CORPORATE FINANCIAL REPORTING

Ind AS 38 IntAngIble ASSetS

Objective
This Standard prescribes the accounting treatment for intangible assets not covered by other
standards. It requires recognizing an intangible asset only when specific criteria are met and outlines
the rules for recognition, measurement, and disclosure.

Scope of Ind AS 38
This Standard shall be applied to all intangible assets, except:
(a) intangible assets that are within the scope of another Standard, for example:
• Intangible assets held for sale in the ordinary course of business (Ind AS 2)
• Deferred tax assets (Ind AS 12)
• Leases of intangibles assets (Ind AS 116)
• Assets arising from employee benefits (Ind AS 19)
• Goodwill arising in a business combination (Ind AS 103)
• Deferred acquisition costs and intangible assets arising from insurance contract (Ind AS 104)
• Non-current intangible assets classified as held for sale (Ind AS 105)
• Assets arising from contracts with customers (Ind AS 115)
(b) financial assets
(c) the recognition and measurement of exploration and evaluation assets
(d) expenditure on the development and extraction of minerals, oil, natural gas and similar non-
regenerative resources.

Key Considerations in the Scope of Ind AS 38

Consideration Explanation

Assets with both physical and intangible elements need careful judgment for
Tangible vs.
classification. For example, software crucial for hardware operation is
Intangible
tangible, while standalone software is intangible.

Integral Software Software essential for hardware to function, like the operating system in a
(Tangible) computer, is treated as a tangible asset under Ind AS 16.

Non-integral
Software that isn't necessary for hardware operation, like word processing
Software
software, SAP, ERP, is classified as an intangible asset under Ind AS 38.
(Intangible)

Costs related to advertising, training, start-up activities, and R&D are

Other Expenditures covered by Ind AS 38 but are not recognized as intangible assets as they fail
the recognition criteria.

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Consideration Explanation

Research & Even if research creates a physical asset (like a prototype), its main value is
Development in the knowledge gained, making it an intangible asset under Ind AS 38.

Rights from licensing agreements, such as patents or films, are covered by

Licensing Rights
Ind AS 38 and not by Ind AS 116 (Leases).

Extractive & Ind AS 38 doesn’t cover exploration and extraction costs but does apply to
Insurance Industries intangible assets like software and start-up costs in these industries.

Meaning of Intangible Assets

Definition: An intangible asset is an identifiable non-monetary asset without physical substance.
Key Components in the definition of Intangible Assets:

Key
Explanation
Component

An intangible asset must be identifiable, meaning it can be separated from the

entity and sold, transferred, licensed, rented, or exchanged. It can also arise from
contractual or legal rights, even if those rights are not transferable. This
Identifiability identifiability is crucial to differentiate the asset from goodwill. Examples include
customer lists, licenses, trademarks, patents, franchises, and copyrights. Goodwill,
in contrast, represents future economic benefits from assets that are not
individually identifiable, usually recognized in a business combination.

The entity must control the asset, meaning it can obtain future economic benefits
and restrict others from accessing those benefits. Control often stems from legal
rights that are enforceable in court, but it can also exist through other means. For
example, market knowledge or trade secrets can provide control if they are legally
Control
protected. However, assets like a skilled workforce or customer relationships
typically do not meet the control criterion unless there are legal rights to protect
them, such as confidentiality agreements or contracts. Without such protection, it’s
harder to prove control over future benefits.

The intangible asset should lead to future economic benefits for the entity. These
benefits could include increased revenue from the sale of products or services, cost
Future
savings, or other operational advantages. For instance, using intellectual property
Economic
in a production process might reduce future production costs, thereby enhancing
Benefits
profitability. The potential for these benefits is what makes an asset valuable to the
entity and justifies its recognition as an intangible asset.

Monetary assets are money held and assets to be received in fixed or determinable
Non-Monetary amounts of money. All other assets are Non-Monetary Assets. Example of Non-
Assets Monetary Assets are PPE, Intangible Assets, Investments, Inventory. Values of
Non-Monetary Assets fluctuates with time.

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Recognition Criteria:
An item is recognized as an intangible asset if:
• It is probable that future economic benefits will flow to the entity.
• The cost of the asset can be reliably measured.
This criteria applies to both initial costs of acquiring or internally generating an intangible asset and
subsequent costs for adding, replacing, or servicing it.

Recognition of an Expense
If an item within the scope of this standard, does not meet the definition of an intangible asset, the
expenditure is recognized as an expense when incurred. However, If the item is acquired through a
business combination, it is included in goodwill recognized at the acquisition date.
The following expenditures are always expensed:
(a) Research costs (unless part of a business combination).
(b) Start-up costs which includes legal and secretarial fees for setting up a business, costs for opening
a new facility or business and Pre-operating costs for launching new products or processes.
(c) Training costs.
(d) Advertising and promotional costs.
(e) Costs for relocating or reorganizing the entity.

Subsequent Expenditure:
Generally, subsequent expenditures on intangible assets are for maintaining existing benefits, not for
creating new assets. Therefore, they are typically not recognized as intangible assets.
Expenditures on brands, mastheads, publishing titles, customer lists, etc., are always expensed as they
cannot be distinguished from overall business development costs.

Examples of intangible assets and their recognition criteria under Ind AS 38:

Generates
Non- Has Entity Cost
Item/Expenditur Identifiabl Future Concluding
Monetary Physical Has Reliably
e e Asset Economic Remark
Asset Substance Control Measured
Benefits

Not
Customer List Yes Yes No Yes Yes No
Recognized

Software License Yes Yes No Yes Yes Yes Recognized

Trademark Yes Yes No Yes Yes Yes Recognized

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Generates
Non- Has Entity Cost
Item/Expenditur Identifiabl Future Concluding
Monetary Physical Has Reliably
e e Asset Economic Remark
Asset Substance Control Measured
Benefits

Not
Brand Name Yes Yes No Yes Yes No
Recognized

Patent Yes Yes No Yes Yes Yes Recognized

Franchise
Yes Yes No Yes Yes Yes Recognized
Agreement

Copyright Yes Yes No Yes Yes Yes Recognized

Not
Trade Secret Yes Yes No Yes Yes No
Recognized

Not
R&D Prototype No Yes Yes No Yes No
Recognized

Confidentiality
Yes Yes No Yes Yes Yes Recognized
Agreement

Customer Not
No Yes No No Yes No
Relationship Recognized

Skilled Not
No Yes Yes No Yes No
Workforce Recognized

Film Production
Yes Yes No Yes Yes Yes Recognized
Rights

Import Quota Yes Yes No Yes Yes Yes Recognized

Market Not
Yes Yes No Yes Yes No
Knowledge Recognized

Not
Training Costs No Yes No No Yes No
Recognized

Not
Advertising Costs No Yes No No Yes No
Recognized

Not
Start-Up Costs No Yes No No Yes No
Recognized

Website
Development Yes Yes No Yes Yes Yes Recognized
Costs

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Generates
Non- Has Entity Cost
Item/Expenditur Identifiabl Future Concluding
Monetary Physical Has Reliably
e e Asset Economic Remark
Asset Substance Control Measured
Benefits

