would
not exist
have paid

6.10 ACQUISITION BY WAY OF A GOVERNMENT

GRANT
In some cases, an intangible asset may be acquired free of charge, or for nominal
consideration, by way of a government grant. This may occur when a government
transfers or allocates to an enterprise intangible assets such as airport landing
rights, licences to operate radio or television stations, import licences or quotas
or rights to access other restricted resources.

AS 12, requires that government grants in the form of non-monetary assets, given
at a concessional rate should be accounted for on the basis of their acquisition
cost.

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Accordingly, intangible asset acquired free of charge, or for nominal

consideration, by way of government grant is recognised at a nominal value or at
the acquisition cost, as appropriate; any expenditure that is directly attributable
to making the asset ready for its intended use is also included in the cost of the
asset.

6.11 EXCHANGE OF ASSETS

An intangible asset may be acquired in exchange or part exchange for another
asset. In such a case, the cost of the asset acquired is determined in accordance
with the principles laid down in this regard in AS 10.

The cost of such an item is measured at fair value unless:

(a) the exchange transaction lacks commercial substance or

(b) the fair value of neither the asset(s) received nor the asset(s) given up is
reliably measurable.

The acquired item is measured in this manner even if an enterprise cannot

immediately derecognize the asset given up. If the acquired item is not measured at
fair value, its/their cost is measured at the carrying amount of the asset(s) given up.

6.12 INTERNALLY GENERATED GOODWILL

Internally generated goodwill is not recognised as an asset because it is not an
identifiable resource controlled by the enterprise that can be measured reliably at
cost.

Differences between the market value of an enterprise and the carrying amount
of its identifiable net assets at any point in time may be due to a range of factors
that affect the value of the enterprise. However, such differences cannot be
considered to represent the cost of intangible assets controlled by the enterprise.

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6.13 INTERNALLY GENERATED INTANGIBLE

ASSETS
It is sometimes difficult to assess whether an internally generated intangible asset
qualifies for recognition. It is often difficult to:
(a) identify whether, and the point of time when, there is an identifiable asset
that will generate probable future economic benefits; and
(b) determine the cost of the asset reliably. In some cases, the cost of
generating an intangible asset internally cannot be distinguished from the
cost of maintaining or enhancing the enterprise’s internally generated
goodwill or of running day-to- day operations.
To assess whether an internally generated intangible asset meets the criteria for
recognition, an enterprise classifies the generation of the asset into
➢ Research Phase &
➢ Development Phase
If an enterprise cannot distinguish the research phase from the development
phase of an internal project to create an intangible asset, the enterprise treats the
expenditure on that project as if it were incurred in the research phase only.

6.14 RESEARCH PHASE

Research is original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding.
No intangible asset arising from research or from the research phase should be
recognised. Expenditure on research or on the research phase should be
recognised as an expense when it is incurred.
Examples of research activities are:
a. Activities aimed at obtaining new knowledge.

b. The search for, evaluation and final selection of, applications of research
findings or other knowledge.

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c. The search for alternatives for materials, devices, products, processes, systems
or services;

d. The formulation, design, evaluation and final selection of possible alternatives

for new or improved materials, devices, products, processes, systems or
services.

6.15 DEVELOPMENT PHASE

Development is the application of research findings or other knowledge to a plan
or design for the production of new or substantially improved materials, devices,
products, processes, systems or services prior to the commencement of
commercial production or use.

An intangible asset arising from development (or from the development phase of
an internal project) should be recognised 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.

Examples of development activities are:

a. The design, construction and testing of pre-production or pre-use
prototypes and models.
b. The design of tools, jigs, moulds and dies involving new technology.

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c. The design, construction and operation of a pilot plant that is not of a scale
economically feasible for commercial production and

d. The design, construction and testing of a chosen alternative for new or

improved materials, devices, products, processes, systems or services.
AS 26 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 recognised as intangible assets.

