Accounting Standard (AS) 26
(issued 2002)
Intangible Assets
Contents
OBJECTIVE
SCOPE Paragraphs 1-5
DEFINITIONS 6-18
Intangible Assets 7-18
Identifiability 11-13
Control 14-17
Future Economic Benefits 18
RECOGNITION AND INITIAL MEASUREMENT OF AN
INTANGIBLE ASSET 19-54
Separate Acquisition 24-26
Acquisition as Part of an Amalgamation 27-32
Acquisition by way of a Government Grant 33
Exchanges of Assets 34
Internally Generated Goodwill 35-37
Internally Generated Intangible Assets 38-54
Research Phase 41-43
Development Phase 44-51
Cost of an Internally Generated Intangible Asset 52-54
Continued../. .
502
RECOGNITION OF AN EXPENSE 55-58
Past Expenses not to be Recognised as an Asset 58
SUBSEQUENT EXPENDITURE 59-61
MEASUREMENT SUBSEQUENT TO INITIAL
RECOGNITION 62
AMORTISATION 63-80
Amortisation Period 63-71
Amortisation Method 72-74
Residual Value 75-77
Review of Amortisation Period and Amortisation Method 78-80
RECOVERABILITY OF THE CARRYING AMOUNT –
IMPAIRMENT LOSSES 81-86
RETIREMENTS AND DISPOSALS 87-89
DISCLOSURE 90-98
General 90-95
Research and Development Expenditure 96-97
Other Information 98
TRANSITIONAL PROVISIONS 99-100
APPENDICES
Accounting Standard (AS) 26*
(issued 2002)
IntangibleAssets
(This Accounting Standard includes paragraphs set in bold italic type
and plain type, which have equal authority. Paragraphs in bold italic
type indicate the main principles. This Accounting Standard should be
read in the context of its objective and the Preface to the Statements of
Accounting Standards1.)
Accounting Standard (AS) 26, 'Intangible Assets', issued by the Council of
the Institute of Chartered Accountants of India, comes into effect in respect
of expenditure incurred on intangible items during accounting periods
commencing on or after 1-4-2003 and ismandatory in nature2 fromthat date
for the following:
* It may be noted that the Institute has issued an Announcement in 2003 titled
‘Applicability of Accounting Standard (AS) 26, Intangible Assets, to
Intangible Items’ (published in ‘The Chartered Accountant’, November 2003, pp.
479). The Announcement deals with the issue as to what should be the
treatment of the expenditure incurred on intangible items, which were treated as
deferred revenue expenditure and ordinarily spread over a period of 3 to 5 years
before AS 26 became mandatory and which do not meet the definition of an
‘asset’ as per AS 26. The full text of the above Announcement has been
reproduced in the section titled
‘Announcements of the Council regarding status of various documents issued
by the Institute of Chartered Accountants of India’ appearing at the beginning
of this Compendium.
It may also be noted that a limited revision to this Standard has been made in
2004, pursuant to which paragraph 1 of this Standard has been revised (see
footnote 4). Pursuant to this limited revision, which comes into effect in respect
of accounting periods commencing on or after 1-4-2003, the above
Announcement stands superseded to the extent it deals with VRS expenditure,
from the aforesaid date (see ‘The Chartered Accountant’, April 2004, pp.1157).
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which
Accounting Standards are intended to apply only to items which are material.
2 Reference may be made to the section titled ‘Announcements of the Council
regarding status of various documents issued by the Institute of Chartered
Accountants of India’ appearing at the beginning of this Compendium for a
detailed discussion on the implications of the mandatory status of an accounting
standard.
504 AS 26 (issued 2002)
(i) Enterprises whose equity or debt securities are listed on a
recognised stock exchange in India, and enterprises that are in
the process of issuing equity or debt securities that will be listed
on a recognised stock exchange in India as evidenced by the
board of directors' resolution in this regard.
(ii) All other commercial, industrial and business reporting enterprises,
whose turnover for the accounting period exceeds Rs. 50 crores.
In respect of all other enterprises, the Accounting Standard comes into effect
in respect of expenditure incurred on intangible items during accounting
periods commencing on or after 1-4-2004 and is mandatory in nature from
that date.
Earlier application of the Accounting Standard is encouraged.