Literary Works Yes Yes No Yes Yes Yes Recognized

Musical Works Yes Yes No Yes Yes Yes Recognized

Domain Name Yes Yes No Yes Yes Yes Recognized

Licensing Rights Yes Yes No Yes Yes Yes Recognized

Not
Market Research No Yes No No Yes No
Recognized

Social Media Not

Yes Yes No Yes Yes No
Accounts Recognized

Internally
Not
Generated No Yes No Yes Yes No
Recognized
Goodwill

Note:
Some internally generated items that are prohibited to be recognized as intangible assets are Goodwill,
brands, mastheads, publishing titles, customer lists and items similar in substance shall not be
recognized as intangible assets.
If Customer List, Brand name, Trade secret or Market Knowledge is acquired and cost can be reliably
measured then it can be recognised as an Intangible asset.

Example 1
An entity may have a team of skilled staff and may be able to identify incremental staff skills leading
to future economic benefits from training. The entity may also expect that the staff will continue to
make their skills available to the entity. However, an entity usually has insufficient control over the
expected future economic benefits arising from a team of skilled staff and from training for these
items to meet the definition of an intangible asset. For a similar reason, specific management or
technical talent is unlikely to meet the definition of an intangible asset, unless it is protected by legal
rights to use it and to obtain the future economic benefits expected from it, and it also meets the other
parts of the definition.
An entity may have a portfolio of customers or a market share and expect that, because of its efforts in
building customer relationships and loyalty, the customers will continue to trade with the entity.
However, in the absence of legal rights to protect, or other ways to control, the relationships with
customers or the loyalty of the customers to the entity, the entity usually has insufficient control over
the expected economic benefits from customer relationships and loyalty for such items (e.g. portfolio
of customers, market shares, customer relationships and customer loyalty) to meet the definition of
intangible assets. In the absence of legal rights to protect customer relationships, exchange
transactions for the same or similar non-contractual customer relationships (other than as part of a
business combination) provide evidence that the entity is nonetheless able to control the expected

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future economic benefits flowing from the customer relationships. Because such exchange
transactions also provide evidence that the customer relationships are separable, those customer
relationships meet the definition of an intangible asset.

Example 2
A software company X Ltd. is developing new software for the telecom industry. It employs
100 employs engineers trained in that particular discipline who are engaged in the
development of the software. X Ltd. feels that it has an excellent HR policy and does not
expect any of its employees to leave in the near future. It wants to recognise these set of
engineers as a human resources asset in the form of an intangible asset. What would be your
advice to X Ltd?

Solution
Although, without doubt the skill sets of the employees make them extremely valuable to the
company, however it does not have control over them. Merely having good HR policies would
not make them eligible to be recognized as an intangible asset.

Example 3
X Ltd. has acquired a telecom license from Government to operate mobile telephony in two
states of India. Can the cost of acquisition be capitalised as an intangible asset under Ind AS
38?

Solution
Cost of acquisition of the telecom license can be capitalised as an intangible asset under the
head Licenses, as the cost is ascertainable, and it will lead to future economic benefits for X
Ltd.

Example 4
Sun Ltd has an expertise in the consulting business. In years gone by, the Company gained a
30% market share for its services business and intends to recognise it as an intangible asset.
Is the action by Company justified?

Solution
Market share does not meet the definition of intangible assets as is not identifiable i.e. it is
neither separable and nor has arisen from contractual or legal rights.

Example 5

Company XYZ ltd has provided training to its staff on various new topics like GST, Ind AS
etc. to ensure the compliance as per the required law. Can the company recognise such cost of
staff training as intangible asset?

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Solution

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.

Example 6

X Garments Ltd. spent ₹1,00,00,000 towards promotions for a fashion show by way of various
on-road shows, contests etc.
After that event, it realised that the brand name of the entity got popular and resultantly,
subsequent sales have shown a significant improvement. It is further expected that this hike
will have an effect over the next 2-3 years.
How should the entity account for the above cost incurred on promoting such show?

Solution
Expenditure of 1,00,00,000 though increased future economic benefits, but it does not result
in creation of an intangible asset.
Such promotional cost should be expensed off.

Example 7

Pluto Ltd. intends to open a new retail store in a new location in the next few weeks. Pluto Ltd
has spent a substantial sum on a series of television advertisements to promote this new store.
The Company has paid an amount of ₹800,000 for advertisements before 31 st March, 2011.
₹700,000 of this sum relates to advertisements shown before 31 st March, 2011 and ₹100,000
to advertisements shown in April, 2011. Since 31st March, 2011, the Company has paid for
further advertisements costing ₹400,000.
Pluto Ltd is of view that such costs can be carried forward as intangible assets. Since market
research indicates that this new store is likely to be highly successful. Please explain and
justify the treatment of the above costs in the financial statements for the year ended 31st March
2011.

Solution

Under Ind AS 38 – Intangible Assets – intangible assets can only be recognized if they are

identifiable and have a cost which can be reliably measured.

These criteria are very difficult to satisfy for internally developed intangibles.

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For these reasons, Ind AS 38 specifically prohibits recognizing advertising expenditure as an

intangible asset. The issue of how successful the store is likely to be does not affect this
prohibition. Therefore, such costs should be recognized as expenses.

However, the costs would be recognized on accrual basis. Therefore, of the advertisements
paid for before 31st March, 2011,7,00,000 would be recognized as an expense and 1,00,000
as a pre-payment in the year ended 31st March, 2011. The cost of advertisements amounting
4,00,000 paid for since 31st March, 2011 would be charged as expenses in the year ended
31st March, 2012.

Example 8
Venus Ltd. is preparing its accounts for the year ended 31 st March, 2012 and is unsure how to
treat the following items.
1. Company has completed a big marketing and advertising campaign costing ₹2,40,000. The
finance director had authorised this campaign on the basis that it would create ₹5,00,000 of
additional profits over the next three years.
2. A new product was developed during the year. The expenditure aggregated ₹1,50,000 of
which ₹1,00,000 was incurred prior to 30 th September, 2011, the date on which it became
clear that the product was technically viable. The new product will be launched in the next
four months and its recoverable amount is estimated at ₹70,000.
3. Staff participated in a training programme which cost the company ₹ 300,000. The training
organisation had made a presentation to the directors outlining that incremental profits to
the business over the next twelve months would be ₹500,000.
What amounts should appear as assets in Venus Ltd. Balance sheet as at 31 st March, 2012?