To demonstrate how an intangible asset will generate probable future economic

benefits, an enterprise assesses the future economic benefits to be received from
the asset using the principles in Accounting Standard on Impairment of Assets. If
the asset will generate economic benefits only in combination with other assets,
the enterprise applies the concept of cash generating units as set out in
Accounting Standard on Impairment of Assets.

6.16 COST OF AN INTERNALLY GENERATED

INTANGIBLE ASSET
The cost of an internally generated intangible asset is the sum of expenditure
incurred from the time when the intangible asset first meets the recognition
criteria. Reinstatement of expenditure recognised as an expense in previous
annual financial statements or interim financial reports is prohibited.

The cost of an internally generated intangible asset comprises all expenditure that
can be directly attributed, or allocated on a reasonable and consistent basis, to
creating, producing and making the asset ready for its intended use from the time
when the intangible asset first meets the recognition criteria. The cost includes, if
applicable:
a Expenditure on materials and services used or consumed in generating the
intangible asset.
b. The salaries, wages and other employment related costs of personnel
directly engaged in generating the asset.

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Any expenditure that is directly attributable to generating the asset, such as
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fees to register a legal right and the amortisation of patents and licenses
that are used to generate the asset (E.g., borrowing cost as per para 4(e) of
AS 16, etc.) and
d. Overheads that are necessary to generate the asset and that can be
allocated on a reasonable and consistent basis to the asset. Allocations of
overheads are made on bases similar to those discussed in AS 2 & AS 16.
The following are not components of the cost of an internally generated
intangible asset, these should be expensed off in profit and loss account:
a. Selling, administrative and other general overhead expenditure unless this
expenditure can be directly attributed to making the asset ready for use.

b. Clearly identified inefficiencies and initial operating losses incurred before

an asset achieves planned performance and
c. Expenditure on training the staff to operate the asset.
Example
An enterprise is developing a new production process. During the year 20X1,
expenditure incurred was ` 10 lacs, of which ` 9 lacs was incurred before 1
December 20X1 and 1 lac was incurred between 1 December 20X1 and 31
December 20X1. The enterprise is able to demonstrate that, at 1 December 20X1,
the production process met the criteria for recognition as an intangible asset. The
recoverable amount of the know-how embodied in the process (including future
cash outflows to complete the process before it is available for use) is estimated to
be ` 5 lacs.

At the end of 20X1, the production process is recognised as an intangible asset at a

cost of ` 1 lac (expenditure incurred since the date when the recognition criteria
were met, that is, 1 December 20X1). The ` 9 lacs expenditure incurred before 1
December 20X1 is recognised as an expense because the recognition criteria were
not met until 1 December 20X1. This expenditure will never form part of the cost of
the production process recognised in the balance sheet.
During the year 20X2, expenditure incurred is ` 20 lacs. At the end of 20X2, the
recoverable amount of the know-how embodied in the process (including future

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cash outflows to complete the process before it is available for use) is estimated to
be ` 19 lacs.
At the end of the year 20X2, the cost of the production process is ` 21 lacs ( ` 1 lac
expenditure recognised at the end of 20X1 plus ` 20 lacs expenditure recognised in
20X2). The enterprise recognises an impairment loss of ` 2 lacs to adjust the
carrying amount of the process before impairment loss ( ` 21 lacs) to its recoverable
amount (` 19 lacs). This impairment loss will be reversed in a subsequent period if
the requirements for the reversal of an impairment loss in AS 28, are met.

6.17 RECOGNITION OF AN EXPENSE

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 or

b. The item is acquired in an amalgamation in the nature of purchase and

cannot be recognised as an intangible asset. It forms part of the amount
attributed to goodwill (capital reserve) at the date of acquisition.
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.
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 item of 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 new facility 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;

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(c) expenditure on advertising and promotional activities; and

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

Past Expenses not to be recognised as an Asset

Expenditure on an intangible item that was initially recognised as an expense 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.

6.18 SUBSEQUENT EXPENDITURE

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.
Subsequent expenditure on brands, mastheads, publishing titles, customer lists
and items similar in substance is always recognised as an expense to avoid the
recognition of internally generated goodwill.
The nature of intangible assets is such that, in many cases, it is not possible to
determine whether subsequent expenditure is likely to enhance or maintain the
economic benefits that will flow to the enterprise from those assets. 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.