In respect of intangible items appearing in the balance sheet as on the
aforesaid date, i.e., 1-4-2003 or 1-4-2004, as the case may be, the Standard
has limited application as stated in paragraph 99. Fromthe date of this Standard
becoming mandatory for the concerned enterprises, the following stand
withdrawn:
(i) Accounting Standard (AS) 8, Accounting for Research and
Development;
(ii) Accounting Standard (AS) 6, Depreciation Accounting, with
respect to the amortisation (depreciation) of intangible
assets; and
(iii) Accounting Standard (AS) 10, Accounting for Fixed Assets -
paragraphs 16.3 to 16.7, 37 and 38.
The following is the text of the Accounting Standard.
Objective
The objective of this Statement is to prescribe the accounting treatment for
intangible assets that are not dealt with specifically in another Accounting
Standard. This Statement requires an enterprise to recognise an intangible
asset if, and only if, certain criteria are met. The Statement also specifies
Intangible Assets 505
how to measure the carrying amount of intangible assets and requires certain
disclosures about intangible assets.
Scope
1. This Statement should be applied by all enterprises in accounting
for intangible assets, except:
(a) intangible assets that are covered by another Accounting
Standard;
(b) financial assets3;
(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.
4This Statement should not be applied to expenditure in respect of
termination benefits5 also.
2. If another Accounting Standard deals with a specific type of intangible
asset, an enterprise applies that Accounting Standard instead of this
Statement. For example, this Statement does not apply to:
3 A financial asset is any asset that is :
(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.
4 The Council of the Institute decided to make a limited revision to AS 26 in 2004,
pursuant to which the last sentence has been added to paragraph 1. This
revision comes into effect in respect of accounting periods commencing on or
after 1.4.2003 (see ‘The Chartered Accountant’, April 2004, pp. 1157).
5 Accounting Standard (AS) 15 (revised 2005), Employee Benefits, which comes
into effect in respect of accounting periods commencing on or after 1-4-2006,
specifies the requirements relating to accounting for ‘Termination Benefits’.
506 AS 26 (issued 2002)
(a) intangible assets held by an enterprise for sale in the ordinary
course of business (seeAS 2, Valuation of Inventories, andAS 7,
Accounting for Construction Contracts6);
(b) deferred tax assets (seeAS 22,Accounting for Taxes on Income);
(c) leases that fall within the scope of AS 19, Leases; and
(d) goodwill arising on an amalgamation (see AS 14, Accounting for
Amalgamations) and goodwill arising on consolidation (see AS
21, Consolidated Financial Statements).
3. This Statement applies to, among other things, expenditure on advertising,
training, start-up, research and development activities. Research
and development activities are directed to the development of
knowledge. Therefore, although these activities may result in an asset
with physical substance (for example, a prototype), the physical element
of the asset is secondary to its intangible component, that is the knowledge
embodied in it. This Statement also applies to rights 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.
4. In the case of a finance lease, the underlying assetmay be either tangible
or intangible. After initial recognition, a lessee deals with an intangible asset
held under a finance lease under this Statement.
5. Exclusions from the scope of an Accounting Standard may occur if
certain activities or transactions are so specialised that they give rise to
accounting issues that may need to be dealt with in a different way. Such
issues arise in the expenditure on the exploration for, or development and
extraction of, oil, gas and mineral deposits in extractive industries and in the
case of contracts between insurance enterprises and their policyholders.
Therefore, this Statement does not apply to expenditure on such activities.
However, this Statement 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. Accounting issues of
specialised nature also arise in respect of accounting for discount or premium
6 This Standard has been revised and titled as ‘Construction Contracts’. The
revised AS 7 is published elsewhere in this Compendium.
Intangible Assets 507
relating to borrowings and ancillary costs incurred in connection with the
arrangement of borrowings, share issue expenses and discount allowed on
the issue of shares.Accordingly, this Statement does not apply to such items
also.
Definitions
6. The following terms are used in this Statement with the meanings
specified:
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.
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.
Research is original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and
understanding.
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.
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.
508 AS 26 (issued 2002)
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.
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.
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.7
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.
Intangible Assets
7. 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,
7 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the
requirements relating to impairment of assets.
Intangible Assets 509
market knowledge and trademarks (including brand names and publishing
titles). Common examples of items encompassed by these broad headings
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 itemof intangible nature
which either arises on acquisition or is internally generated.
8. Not all the items described in paragraph 7 will meet the definition of an
intangible asset, that is, identifiability, control over a resource and expectation
of future economic benefits flowing to the enterprise. If an item covered by
this Statement does notmeet the definition of an intangible asset, expenditure
to acquire it or generate it internally is recognised as an expense when it is
incurred. However, if the item is acquired in an amalgamation in the nature
of purchase, it forms part of the goodwill recognised at the date of the
amalgamation (see paragraph 55).
9. 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.