Solution

The treatment in Venus Ltd.’s balance sheet as at 31st March, 2012 will be as follows:

1. Marketing and advertising campaign: no asset will be recognized because it is

not possible to identify future economic benefits that are attributable only to this
campaign. All of the expenditure should be expensed in the statement of profit and
loss account.
2. New product: development expenditure appearing in the statement of financial
position will be valued at 50,000. The expenditure prior to the date on which the
product becomes technically feasible is recognized in the statement of profit and
loss account as an expense.
3. Training programme: no intangible asset will be recognized, because staff are not
under the control of Venus Ltd. and when staff leave the benefits of the training,
whatever they may be, also leave.

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Example 9
X Ltd. purchased a franchise from a restaurant chain at a cost of ₹1,00,00,000 and the franchise
has 10 years life. In addition, the franchise agreement mentions that the franchisee would also
pay the franchisor royalty as a percentage of sales made. Can the franchise rights be treated as
an intangible asset under Ind AS 38?

Solution
The franchise rights meets the identification criterion of an intangible asset since it arises from
the contractual rights. It is acquired separately and it’s cost can be measured reliably. In
addition, X Ltd. will have future economic benefits and control over them from the franchise
rights.
X Ltd. should recognize the franchise right as intangible asset and amortise it over 10 years.
Royalty as a percentage of sales paid to the franchisor would be a charge to the profit and
loss in the books of the X Ltd.

Example 10

An entity regularly places advertisements in newspapers advertising its products and includes
a reply slip that informs individuals replying to the advertisement that the entity may pass on
the individual’s details to other sellers of similar products, unless the individual ticks a box in
the advertisement.

Over a period of time the entity has assembled a list of customers’ names and addresses. The
list is provided to other entities for a fee. The entity would like to recognise an asset in respect
of the expected future economic benefits to be derived from the list. Can the customer list be
treated as an intangible asset under Ind AS 38?

Solution
In this situation, the entity has no legal rights to the customer relationship, but exchange
transactions have taken place that evidence separability of the asset and the control that the
entity is able to exercise over the asset. Therefore, the list is an intangible asset. However, the
entity may not recognize the asset because the cost of generating the customer list internally
cannot be distinguished from the cost of developing the business as a whole. It does not meet
the conditions specified to recognize an internally generated intangible asset.

Measurement of Intangible Asset:

Mode of Intangible Asset Details

- Cost Includes:
- Purchase Price (including import duties, non-refundable taxes,
less discounts).
1. Separate Acquisition
- Directly attributable costs:
[Q1, Q2] - Employee benefits (as per Ind AS 19) for preparing the asset.
- Professional and legal fees.
- Testing costs to ensure functionality.

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Mode of Intangible Asset Details

- Exclusions:
- Costs for introducing new products or services.
- Setting up in new locations.
- General administrative or overhead costs.

- Deferred Consideration:
- If payment is deferred, recognize the cost as cash price
equivalent.
- The difference is recorded as interest expense unless
capitalized under Ind AS 23.

- Cessation of Capitalization:
- Stops when the asset is ready for use.
- Post-use costs, redeployment, or operating losses are not
capitalized.

- Recognized at fair value on acquisition date under Ind AS

2. Acquisition in a 103.
Business Combination - Separate from goodwill, even if not previously recognized by
the acquiree.
[Q3, Q4, Q5] - If the acquiree’s in-process R&D meets the definition of an
intangible asset, it is recognized separately from goodwill.

- Recognized either at:

- Fair Value: Asset and grant recognized at fair value.
3. Acquisition by Way of
- Nominal Amount: Asset recognized at nominal amount plus
Government Grant
directly attributable costs for its intended use.
- Examples: Airport landing rights, licenses, import quotas.

- Acquired asset measured at fair value unless:

- The transaction lacks commercial substance.
- Fair value of neither asset can be reliably measured.

- If not at fair value, measure at the carrying amount of the

4. Exchange of Assets asset given up.
[Q6, Q7] - Commercial Substance:
- Exists if the cash flows (risk, timing, amount) of the asset
received differ from the asset given up.
- If fair value is measurable, use the fair value of the asset given
up. If the asset received has a more clearly evident fair value,
use that instead.

- Not Recognized because:

5. Internally Generated - It is not an identifiable resource (i.e., not separable from the
Goodwill entity).
- It cannot be reliably measured at cost.
- Differences between fair value and carrying amount of net

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Mode of Intangible Asset Details

assets reflect factors affecting value, but do not represent an

intangible asset.

- Challenges in Recognition:
- Difficulty identifying when an asset exists with future
benefits.
- Difficulty reliably measuring the cost.

- Research Phase:
- Expenditure expensed as incurred.
- No intangible asset recognized due to uncertainty in future
benefits.
- Examples:
- New knowledge acquisition.
- Evaluating applications of research.
- Search for alternatives (materials, processes).

- Development Phase:
- Intangible asset recognized if:
- Technical feasibility to complete the asset.
- Intention to complete the asset for use/sale.
6. Internally Generated - Probable future benefits (e.g., identifiable market).
Intangible Assets - Available resources to complete the project.
[Q8, Q9, Q10, Q11] - Reliable measurement of development costs.

- Cost of Internally Generated Intangible Assets:

- Inclusions:
- Materials and services used.
- Employee benefits directly attributable.
- Fees to register legal rights.
- Exclusions:
- Selling, administrative, general overhead costs unless directly
attributable.
- Initial operating losses.
- Costs of training staff.

- Recoverable amount: Capitalisation will be only upto the

amount recoverable calculated as per Ind AS 36.

- Reinstatement Prohibited: Expenditure expensed cannot be

reinstated as part of the asset's cost.

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Example 11

X Pharmaceutical Ltd. seeks your opinion in respect of following accounting transactions:

1. Acquired a 4-year license to manufacture a specialised drug at a cost of ₹1,00,00,000 at
the start of the year. Production commenced immediately.
2. Also purchased another company at the start of year. As part of that acquisition, X
Pharmacy Ltd. acquired a brand with a fair value of ₹3,00,00,000 based on sales revenue.
The life of the brand is estimated at 15 years.
3. Spent ₹1,00,00,000 on an advertising campaign during the first six months. Subsequent
sales have shown a significant improvement and it is expected this will continue for 3
years.
4. It has commenced developing a new drug ‘Drug-A’. The project cost would be
₹10,00,00,000. Clinical trial proved successful and such drug is expected to generate
revenue over the next 5 years.
Cost incurred (accumulated) till 31st March, 2011 is ₹5,00,00,000.
Balance cost incurred during the financial year 2011-2012 is ₹5,00,00,000.
5. It has also commenced developing another drug ‘Drug B’. It has incurred ₹50,00,000
towards research expenses till 31st March, 2012. The technological feasibility has not yet
been established.