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6.19 MEASUREMENT SUBSEQUENT TO INITIAL

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

6.20 AMORTISATION PERIOD

The depreciable amount of an intangible asset should be allocated on a
systematic basis over the best estimate of its useful life. Amortisation should
commence when the asset is available for use.
Estimates of the useful life of an intangible asset generally become less reliable as
the length of the useful life increases. AS 26 adopts 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 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 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 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

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

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.

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 and
c. Discloses the reasons why the presumption is rebutted and the factors that
played a significant role in determining the useful life of the asset.
Example:
A. An enterprise has purchased an exclusive right to generate hydroelectric power
for 60 years. The costs of generating hydro-electric 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 60 years.
The enterprise amortises the right to generate power over 60 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 30
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 30 years.
The enterprise amortises the right to operate the motorway over 30 years, unless
there is evidence that its useful life is shorter.
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 the legal
rights are renewable and renewal is virtually certain.

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The useful life of an intangible asset may be very long but it is always finite.

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 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.

Example:
Company X has purchased a copyright to produce a safety equipment for sale in the
market. The rights have been obtained for 10 years. Hence, company is amortizing
the intangible asset in 10 years. After 7 years, due to change in the environmental
law, safety equipments produced out of new technology are only considered valid.

In above scenario, the company need to write off the balance amount in the year of
implementation of the law.

6.21 AMORTISATION METHOD

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. 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.

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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. For example, the amortisation of intangible
assets used in a production process is included in the carrying amount of
inventories.

6.22 RESIDUAL VALUE

Residual value is the amount, which an enterprise expects to obtain for an asset at
the end of its useful life after deducting the expected costs of disposal.
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.
A residual value other than zero implies that an enterprise expects to dispose of
the intangible asset before the end of its economic life.

6.23 REVIEW OF AMORTISATION PERIOD AND

AMORTISATION METHOD
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.

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6.24 RECOVERABILITY OF THE CARRYING

AMOUNT-IMPAIRMENT LOSSES
Impairment losses of intangible assets are calculated on the basis of AS 28 . AS 28
“Impairment of Assets” is covered in next unit of this chapter.
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.
AS 26 requires an enterprise to test for impairment, at least annually, the carrying
amount of an intangible asset that is not yet available for use.
Example:
X limited is developing a customized software for ` 10 Cr. It will take 3 years to
complete development. Present value of future economic benefit is considered to be
` 15 Cr. After 2 years, 70% work is completed. However, due to change in market
conditions, present value of future economic benefits are estimated to be ` 6 Cr
only.
Company should recognize ` 1 Cr as impairment loss on "Intangible asset under
development” as per AS 28. Only ` 6 Cr can be shown as "Intangible asset under
development”. Company cannot capitalize any further amount till the time
recoverable amount increases even if work of ` 10 Cr is completed.

6.25 RETIREMENTS AND DISPOSALS

An intangible asset should be derecognised (eliminated from the balance sheet) if

➢ disposed or
➢ when no future economic benefits are expected from its use and
subsequent disposal.

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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.
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.

6.26 DISCLOSURE
The financial statements should disclose the following for each class of intangible
assets, distinguishing between internally generated intangible assets and other
intangible assets:
1. The useful lives or the amortisation rates used.
2. The amortisation methods used.
3. The gross carrying amount and the accumulated amortisation (aggregated
with accumulated impairment losses) at the beginning and end of the
period.
4. A reconciliation of the carrying amount at the beginning and end of the
period showing:
I. Additions, indicating separately those from internal development and
through amalgamation.
II. Retirements and disposals.
III. Impairment losses recognised in the statement of profit and loss
during the period.
IV Impairment losses reversed in the statement of profit and loss during
the period.
V Amortisation recognised during the period and
VI Other changes in the carrying amount during the period.
A class of intangible assets is a grouping of assets of a similar nature and
use in an enterprise's operations. Examples of separate classes may include:

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(a) brand names;
(b) mastheads and publishing titles;
(c) computer software;
(d) licences and franchises;
(e) copyrights, and patents and other industrial property rights, service
and operating rights;
(f) recipes, formulae, models, designs and prototypes; and
(g) intangible assets under development.