10. In some cases, an asset may incorporate both intangible and tangible
elements that are, in practice, inseparable. In determining whether such an
asset should be treated under AS 10, Accounting for Fixed Assets, or as an
intangible asset under this Statement, 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.
Identifiability
11. 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 fromgoodwill. Goodwill arising on an amalgamation in
510 AS 26 (issued 2002)
the nature of purchase represents a payment made by the acquirer in
anticipation of future economic benefits. The future economic benefitsmay
result from synergy between the identifiable assets acquired or from assets
which, individually, do not qualify for recognition in the financial statements
but for which the acquirer is prepared to make a payment in the
amalgamation.
12. An intangible asset can be clearly distinguished from goodwill if the
asset is separable. An asset is separable if the 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.
13. 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. Similarly, if an internal project aims to create legal rights for
the enterprise, the nature of these rights may assist the enterprise
in identifying an underlying internally generated intangible asset. Also,
even if an asset generates future economic benefits 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.
Control
14. 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.
In the absence of legal rights, it is more difficult to demonstrate control.
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.
15. 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 (where permitted) or by a legal duty on employees to maintain
confidentiality.
Intangible Assets 511
16. An enterprise may have a team of skilled staff and may be able to
identify incremental staff skills leading to future economic benefits from
training. The enterprise may also expect that the staff will continue to make
their skills available to the enterprise. However, usually an enterprise has
insufficient control over the expected future economic benefits arising from
a team of skilled staff and from training to consider that these items 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.
17. An enterprise may have a portfolio of customers or a market share
and expect that, due to its efforts in building customer relationships and
loyalty, the customerswill continue to tradewith the enterprise. However, in
the absence of legal rights to protect, or other ways to control, the
relationshipswith customers or the loyalty of the customers to the enterprise,
the enterprise usually has insufficient control over the economic benefits
fromcustomer relationships and loyalty to consider that such items (portfolio
of customers, market shares, customer relationships, customer loyalty) meet
the definition of intangible assets.
Future Economic Benefits
18. 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.
Recognition and Initial Measurement of an
IntangibleAsset
19. The recognition of an item as an intangible asset requires an enterprise
to demonstrate that the item meets the:
(a) definition of an intangible asset (see paragraphs 6-18); and
(b) recognition criteria set out in this Statement (see paragraphs 20-
54).
512 AS 26 (issued 2002)
20. 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.
21. 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.
22. An enterprise uses judgement to assess the degree of certainty
attached to the flow of future economic benefits that are attributable to the
use of the asset on the basis of the evidence available at the time of initial
recognition, giving greater weight to external evidence.
23. An intangible asset should be measured initially at cost.
Separate Acquisition
24. 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.
25. The cost of an intangible asset comprises its purchase price, including
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.
26. 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.
Acquisition as Part of an Amalgamation
27. An intangible asset acquired in an amalgamation in the nature of
purchase is accounted for in accordance with Accounting Standard (AS) 14,
Intangible Assets 513
Accounting for Amalgamations.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, paragraphs 28 to 32 of this Statement need to be considered.
28. 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 change in economic circumstances
between the transaction date and the date at which the asset's fair value is
estimated.
29. 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. In determining this
amount, an enterprise considers the outcome of recent transactions for
similar assets.
30. Certain enterprises that are regularly involved in the purchase and sale
of unique intangible assets have developed techniques for estimating their
fair values indirectly. These techniques may be used for initialmeasurement
of an intangible asset acquired in an amalgamation in the nature of purchase
if their objective is to estimate fair value as defined in this Statement and if
they reflect current transactions and practices in the industry to which the
asset belongs. These techniques include, where appropriate,
applying multiples reflecting current market transactions to certain
indicators driving the profitability of the asset (such as revenue, market
shares, operating profit, etc.) or discounting estimated future net cash
flows from the asset.
31. In accordance with this Statement:
(a) a transferee recognises an intangible asset that meets the
recognition criteria in paragraphs 20 and 21, 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
514 AS 26 (issued 2002)
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 (see paragraph 55).
32. Unless there is an active market for an intangible asset acquired in an
amalgamation in the nature of purchase, the cost initially recognised for the
intangible asset is restricted to an amount that does not create or increase
any capital reserve arising at the date of the amalgamation.
Acquisition by way of a Government Grant
33. 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, Accounting for Government Grants, 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. AS 12 also requires that
in case a non-monetary asset is given free of cost, it should be recorded at a
nominal value. 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.
Exchanges of Assets
34. 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
accordancewith the principles laid down in this regard inAS 10,Accounting
for Fixed Assets.