How the above transactions will be accounted for in the books of account of X Pharmaceutical
Ltd?

Solution

X Pharmaceutical Ltd. is advised as under:

1. It should recognize the drug license as an intangible asset because it is a separate

external purchase, separately identifiable asset and considered successful in respect of
feasibility and probable future cash inflows.
The drug license should be recorded at 1,00,00,000.
2. It should recognize the brand as an intangible asset because it is purchased as part of
acquisition, and it is separately identifiable. The brand should be amortised over a
period of 15 years.
The brand will be recorded at 3,00,00,000.
3. The advertisement expenses of 1,00,00,000 should be expensed off.
4. The development cost incurred during the financial year 2011-2012 should be
capitalised. Cost of intangible asset (Drug A) as on 31st March, 2012
Opening cost 5,00,00,000
Development cost 5,00,00,000
Total cost 10,00,00,000
Research expenses of 50,00,000 incurred for developing ‘Drug B’ should be expensed
off since technological feasibility has not yet established.

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Measurement After Recognition: [Q12, Q13]

An entity must choose either the cost model or the revaluation model as its accounting policy and apply
it consistently to an entire class of Intangible Assets. If no active market exists, the asset is carried at
Cost minus Amortization and Impairment Losses.
Cost Model

Description Amount (₹)

Cost X

Less: Accumulated Amortisation Y

Less: Accumulated Impairment Loss Z

Carrying Amount (X - Y - Z)

Revaluation Model

Description Amount (₹)

Fair Value at Revaluation Date X

Less: Subsequent Accumulated Amortisation Y

Less: Subsequent Accumulated Impairment Losses Z

Carrying Amount (X - Y - Z)

Frequency of Revaluations:
• Revaluations should be done regularly so the asset’s Carrying Amount doesn’t differ significantly
from its Fair Value.
• Revaluations are more frequent (annually) for assets with volatile fair values but unnecessary for
those with stable fair values.

On Applying Revaluation, asset is treated in one of the following ways:

Option Description

Adjust gross carrying amount proportionately or by

a) Adjust Gross Carrying Amount market data. Modify accumulated amortisation to
reflect the revalued amount.

Remove accumulated amortisation from the gross

b) Eliminate Accumulated Amortisation
carrying amount.

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Treatment of surplus or deficit arising on revaluation

Scenario Impact

+ Increase in Carrying Amount + OCI (Revaluation Surplus)

+ Profit or Loss (if reversing a previous decrease)

- Decrease in Carrying Amount - Profit or Loss

- OCI (if credit in Revaluation Surplus)

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Utilisation of Revaluation Surplus

Options Action

[Link]
Transfer the entire revaluation surplus to retained earnings.
Derecognition

Transfer the difference between amortisation on revalued amount and original

2. During Use
cost to retained earnings.

Tax effects from revaluation are recognized and disclosed per Ind AS 12, Income Taxes.

Useful Life of Intangible Assets

Two Types of Useful Life:
1. Finite Useful Life:
o Amortized over its useful life.
2. Indefinite Useful Life:
o Not amortized but tested for impairment regularly.
o No foreseeable limit to how long the asset will generate cash flows for the entity.
o As per Ind AS 36, the asset must be tested for impairment annually, and whenever
there’s any sign it may be impaired.
o The asset's useful life should be reviewed each period to confirm if it still qualifies as
indefinite. If not, the change to a finite life is treated as a change in accounting
estimates as per Ind AS 8.
o If the useful life changes to finite, this signals potential impairment. The asset is then
tested for impairment, and if its carrying amount exceeds its recoverable amount, the
excess is recognised as an impairment loss.
Factors in Determining Useful Life:
1. Expected usage of the asset.
2. Product life cycles and public information about similar assets.
3. Risk of obsolescence (technological, commercial, etc.).
4. Industry stability and market demand.
5. Competitors' actions.
6. Legal or contractual limitations (e.g., expiry of licenses).
7. Relationship with other assets (if dependent on their useful lives).
Contractual or Legal Rights:
• The useful life of assets tied to contracts/legal rights cannot exceed the term of those rights.

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• Renewal periods can be included only if renewal is expected without significant cost.
Indicators for this include evidence of past renewals, satisfaction of renewal conditions, and
low cost compared to future benefits.
• If renewal costs are high, they are treated as acquiring a new intangible asset.

Amortisation of an Intangible Asset with Finite Life: [Q14, Q15, Q16, Q17]

Aspect Explanation

The cost of the asset minus its residual value. Amortised over the asset’s
Depreciable useful life in a systematic way. Amortisation is usually recognized in profit or
Amount loss but may be included in the cost of another asset, e.g., inventories
produced using the asset.

Residual value is assumed to be zero unless: (a) A third party is committed to

purchasing the asset, or (b) There is an active market for the asset where its
Residual Value
value can be determined, and the market will likely exist at the end of its
useful life.

Amortisation Amortisation begins when the asset is ready for use and ends when the asset is
Period fully amortised, sold, or classified as held for sale.

Review of
The amortisation period should be reviewed at each year-end. If the useful life
Amortisation
changes, the amortisation period should be adjusted.
Period

The method should reflect the pattern of consumption of the asset's benefits.
Amortisation
Common methods include the straight-line, diminishing balance, and units of
Method
production methods.

Generally considered inappropriate unless the asset’s usage is linked directly

Revenue-Based
to revenue, such as in cases where a contract specifies revenue generation as a
Amortisation
limiting factor.

The asset is reviewed annually for impairment (Ind AS 36). If there is any
Impairment Review
indication of impairment, the asset is tested and its value adjusted accordingly.

A direct-mail marketing company buys a customer list and expects to use it

Example 1 for 1-3 years. Management estimates that the list will be useful for 18 months.
Even though the company may add more customers later, the acquired list’s
Acquired Customer benefit comes from the customers already on it when purchased. The list is
List amortised over 18 months, and at the end of each reporting period, it’s
reviewed for impairment under Ind AS 36 to check if its value has decreased.

Example 2 A company acquires a patent with a 15-year legal life but plans to sell it in 5
years. Although the patent itself lasts for 15 years, its useful life to the
Acquired Patent
company is only 5 years. It will be amortised over these 5 years. The entity
with 15-Year Legal
has a commitment from a third party to purchase that patent in five years for
Life
60 per cent of the fair value of the patent at the date it was acquired, and the

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Aspect Explanation

entity intends to sell the patent in five years. The residual value will be 60%
of the patent’s fair value at the time of purchase. The company also reviews
the patent for impairment under Ind AS 36 to ensure its value hasn’t dropped.