6.27 OTHER DISCLOSURES

The financial statements should also disclose:
a. If an intangible asset is amortised over more than ten years, the reasons
why it is presumed that the useful life of an intangible asset will exceed ten
years from the date when the asset is available for use. In giving these
reasons, the enterprise should describe the factor(s) that played a significant
role in determining the useful life of the asset.
b. A description, the carrying amount and remaining amortisation period of
any individual intangible asset that is material to the financial statements of
the enterprise as a whole.
c. The existence and carrying amounts of intangible assets whose title is
restricted and the carrying amounts of intangible assets pledged as security
for liabilities and
d. The amount of commitments for the acquisition of intangible assets.
The financial statements should disclose the aggregate amount of research and
development expenditure recognised as an expense during the period.
An enterprise is encouraged, but not required, to give a description of any fully
amortised intangible asset that is still in use.

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Illustration
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ABC Ltd. developed know-how by incurring expenditure of ` 20 lakhs, The know-how
was used by the company from 1.4.20X1. The useful life of the asset is 10 years from
the year of commencement of its use. The company has not amortised the asset till
31.3.20X8. Pass Journal entry to give effect to the value of know-how as per
Accounting Standard-26 for the year ended 31.3.20X8.

Solution
Journal Entry

` `
Profit and Loss A/c (Prior period item) Dr. 12,00,000
Amortization A/c Dr. 2,00,000
To Know-how A/c 
14,00,000
[Being amortization of 7 years (out of which
amortization of 6 years charged as prior period
item)]

Illustration 2
The company had spent ` 45 lakhs for publicity and research expenses on one of its
new consumer product, which was marketed in the accounting year 20X1-20X2, but
proved to be a failure. State, how you will deal with the following matters in the
accounts of U Ltd. for the year ended 31st March, 20X2.
Solution
In the given case, the company spent ` 45 lakhs for publicity and research of a
new product which was marketed but proved to be a failure. It is clear that in
future there will be no related further revenue/benefit because of the failure of
the product. Thus, according to AS 26 ‘Intangible Assets’, the company should
charge the total amount of ` 45 lakhs as an expense in the profit and loss
account.


As per para 63 of AS 26 “Intangible Assets”, 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.

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Illustration 3 v
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A company with a turnover of ` 250 crores and an annual advertising budget of
` 2 crores had taken up the marketing of a new product. It was estimated that the
company would have a turnover of ` 25 crores from the new product. The company
had debited to its Profit and Loss account the total expenditure of ` 2 crore incurred
on extensive special initial advertisement campaign for the new product.
Is the procedure adopted by the company correct?
Solution
According to AS 26 ‘Intangible Assets’, “expenditure on an intangible item should
be recognised as an expense when it is incurred unless it forms part of the cost of
an intangible asset”.

AS 26 mentions that expenditure on advertising and promotional activities should

be recognised as an expense when incurred.
In the given case, advertisement expenditure of ` 2 crores had been taken up for
the marketing of a new product which may provide future economic benefits to
an enterprise by having a turnover of ` 25 crores. Here, no intangible asset or
other asset is acquired or created that can be recognised. Therefore, the
accounting treatment by the company of debiting the entire advertising
expenditure of ` 2 crores to the Profit and Loss account of the year is correct.

Reference: The students are advised to refer the full text of AS 28

“Intangible Assets” (issued 2002).

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TEST YOUR KNOWLEDGE
MCQs
1. Which of the following is not covered within the scope of AS 26?

