Ind AS 38: INTANGIBLE ASSETS

Question 1
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 recognize such cost of staff
training as intangible asset?
Std Ind AS 38
Concept: Controllability is required for asset to be considered as Intangible asset
Conclusion: 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.

Question 2
XYZ has expertise in a consulting business. In past years, the company has gained a market
share for its services of 30 percent and considers recognizing it as an intangible asset. Is the
action by the company justified?
Std Ind AS 38
Concept: An Asset should be an identifiable asset to be considered as an Intangible asset. Also,
Controllability is required for asset to be considered as an Intangible asset
Conclusion: 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.

Question 3:
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 Rs. 800,000 for advertisements before 31st March, 20X1.
Rs.700,000 of this sum relates to advertisements shown before 31st March, 20X1 and Rs. 100,000
to advertisements shown in April, 20X1. Since 31st March, 20X1, the Company has paid for
further advertisements costing Rs. 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. Explain and justify the
treatment of the above costs in the financial statements for the year ended 31st March, 20X1.

Solution: Standard: Ind AS 38 – Intangible Assets

Concept: 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. Ind AS 38 specifically prohibits recognizing advertising expenditure as an
intangible asset.
Conclusion: 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, the advertisements paid
before 31st March, 20X1, Rs. 7,00,000 would be recognized as an expense and Rs. 1,00,000 as a
pre-payment for the year ended on 31st March, 20X1. Rs. 4,00,000 cost of advertisements paid
for since 31st March, 20X1 would be charged as expenses in the year ended 31st March, 20X2.

Question 4: Jupiter Ltd acquires new energy efficient technology that will significantly reduce
its energy costs for manufacturing. Determine the value of an intangible asset.
Cost of new solar technology (Gross before discount) 1000000
Trade discount provided 100000
Training course for staff in new technology 50000
Initial testing of new technology 35000
Losses incurred while other parts of the plant shut down during testing and 25000
training

Question 5:
X Ltd. purchased a standardized finance software at a list price of Rs. 30,00,000
and paid Rs. 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 a cost of Rs. 7,00,000
towards customization of the software for its intended use. X Ltd. purchased a 5-year
maintenance contract with the vendor company of Rs. 2,00,000. At what cost the intangible
asset will be recognized?

Question 6: Venus India Ltd acquired a software for its internal use. The amount payable for
the software was Rs. 600,000 immediately and Rs. 400,000 in one-year time. The other
expenditure incurred were:
Purchase tax: Rs. 1,00,000
Entry Tax: 90,000 (recoverable later from tax department)
Legal fees for Software Acquisition: Rs. 87,000
Consultancy fees for implementation: Rs. 1,20,000
Cost of capital of the company is 10%.
Determine the cost of the software on initial recognition using the principles of Ind AS 38.

Question 7: On 31st March 20X1, Earth India Ltd paid Rs. 50,00,000 for a 100% interest in Sun
India Ltd. At that date Sun Ltd’s net assets had a fair value of Rs. 30,00,000. In addition, Sun
Ltd also held the following rights:
Trade Mark named “GRAND” – valued at Rs. 180,000 using a discounted cash flow technique.
Sole distribution rights to an electronic product. Future cash flows from which are estimated to
be Rs. 150,000 per annum for the next 6 years.
10% is considered an appropriate cost of capital.
Determine the value of goodwill and other Intangible assets arising on acquisition.
Question 8:
X Ltd. is engaged in the business of publishing Journals. They acquired 50% stake in Y Ltd., a
company in the same industry. X Ltd. paid purchase consideration of Rs. 10,00,00,000 and fair
value of net asset acquired is Rs. 8,50,00,000. Also acquired the following as a part of above
purchase consideration:
(a) Rs. 30,00,000 for obtaining the skilled staff of Y Ltd.
(b) Rs. 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 of Rs.8,50,00,000.
Determine how should the above transactions be accounted for by X Ltd?

Solution:
As per Ind AS 38- X Ltd. should recognize an intangible asset in respect of the consideration
paid towards the ‘Non-Compete Fee’. As it will have an impact on the future economic benefits
flowing to the entity.
Rs. 50,00,000 will be separately recognized as an intangible asset.

However, the amount paid for obtaining skilled staff amounting to Rs. 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 off. The entity has insufficient control over the expected
future economic benefits arising from the team of skilled staff.
As per Ind AS-103, Costs incurred at the time of acquisition are considered separate
transactions and should not be included as part of the consideration transferred. These costs
are not considered part of the fair value of a business and, by themselves, do not represent an
asset. Instead, these costs represent services that have been rendered to and consumed by the
acquirer. Direct and indirect acquisition-related costs are expensed as incurred when the
service is received.

The value of goodwill would be =Purchase Consideration–Net Assets acquired (Fair Value)

Purchase Consideration Rs.10,00,00,000

Less: Net Assets Acquired Rs. 8,50,00,000
Also paid for an Intangible asset as Non-Compete Fee Rs. 50,00,000
Goodwill (Balancing Figure) Rs. 1,00,00,000
 Question 9: Sun Ltd acquired a software from Earth Ltd. in exchange for a telecommunication
license. The telecommunication license is carried at Rs. 5,00,000 in the books of Sun Ltd. The
Software is carried at Rs. 1,00,000 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 Rs. 5,20,000 and fair value of telecommunication license is Rs.
5,00,000, both are equally reliable.
2) Fair Value of Telecommunication license is not measurable. However similar software is
transacted by another similar company for Rs. 5,20,000
3) Fair Value of Software is not measurable. However similar Telecommunication license is
transacted by another similar company at Rs. 5,00,000.
4) Neither Fair Value of Software nor Telecommunication license could be reliably measured.