The company acquires a copyright that has 50 years of legal protection

Example 3 remaining, but it only expects to generate revenue from it for 30 years based
Acquired Copyright on market analysis and consumer trends. Even though the copyright can
with 50-Year Legal legally last longer, the company considers its useful life to be 30 years, over
Life which it will be amortised. The copyright is also reviewed for impairment
under Ind AS 36 at the end of each reporting period.

Example 4 A broadcasting licence that is renewable every 10 years at a very low cost is
expected to generate cash inflows indefinitely. Since the company can renew
Acquired the licence at little cost and has successfully done so before, the licence is
Broadcasting considered to have an indefinite useful life. As a result, the company won’t
Licence amortise it unless there’s a reason to believe the useful life has become finite.
(Renewable) The licence is tested for impairment annually as required by Ind AS 36.

The licensing authority decides to stop renewing broadcasting licences and

Example 5 will instead auction them. The company’s licence, which was previously
Broadcasting renewable, now has only 3 years left until expiration. Since it can’t be
Licence Expiry Due renewed, the useful life of the licence is no longer indefinite. It will be
to Policy Change amortised over the remaining 3 years and tested for impairment immediately
to reflect the change in its value under Ind AS 36.

Retirements and Disposals

Aspect Explanation

An intangible asset should be derecognized when:

Derecognition - It is sold, or
- No future benefits are expected from its use or sale.

An intangible asset can be disposed of in various ways, such as:

- Sale
Disposal Methods
- Entering into a finance lease
- Donation

The gain or loss on derecognition is:

- Difference between net disposal proceeds (if any) and the carrying
Gain or Loss amount.
Calculation - Recognize in profit or loss, unless Ind AS 116 applies (e.g., sale and
leaseback).
- Gains should not be classified as revenue.

The asset is considered disposed of when the recipient gains control,

Date of Disposal
according to Ind AS 115.

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Disclosures:

Disclosure Aspect Disclosures Required

Disclose:
a) Useful lives (finite or indefinite).
b) Amortization methods and rates.
c) Gross carrying amount and accumulated amortization/impairment at
1. General Disclosure
start and end of period.
d) Line items in profit and loss for amortization.
e) Reconciliation of carrying amount, including additions, disposals,
revaluations, impairments, amortization, and other changes.

2. Indefinite Useful Life Disclose carrying amount and reasons for indefinite life assessment.

3. Material Intangible Disclose description, carrying amount, and remaining amortization

Assets period of material assets.

Disclose:
4. Government Grant a) Initial fair value.
Acquired Assets b) Carrying amount.
c) Measurement basis (cost or revaluation).

Disclose:
5. Title Restrictions and a) Assets with title restrictions.
Commitments b) Assets pledged as security.
c) Capital commitments for acquisitions.

Disclose:
6. Revalued Intangible a) Revaluation date.
Assets b) Carrying amount and cost model value.
c) Revaluation surplus details.

7. Research and
Disclose total R&D expenditure recognized as an expense.
Development Expenditure

Optional:
8. Other Information a) Fully amortized assets still in use.
b) Significant unrecognized assets.

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Question 1

Venus India Private Ltd acquired a software for its internal use costing ₹10,00,000. The
amount payable for the software was ₹600,000 immediately and ₹400,000 in one year time.
The other expenditure incurred were:-

Purchase tax: ₹1,00,000

Entry Tax: 10% (recoverable later from tax department)
Legal fees: ₹87,000

Consultancy fees for implementation: ₹1,20,000

Cost of capital of the company is 10%.
Calculate the cost of the software on initial recognition using the principles of Ind AS 38
Intangible Assets.

Solution

Particulars Amount in
Cash paid 6,00,000
Deferred consideration (4,00,000 / 1.1) 3,63,636
Purchase Tax 1,00,000
Entry tax (not to be considered as it is a refundable tax) -
Legal fees 87,000
Consultancy fees for implementation 1,20,000
Total cost to be capitalized 12,70,636

Question 2
X Ltd. purchased a standardised finance software at a list price of ₹30,00,000 and paid ₹50,000
towards purchase tax which is non-refundable. In addition to this, the entity was granted a
trade discount of 5% on the initial list price. X Ltd. incurred cost of ₹7,00,000 towards
customisation of the software for its intended use. X Ltd. also purchased a 5-year maintenance
contract with the vendor company of ₹2,00,000.

At what cost the intangible asset will be recognised?

Solution
In accordance with Ind AS 38, the cost of a separately acquired intangible asset is its
purchases price and non-refundable purchase taxes, after deducting trade discounts and
rebates and any directly attributable cost of preparing the asset for its intended use.

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Therefore, the initial cost of the asset should be:

Particulars Amount ( )
List price 30,00,000
Less: Trade discount (5%) (1,50,000)
28,50,000
Non-refundable purchase tax 50,000
Customisation cost 7,00,000
Total cost 36,00,000
The maintenance contract of 2,00,000 is an expense and therefore should be taken as a
prepaid expense and charged to profit and loss over a period of 5 years.

Question 3

X Limited in a business combination, purchased the net assets of Y Limited for ₹4,00,000 on
31st March, 2011. The assets and liabilities position of Y Limited just before the acquisition is
as follows:

Assets Cost (in ₹)

Property, Plant & Equipment 1,00,000
Intangible asset 1 20,000
Intangible asset 2 50,000
Cash & Bank 1,30,000
Liabilities
Trade payable 50,000
The fair market value of the PPE, intangible asset 1 and intangible asset 2 is available and they
are ₹1,50,000, ₹30,000 and ₹70,000 respectively.
How would X Limited account for the net assets acquired from Y Limited?

Solution
X Limited will account for the assets acquired from Y Limited in following manner:

Assets Amount
Property, plant and equipment 1,50,000
Goodwill 70,000
Intangible asset 1 30,000
Intangible asset 2 70,000
Cash & Bank 1,30,000
Liabilities
Trade payable 50,000

Goodwill = 4,00,000 – (1,50,000 + 70,000 + 30,000 + 1,30,000 – 50,000) = 70,000

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Question 4

On 31st March, 2011, Earth India Ltd. paid ₹50,00,000 for a 100% interest in Sun India Ltd.
At that date Sun Ltd.’s net assets had a fair value of ₹30,00,000. In addition, Sun Ltd. also
held the following rights:
• Trade Mark named “GRAND” – valued at ₹180,000 using a discounted cash flow
technique.
• Sole distribution rights to an electronic product; future cash flows from which are estimated
to be ₹150,000 per annum for the next 6 years.
10% is considered an appropriate discount rate. The 6-year, 10% annuity factor is 4.36.
Calculate goodwill and other Intangible assets arising on acquisition.