(a) Intangible assets held-for-sale in the ordinary course of business

(b) Assets arising from employee benefits
(c) (a) & (b) both
(d) Research and development activities

2. Intangible asset is recognised if it:

(a) meets the definition of an intangible asset
(b) is probable that future economic benefits will flow
(c) the cost can be measured reliably
(d) meets all of the above parameters
3. Sun Limited has purchased a computer with various additional software.
These are integral part of the computer. Which of the following are true in the
context of AS 26:
(a) Recognise Computer and software as tangible asset
(b) Recognise tangible and intangible separately
(c) Recognise computer and software as intangible asset

(d) Does not recognize the software as an asset.

4. Hexa Ltd developed a technology to enhance the battery life of mobile
devices. Hexa has capitalised development expenditure of ` 5,00,000. Hexa
estimates the life of the technology developed to be 3 years but the company
has forecasted that 50% of sales will be in year 1, 35% in year 2 and 15% in
year 3. What should be the amortisation charge in the second year of the
product’s life?
(a) ` 2,50,000
(b) ` 1,75,000

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(c) ` 1,66,667 v
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(d) ` 1,85,000

Theoretical Questions
5. What is meant by Intangible Assets and what are the important factors to
consider the recognition of item as an Intangible asset? What is the
recognition criteria in accordance with the provisions of AS 26?

6. What is the measurement criteria at the time of initial recognition of Intangible

assets acquired through separate acquisition?

7. What is the criteria for recognition and measurement of Internally generated

intangible assets. Describe which kind of cost is considered for capitalisation with
respect to provisions of AS 26. Whether the same applies for internally generated
goodwill also?

8. Advise the complete accounting treatment for Research and development phase
as per AS 26.

9. What is meant by Amortisation of an Intangible asset. What are the different

methods for amortisation as per AS 26?

Practical Questions
10. Swift Ltd. acquired a patent at a cost of ` 80,00,000 for a period of 5 years
and the product life-cycle is also 5 years. The company capitalized the cost
and started amortizing the asset at ` 10,00,000 per annum. The company
had amortized the patent at 10,00,000 per annum in first two years on the
basis of economic benefits derived from the product manufactured under the
patent. After two years it was found that the product life-cycle may continue
for another 5 years from then. The patent was renewable and Swift Ltd. got it
renewed after expiry of five years. The net cash flows from the product during
these 5 years were expected to be ` 36,00,000, ` 46,00,000, ` 44,00,000, `
40,00,000 and ` 34,00,000. Find out the amortization cost of the patent for
each of the years.

11. AB Ltd. launched a project for producing product X in October, 20X1. The
Company incurred ` 20 lakhs towards Research. Due to prevailing market

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conditions, the Management came to conclusion that the product cannot be
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manufactured and sold in the market for the next 10 years. The Managem ent
hence wants to defer the expenditure write off to future years.

Advise the Company as per the applicable Accounting Standard.

12. During 20X1-X2, an enterprise incurred costs to develop and produce a
routine low risk computer software product, as follows:

Particular `
Completion of detailed program and design (Phase 1) 50,000
Coding and Testing (Phase 2) 40,000
Other coding costs (Phase 3 & 4) 63,000
Testing costs (Phase 3 & 4) 18,000
Product masters for training materials (Phase 5) 19,500
Packing the products (1,500 units) (Phase 6) 16,500
After completion of phase 2, it was established that the product is technically
feasible for the market. You are required to state how the above referred cost
to be recognized in the books of accounts.

ANSWERS/SOLUTIONS
MCQs

1. (c) 2. (d) 3. (a) 4. (b)

Theoretical Questions
5. An intangible asset is 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. Below are the 3 key
ingredients to be satisfied to cover an item as an intangible asset under this
standard:
• identifiability,
• control over a resource and

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expectation (i.e. probable – 50% plus) of future economic benefits
flowing to the enterprise. v