Solution: Ind AS 38 Concept: As Above given in 5.4 (Similar to Ind AS 16-PPE)

Sun Ltd. Earth Ltd.
Fair Value Carrying Amt Fair Value Carrying Amt
Asset Telecom
5,00,000 5,00,000 Software 5,20,000 1,00,000
Given up license
Asset Telecom
Software 5,20,000 5,00,000
Received license

Situation Sun Ltd. Earth Ltd.

Both Fair Values are equally reliable
(Record Debit at the Fair Value of Asset given up)
1 Software Dr. 5,00,000 Telecom license Dr. 5,20,000
To Telecom license 5,00,000 To Software 1,00,000
To Profit on Exchange 4,20,000
Fair Value of Software is more reliably measurable Rs. 5,20,000
(Record Debit at the Fair Value of Software)
2
Software Dr. 5,20,000 Telecom license Dr. 5,20,000
To Telecom license 5,00,000 To Software 1,00,000
To Profit on Exchange 20,000 To Profit on Exchange 4,20,000
Fair Value of Telecom license is more reliably measurable Rs. 5,00,000
(Record Debit at the Fair Value of Telecom license)
3 Software Dr. 5,00,000 Telecom license Dr. 5,00,000
To Telecom license 5,00,000 To Software 1,00,000
To Profit on Exchange 4,00,000
Fair Values of both Assets could not be reliably measured
(Record Debit at the Carrying Amount of Asset given up)
4
Software Dr. 5,00,000 Telecom license Dr. 1,00,000
To Telecom license 5,00,000 To Software 1,00,000
Question 10: What amounts should appear as assets in Venus Ltd. Balance sheet as at 31st
March 20X2? Venus Ltd. is preparing its accounts for the year ended 31st March 20X2 and is
unsure how to treat the following items.
1. Company has completed a big marketing and advertising campaign costing Rs. 2,40,000. The
finance director had authorised this campaign on the basis that it would create Rs. 5,00,000 of
additional profits over the next three years.
2. A new product was developed during the year. The expenditure totalled Rs. 1,50,000 of
which Rs. 1,00,000 was incurred prior to 30th September 20X1, the date on which it became
clear that the product was technically viable.
3. Staff participated in a training programme which cost the company Rs. 300,000. The training
organisation had made a presentation to the directors of Venus Ltd. outlining that incremental
profits to the business over the next twelve months would be Rs. 500,000.

Question 11: (All Rs. In ‘000)

Expenditure on a new production process in 20X1-20X2:
1st April to 31st December = Rs. 2,700
1st January to 31st March = Rs. 900
Rs. 3,600
The production process met the intangible asset recognition criteria for development on 1st
January, 20X2. The amount reviewed to be recoverable from the process is Rs. 1,000.
Expenditure incurred for development of the process in FY 20X2-20X3 is Rs. 6,000. Asset was
brought into use on 1st Apr 20X3 and is expected to be useful for 6 years.
What is the carrying amount of the intangible asset at 31st March, 20X2 and 31st March, 20X3.
Also determine the charge to profit or loss for 20X1-20X2?
At 31st March, 20X4, the amount reviewed to be recoverable from the process is Rs. 5,000.
Determine the carrying amount of the intangible asset at 31st March, 20X4 and the charge to
profit or loss for 20X3-20X4 on account of impairment loss?

Question 12:
(a) Saturn Ltd. acquired an intangible asset on 31st March 20X1 for Rs. 1,00,000. The asset was
revalued at Rs. 1,20,000 on 31st March 20X2 and Rs. 85,000 on 31st March 20X3.
(b) Jupiter Ltd. acquired an intangible asset on 31st March 20X1 for Rs. 1,00,000. The asset was
revalued at Rs. 85,000 on 31st March 20X2 and at Rs. 1,05,000 on 31st March 20X3. 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.
(Solution Similar to Ind AS 16)

Question 13: X Limited engaged in the business of manufacturing fertilizers 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 fertilizers 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 fertilizers as follows:
 Year (in metric tons)
1 50000
2 70000
3 100000
4 120000
5 110000
At the end of the 1st year, it achieved its targeted production. At the end of 2nd year, 65,000
metric tons of fertilizers was being manufactured, and X Limited considered revising 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. Determine how will X Limited amortize the technical know-how
fees as per Ind AS 38

Question 14:
X Ltd. purchased a patent right on April 1, 20X1, for Rs. 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 amortization is determined by the management to be
the best method. As on April 1, 20X2, 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 Rs. 1,50,000 and decides to amortize over 2 years. As on April 1, 20X3, having perfected the
related production process, the asset is now appraised at a value of Rs. 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?

Question 15: X Pharmaceutical Ltd. seeks your opinion in respect of the following accounting
transactions:
Acquired a 4-year license to manufacture a specialized drug at a cost of Rs.1,00,00,000 at the
start of the year. Production commenced immediately. Also purchased another company at the
start of the year. As part of that acquisition, the company acquired a brand with a Fair Value of
Rs. 3,00,00,000 based on sales revenue. The life of the brand is estimated at 15 years.
Spent Rs. 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.
On 1st April 20X0, company commenced developing a new drug ‘Drug-A’. The development
cost would be Rs. 10,00,00,000. Clinical trial proved successful and such drug is expected to
generate revenue over the next 5 years.
Development Cost incurred till 31st March, 20X1 is Rs. 5,00,00,000. Balance cost incurred during
the financial year 20X1-20X2 is Rs. 5,00,00,000.
It has also commenced developing another drug ‘Drug B’. It has incurred Rs. 50,00,000 towards
research expenses till March 31, 20X2. The technical feasibility has not yet been established.
How the above transactions will be accounted for in the books of account of X Pharmaceutical
Ltd?