Solution

Particulars Amount Amount

Purchase consideration (A) 50,00,000
Net asset acquired 30,00,000
Trademark 1,80,000
Distribution rights (1,50,000 x 4.36) 6,54,000
Total (B) (38,34,000)
Goodwill on acquisition 11,66,000

Question 5

X Ltd. is engaged in the business of publishing Journals. They acquired 100% stake in Y Ltd.,
a company in the same industry. X Ltd. paid purchase consideration of ₹10,00,00,000 and fair
value of net assets acquired is ₹8,50,00,000. The purchase consideration includes payment for
the following as well:
(a) ₹30,00,000 for obtaining the skilled staff of Y Ltd.
(b) ₹50,00,000 by way of payment towards ‘Non-compete Fee’ so as to restrict Y Ltd. to
compete in the same line of business for next 5 years.
However, the above items (a) and (b) are not forming part of the net assets acquired of
₹8,50,00,000.
How should the above transactions be accounted for by X Ltd?

Solution
X Ltd. should recognize an intangible asset in respect of the consideration paid towards ‘Non-
Compete Fee’.
However, amount paid for obtaining skilled staff amounting to 30,00,000 does not meet the
definition of intangible asset since X Ltd. has not established any right over the resource and
the same should be expensed. The entity has insufficient control over the expected future
economic benefits arising from the team of skilled staff.
Therefore, 50,00,000 will be separately recognized as an intangible asset, whereas amount
paid for obtaining skilled staff does not meet the recognition criteria for being identified as a

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separate intangible asset. However, since it is acquired as part of a business combination, it

forms part of the goodwill recognized at the acquisition date.
The value of goodwill would be 1,00,00,000 (1,50,00,000 – 50,00,000).

Question 6

Sun Ltd acquired a software from Earth Ltd. in exchange for a telecommunication license. The
telecommunication license is carried at ₹5,00,000 in the books of Sun Ltd. The Software is
carried at ₹10,000 in the books of the Earth Ltd which is not the fair value.
Advise journal entries in the following situations in the books of Sun Ltd and Earth Ltd:
1) Fair value of software is ₹5,20,000 and fair value of telecommunication license is
₹5,00,000.
2) Fair Value of Software is not measurable. However similar Telecommunication license is
transacted by another company at ₹4,90,000.
3) Neither Fair Value of Software nor Telecommunication license could be reliably
measured.

Solution

in ‘000
Situation Sun Ltd. Earth Ltd.
1 Software Dr. 500 Telecommunication license Dr. 520
To Telecommunication license 500 To Software 10
To Profit on Exchange Nil To Profit on Exchange 510
2 Software Dr. 490 Telecommunication license Dr. 490

Loss on Exchange Dr. 10 To Software 10

To Telecommunication license 500 To Profit on Exchange 480

Note: The company may first recognize

Impairment loss and then record an entry.
The effect is the same as impairment loss will
also be charged to Income Statement.

3 Software Dr. 500 Telecommunication license Dr. 10

To Telecommunication license 500 To Software 10

Question 7
X Ltd. acquired a patent right of manufacturing drug from Y Ltd. In exchange X Ltd. gives its
intellectual property right to Y Ltd. Current market value of the patent and intellectual property
rights are ₹20,00,000 and ₹18,00,000 respectively. At what value patent right should be
initially recognised in the books of X Ltd. in following two situations?
(a) X Ltd. did not pay any cash to Y Ltd.
(b) X Ltd. pays ₹2,00,000 to Y Ltd.

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Solution

If an entity is able to determine reliably the fair value of either the asset received or the asset
given up, then the fair value of the asset given up is used to measure cost unless the fair value
of the asset received is more clearly evident.

The transaction at the fair value of the asset received adjusted for any cash received or paid.
Therefore, in case (a) patent is measured at 18,00,000, in case (b) it is measured at 20,00,000
(18,00,000 + 2,00,000).

Question 8
X Ltd. acquired Y Ltd. on 30th April, 2011. The purchase consideration is ₹50,00,000. The fair
value of the tangible assets is ₹45,00,000. The company estimates the fair value of “in-process
research projects” at ₹10,00,000. No other Intangible asset is acquired by X Ltd. in the
transaction. Further, cost incurred by X Ltd. in relation to that research project is as follows:
(a) ₹5,00,000 – as research expenses
(b) ₹2,00,000 – to establish technological feasibility
(c) ₹7,00,000 – for further development cost after technological feasibility is established. At
what amount the intangible asset should be measured under Ind AS 38?

Solution
X Ltd. should initially recognize the acquired “in house research and development project’’ at
its fair value i.e., 10,00,000. Research cost of 5,00,000 and cost of 2,00,000 for establishing
technical feasibility should be charged to profit & loss.
Costs incurred from the point of technological feasibility/asset recognition criteria until the
time when development costs are incurred are capitalised.

So the intangible asset should be recognized at 17,00,000 (10,00,000 + 7,00,000).

Question 9
Expenditure on a new production process in 2011-2012:
₹
st st
1 April to 31 December 2,700
1st January to 31st March 900
3,600
The production process met the intangible asset recognition criteria for development on 1st
January, 2012. The amount estimated to be recoverable from the process is ₹1,000.
Expenditure incurred for development of the process in FY 2012-2013 is ₹6,000. Asset was
brought into use on 31st March, 2013 and is expected to be useful for 6 years.

What is the carrying amount of the intangible asset at 31 st March, 2012 and 31st March, 2013.
Also determine the charge to profit or loss for 2011-2012?

At 31st March, 2014, the amount estimated to be recoverable from the process is ₹5,000.
What is the carrying amount of the intangible asset at 31 st March, 2014 and the charge to profit
or loss for 2013-2014 on account of impairment loss?

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Solution

1) Expenditure to be transferred to profit or loss in 2011-2012

Total Expenditure 3,600
Less: Expenditure during development phase (900)
Expenditure to be transferred to profit or loss 2,700
2) Carrying amount of intangible asset on 31st March, 2012
Expenditure during development phase will be capitalised 900
(Recoverable amount is higher being 1,000, hence no impairment)
3) Carrying amount of intangible asset on 31st March, 2013
Carrying amount of intangible asset on 31st March, 2012 900
Add: Further expenditure during development phase 6,000
Total capital expenditure on development phase 6,900
4) Expenditure to be charged to profit or loss in 2013-2014
Opening balance of Intangible Asset 6,900
Less: Amortisation for the year (6,900 / 6) (1,150)
Carrying amount of intangible asset 5,750
Less: Recoverable amount (5,000)
Amount charged to profit or loss (Impairment Loss) 750

5) Carrying Amount of Intangible Asset on 31st March, 2014

Value of intangible asset will be recoverable amount i.e. 5,000

Question 10
X Ltd. is engaged in developing computer software. The expenditures incurred by X Ltd. in
pursuance of its development of software is given below:
(a) Paid ₹2,00,000 towards salaries of the program designers.
(b) Incurred ₹5,00,000 towards other cost of completion of program design.
(c) Incurred ₹2,00,000 towards cost of coding and establishing technical feasibility.
(d) Paid ₹7,00,000 for other direct cost after establishment of technical feasibility.
(e) Incurred ₹2,00,000 towards other testing costs.
(f) A focus group of other software developers was invited to a conference for the
introduction of this new software. Cost of the conference aggregated to ₹70,000.