The recognition of an item as an intangible asset requires an enterprise to

demonstrate that the item meets the definition of an intangible asset and
recognition criteria set out as below:
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.
6. If an intangible asset is acquired separately, the cost of the intangible asset
can usually be measured reliably. This is particularly so when the purchase
consideration is in the form of cash or other monetary assets.
The cost of an intangible asset comprises:
• its purchase price,
• any import duties and other taxes (other than those subsequently
recoverable by the enterprise from the taxing authorities), and
• any directly attributable expenditure on making the asset ready for its
intended use. Directly attributable expenditure includes, for example,
professional fees for legal services.
• Any trade discounts and rebates are deducted in arriving at the cost.
7. To assess whether an internally generated intangible asset meets the criteria
for recognition, an enterprise classifies the generation of the asset into 2
phases:
➢ Research Phase &
➢ Development Phase
Research Phase - The expenses related to Research phase is expensed off in
statement of Profit and loss.
Development Phase - Development is the application of research findings or
other knowledge to a plan or design for the production of new or
substantially improved materials, devices, products, processes, systems or
services prior to the commencement of commercial production or use.
An intangible asset arising from development (or from the development

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v of an internal project) should be recognised if, and only if, an
phase
v
enterprise can demonstrate all of the conditions given in para 6.15.
Cost of an Internally Generated Intangible Asset
The cost of an internally generated intangible asset is the sum of
expenditure incurred from the time when the intangible asset first meets the
recognition criteria. Reinstatement of expenditure recognised as an expense
in previous annual financial statements or interim financial reports is
prohibited.
The cost of an internally generated intangible asset comprises all
expenditure that can be directly attributed, or allocated on a reasonable and
consistent basis, to creating, producing and making the asset ready for its
intended use from the time when the intangible asset first meets the
recognition criteria. For details, refer para 6.16.
Internally generated goodwill is not recognised as an asset because it is not
an identifiable resource controlled by the enterprise that can be measured
reliably at cost.
8. Research phase means acquisition of knowledge and Development phase
means application of knowledge.
The expenditure related to Research phase is expensed off in statement of
Profit and loss. However, the expenditure incurred in Development phase is
capitalised as a cost of the internally generated intangible asset.
If an enterprise cannot distinguish the research phase from the
development phase of an internal project to create an intangible asset, the
enterprise treats the expenditure on that project as if it were incurred in the
research phase only.
9. Amortisation is the systematic allocation of the depreciable amount of an
intangible asset over its useful life.
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. 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

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• the straight-line method, v
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• 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.
Practical Questions
10. Swift Limited amortised ` 10,00,000 per annum for the first two years i.e.
` 20,00,000. The remaining carrying cost can be amortised during next
5 years on the basis of net cash flows arising from the sale of the product.
The amortisation may be found as follows:

S Net cash flows ` Amortisation Ratio Amortisation Amount `

I - 0.125 10,00,000
II - 0.125 10,00,000
III 36,00,000 0.180 10,80,000
IV 46,00,000 0.230 13,80,000
V 44,00,000 0.220 13,20,000
VI 40,00,000 0.200 12,00,000
VII 34,00,000 0.170 10,20,000
Total 2,00,00,000 1.000 80,00,000

It may be seen from above that from third year onwards, the balance of
carrying amount i.e., ` 60,00,000 has been amortised in the ratio of net cash
flows arising from the product of Swift Ltd.

11. As per para 41 of AS 26 “Intangible Assets”, expenditure on research should

be recognised as an expense when it is incurred. Hence, the expenses
amounting ` 20 lakhs incurred on the research has to be charged to the
statement of profit and loss in the current year ending 31 st March, 20X2.

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12. v
As per AS 26, costs incurred in creating a computer software product should
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be charged to research and development expense when incurred until
technological feasibility/asset recognition criteria has been established for
the product. Technological feasibility/asset recognition criteria have been
established upon completion of detailed program design, coding and
testing. In this case, ` 90,000 would be recorded as an expense (` 50,000 for
completion of detailed program design and ` 40,000 for coding and testing
to establish technological feasibility/asset recognition criteria). Cost
incurred from the point of technological feasibility/asset recognition criteria
until the time when products costs are incurred are capitalized as software
cost (63,000+ 18,000+ 19,500) = ` 1,00,500. Packing cost ` 16,500 should be
recognized as expenses and charged to P & L A/c.

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