On 15th March, 2011, the development phase was complete and a cash flow budget was
prepared.

Net profit for the year was estimated to be equal ₹40,00,000. How should X Ltd. account for
the above-mentioned cost?

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Solution

Costs incurred in creating computer software, should be charged to research & development
expenses when incurred until technical feasibility/asset recognition criteria have been
established for the product. Here, technical feasibility is established after completion of
detailed program design.

In this case, 9,00,000 (salary cost of 2,00,000, program design cost of 5,00,000 and coding
and technical feasibility cost of 2,00,000) would be recorded as expense in Profit and Loss
since it belongs to research phase.

Cost incurred from the point of technical feasibility are capitalised as software costs. But the
conference cost of 70,000 would be expensed off.

In this situation, direct cost after establishment of technical feasibility of 7,00,000 and testing
cost of 2,00,000 will be capitalised.

The cost of software capitalised is = (7,00,000 + 2,00,000) = 9,00,000.

Question 11

X Ltd. has started developing a new production process in financial year 2011-2012. Total
expenditure incurred till 30 th September, 2011, was ₹1,00,00,000. The expenditure on the
development of the production process meets the recognition criteria on 1 st July, 2011. The
records of X Ltd. show that, out of total ₹1,00,00,000, ₹70,00,000 were incurred during July
to September, 2011. X Ltd. publishes its financial results quarterly. How should X Ltd. account
for the development expenditure?

Solution
X Ltd. should recognize the intangible asset at 70,00,000 and 30,00,000 which was already
recognized as an expense in first quarter should not be capitalised.

Question 12

1. Saturn Ltd. acquired an intangible asset on 31 st March, 2011 for ₹1,00,000. The asset was
revalued at ₹1,20,000 on 31st March, 2012 and ₹85,000 on 31st March, 2013.

2. Jupiter Ltd. acquired an intangible asset on 31 st March, 2011 for ₹1,00,000. The asset
was revalued at ₹85,000 on 31st March, 2012 and at ₹1,05,000 on 31st March, 2013.

Assuming that the year-end for both companies is 31st March, and that they both use the
revaluation model, show how each of these transactions should be dealt with in the financial
statements. Explain the treatment for revaluation of intangible asset. Ignore computation of
amortization on them for ease of understanding.

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Solution

Saturn Ltd.

20,000 revaluation increase on 31st March, 2012 should be credited to the revaluation reserve
and recognized in other comprehensive income. 20,000 of the revaluation decrease on 31st
March, 2013 should be debited to revaluation reserve and remaining 15,000 should be
recognized as an expense.

Jupiter Ltd.

15,000 revaluation decrease on 31st March, 2012 should be recognized as an expense in the
Statement of Profit and loss. 15,000 out of the 20,000 increases on 31st March, 2013 should
be recognized as income. The remaining 5,000 should be credited to revaluation reserve and
recognized in other comprehensive income.

Note: The above amount will be different if amortization of intangible asset is taken into
consideration.

Question 13

X Ltd. decides to revalue its intangible assets on 1 st April, 2011. On the date of revaluation,
the intangible assets stand at a cost of ₹1,00,00,000 and accumulated amortisation is
₹40,00,000. The intangible assets are revalued at ₹ 1,50,00,000. How should X Ltd. account
for the revalued intangible assets in its books of account?

Solution

The intangible assets are revalued to 1,50,00,000 on an amortised replacement cost basis,
which is 2.5 times increase from its net value. Thereby applying the existing ratio of
accumulated depreciation to the cost the revalued gross amount would be 2,50,00,000 gross
and 1,00,00,000 on amortisation.

Alternatively, the net block can be increased by 90,00,000.

Question 14

X Limited engaged in the business of manufacturing fertilisers entered into a technical

collaboration agreement with a foreign company Y Limited. As a result, Y Limited would
provide the technical know-how enabling X Limited to manufacture fertiliser in a more
efficient way. X Limited paid ₹ 10,00,00,000 for the use of know-how for a period of 5 years.
X Limited estimates the production of fertiliser as follows:

Year (In metric tons)

1 50,000

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2 70,000
3 1,00,000
4 1,20,000
5 1,10,000

At the end of the 1st year, it achieved its targeted production. At the end of 2 nd year, 65,000
metric tons of fertiliser was being manufactured, and X Limited considered to revise the
estimates for the next 3 years. The revised figures are 85,000, 1,05,000 and 1,15,000 metric
tons for year 3, 4 & 5 respectively.

How will X Limited amortise the technical know-how fees as per Ind AS 38?

Solution

Based on the above data, it may be suitable for X Ltd. to use unit of production method for
amortisation of technical know-how.

The total estimated unit to be produced 4,50,00 MT. The technical know-how will be
amortised on the basis of the ratio of yearly production to total production.

The first-year charge should be a proportion of 50,000 / 4,50,000 on 10,00,00,000 =

1,11,11,111.

At the end of 2nd year, as per revised estimate the total number of units to be produced in
future are 3,70,000 MT (i.e. 65,000 + 85,000 + 1,05,000 + 1,15,000).

The amortisation for second year will be 65,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111)
i.e. 1,56,15,615.

Amortisation for remaining years (unless the estimates are again revised):

Year 3 = 85,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) i.e. 2,04,20,420

Year 4 = 1,05,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) i.e. 2,52,25,225

Year 5 = 1,15,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) i.e. 2,76,27,628

Question 15

X Ltd. purchased a patent right on 1 st April, 2011, for ₹3,00,000; which has a legal life of 15
years. However, due to the competitive nature of the product, the management estimates a
useful life of only 5 years. Straight-line amortisation is determined by the management to be
the best method. As at 1st April, 2012, management is uncertain that the process can actually
be made economically feasible, and decides to write down the patent to an estimated market
value of ₹1,50,000 and decides to amortise over 2 years. As at 1st April, 2013, having perfected
the related production process, the asset is now appraised at a value of ₹3,00,000. Furthermore,
the estimated useful life is now believed to be 4 more years. Determine the value of intangible
asset at the end of each financial year?

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Solution

Value as on 31st March, 2012

Original cost 3,00,000

Less: Amortisation (3,00,000 x 1/5) (60,000)

Net Value 2,40,000

Value as on 31st March, 2013

On 1st April, 2012, the impairment is recorded by writing down the asset to the estimated
value of 1,50,000, which necessitates a 90,000 charge to profit & loss (carrying value,
2,40,000 less fair value 1,50,000).

Amortisation provided for the financial year 2012-2013 is 75,000 (1,50,000/2) Net value is
= 1,50,000 – 75,000 = 75,000.

Value as on 31st March, 2014

As of 1st April, 2013, the carrying value of the patent is 75,000. Revalued amount of patent is
3,00,000.

Out of total revaluation gain of 2,25,000, 90,000 will be charged to profit & loss and balance
amount of 1,35,000 (2,25,000 – 90,000) will be credited to revaluation reserve.

Amortisation provided for the financial year 2013-2014 is 75,000 (3,00,000 / 4) Net value is
= 3,00,000 – 75,000 = 2,25,000.

Similarly, Value as on March 31, 2015 = 2,25,000 – 75,000 = 1,50,000

Value as on March 31, 2016 = 1,50,000 – 75,000 = 75,000

Value as on March 31, 2017 = 75,000 – 75,000 = Nil

Question 16
An entity is developing a new production process. During 2011-2012, expenditure incurred
was ₹1,000, of which ₹900 was incurred before 1st March, 2012 and ₹100 was incurred
between 1st March, 2012 and 31st March, 2012. The entity is able to demonstrate that at 1st
March, 2012, 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 ₹500. Explain
the accounting treatment of expenditure incurred in 2011-2012 and 2012-2013 as per relevant
Ind AS.
During 2012-2013, expenditure incurred is ₹2,000. At the end of 2013, 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 ₹1,900.

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Solution
At the end of the financial year 2012, the production process is recognized as an intangible
asset at a cost of 100 (expenditure incurred since the date when the recognition criteria were
met, i.e., 1st March, 2012). 900 expenditures incurred before 1st March, 2012 is recognized
as an expense because the recognition criteria were not met until 1st March, 2012. This
expenditure does not form part of the cost of the production process recognized in the balance
sheet.
At the end of 2013, the cost of the production process is 2,100 (100 expenditure recognized at
the end of 2012 plus 2,000 expenditures recognized in 2013). The entity recognizes an
impairment loss of 200 to adjust the carrying amount of the process before impairment loss
(2,100) to its recoverable amount (1,900). This impairment loss will be reversed in a
subsequent period if the requirements for the reversal of an impairment loss in Ind AS 36 are
met.

Question 17

One of the senior engineers at XYZ has been working on a process to improve manufacturing
efficiency and, consequently, reduce manufacturing costs. This is a major project and has the
full support of XYZʼs board of directors. The senior engineer believes that the cost reductions
will exceed the project costs within twenty-four months of their implementation. Regulatory
testing and health and safety approval was obtained on 1st June 2015. This removed
uncertainties concerning the project, which was finally completed on 20th April 2016. Costs
of 18,00,000, incurred during the year till 31st March 2016, have been recognized as an
intangible asset. An offer of 7,80,000 for the new developed technology has been received
by potential buyer but it has been rejected by XYZ. Utkarsh believes that the project will be a
major success and has the potential to save the company 12,00,000 in perpetuity. Director of
research at XYZ, Neha, who is a qualified electronic engineer, is seriously concerned about
the long-term prospects of the new process and she is of the opinion that competitors would
have developed new technology at some time which would require to replace the new process
within four years. She estimates that the present value of future cost savings will be 9,60,000
over this period. After that, she thinks that there is no certainty about its future.

Advise the appropriate accounting treatment for the aforesaid issue for the year ended 31st
March, 2016.

Solution

Ind AS 38 ‘Intangible Assets’ requires an intangible asset to be recognized if, and only if,
certain criteria are met. Regulatory approval on 1st June 2015 was the last criterion to be met,
the other criteria have been met as follows:

• Intention to complete the asset is apparent as it is a major project with full support from
board
• Finance is available as resources are focused on project
• Costs can be reliably measured
• Benefits are expected to exceed costs – (in 2 years)

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Since the project was completed on 20th April, 2016, on 31st March, 2016, the amount of
15,00,000 (18,00,000 x 10/12) should be capitalised in the balance sheet of year ending 2015-
2016 representing expenditure since 1st June 2015.

The expenditure incurred prior to 1st June 2015 which is 3,00,000 (2/12 x 18,00,000) should
be recognized as an expense, retrospective recognition of expense as an asset is not allowed.

Ind AS 36 ‘Impairment of assets’ requires an intangible asset not yet available for use to be
tested for impairment annually.

Cash flow of Rs.12,00,000 in perpetuity would clearly have a present value in excess of
Rs. 12,00,000 and hence there would be no impairment. However, the research director is
technically qualified, so impairment tests should be based on her estimate of a four-year
remaining life and so present value of the future cost savings of Rs.9,60,000 should be
considered in that case.
Rs. 9,60,000 is greater than the offer received (fair value less costs to sell) of Rs.7,80,000
and so Rs.9,60,000 should be used as the recoverable amount.
So, the carrying amount should be consequently reduced to 9,60,000.
Calculation of Impairment loss of intangible asset under development:

Particulars Amount
Carrying amount 15,00,000
Less: Recoverable amount 9,60,000
Impairment loss 5,40,000
Impairment loss of 5,40,000 is to be recognised in the profit and loss for the year 2015-2016.
Necessary adjusting entry to correct books of account will be:
Particulars Dr Cr
Operating expenses- Development expenditure Dr. 3,00,000
Operating expenses–Impairment loss Dr. 5,40,000
To Intangible asset under development 8,40,000

Question 18 [June 23]

GINGER TULSI LTD. acquired a patent at a cost of ₹ 80,00,000 on April 1, 2019. The company started
amortizing the asset at ₹ 5,00,000 per annum since 31st March 2021. Since 31st March 2022, the
company started amortizing the asset as per Ind AS 38. On 31st March, 2023, it was found that the
product life-cycle may continue for another 5 years from then. The net cash flows from the product
during another 5 years are expected to be₹ 36,00,000, ₹ 46,00,000, ₹ 44,00,000, ₹ 40,00,000 and
34,00,000. On 31st March, 2025, it is felt that no further benefit will accrue in the future. Pass the
necessary journal entry to record Amortization of Cost of Patent as per Ind AS 38 for the year 2021-
2022 to 2024-2025.

IND AS 38 30 30 CA BISHNU
BISHNU KEDIA
KEDIA