Internally Generated Goodwill
35. Internally generated goodwill should not be recognised as an
asset.
36. In some cases, expenditure is incurred to generate future economic
benefits, but it does not result in the creation of an intangible asset thatmeets
Intangible Assets 515
the recognition criteria in this Statement. Such expenditure is
often described as contributing to 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.
37. 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.
Internally Generated Intangible Assets
38. 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.
Therefore, in addition to complying with the general requirements for the
recognition and initial measurement of an intangible asset, an enterprise
applies the requirements and guidance in paragraphs 39-54 below to all
internally generated intangible assets.
39. To assess whether an internally generated intangible asset meets the
criteria for recognition, an enterprise classifies the generation of the asset into:
(a) a research phase; and
(b) a development phase.
Although the terms ‘research’ and ‘development’ are defined, the terms
‘research phase’ and ‘development phase’ have a broader meaning for the
purpose of this Statement.
516 AS 26 (issued 2002)
40. 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.
Research Phase
41. No intangible asset arising from research (or from the research
phase of an internal project) should be recognised. Expenditure on
research (or on the research phase of an internal project) should be
recognised as an expense when it is incurred.
42. This Statement takes the view that, in the research phase of a project,
an enterprise cannot demonstrate that an intangible asset exists from which
future economic benefits are probable. Therefore, this expenditure is
recognised as an expense when it is incurred.
43. 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;
(c) the search for alternatives for materials, devices, products,
processes, systems or services; and
(d) the formulation, design, evaluation and final selection of possible
alternatives for new or improved materials, devices, products,
processes, systems or services.
Development Phase
44. 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;
Intangible Assets 517
(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.
45. In the development phase of a project, an enterprise can, in some
instances, identify an intangible asset and demonstrate that future economic
benefits fromthe asset are probable. This is because the development phase
of a project is further advanced than the research phase.
46. 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;
(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 testingof a chosen alternative fornew
or improved materials, devices, products, processes, systems or
services.
47. 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 Assets8 . If the asset will generate economic benefits only in
8 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the
requirements relating to impairment of assets.
518 AS 26 (issued 2002)
combination with other assets, the enterprise applies the concept of cashgenerating
units as set out in Accounting Standard on Impairment of Assets.
48. Availability of resources to complete, use and obtain the benefits from
an intangible asset can be demonstrated by, for example, a business plan
showing the technical, financial and other resources needed and the
enterprise's ability to secure those resources. In certain cases, an enterprise
demonstrates the availability of external finance by obtaining a lender's
indication of its willingness to fund the plan.
49. An enterprise's costing systems can often measure reliably the cost of
generating an intangible asset internally, such as salary and other expenditure
incurred in securing copyrights or licences or developing computer software.
50. Internally generated brands, mastheads, publishing titles,
customer lists and items similar in substance should not be recognised
as intangible assets.
51. This Statement 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.
Cost of an Internally Generated Intangible Asset
52. The cost of an internally generated intangible asset for the purpose of
paragraph 23 is the sum of expenditure incurred from the time when the
intangible asset first meets the recognition criteria in paragraphs 20-21 and
44. Paragraph 58 prohibits reinstatement of expenditure recognised as an
expense in previous annual financial statements or interim financial reports.
53. 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. 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;
Intangible Assets 519
(c) any expenditure that is directly attributable to generating the
asset, such as fees to register a legal right and the amortisation of
patents and licences that are used to generate the asset; and
(d) overheads that are necessary to generate the asset and that can
be allocated on a reasonable and consistent basis to the asset (for
example, an allocation of the depreciation of fixed assets,
insurance premium and rent). Allocations of overheads are made
on bases similar to those used in allocating overheads to
inventories (see AS 2, Valuation of Inventories). AS 16,
Borrowing Costs, establishes criteria for the recognition of
interest as a component of the cost of a qualifying asset. These
criteria are also applied for the recognition of interest as a
component of the cost of an internally generated intangible asset.
54. The following are not components of the cost of an internally generated
intangible asset:
(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 Illustrating Paragraph 52
An enterprise is developing a new production process. During the
year 20X1, expenditure incurred was Rs. 10 lakhs, of which Rs. 9
lakhswas incurred before 1 December 20X1 and 1 lakhwas 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 Rs. 5 lakhs.
At the end of 20X1, the production process is recognised as an
intangible asset at a cost of Rs. 1 lakh (expenditure incurred since the
520 AS 26 (issued 2002)
date when the recognition criteria were met, that is, 1 December
20X1). The Rs. 9 lakhs 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 Rs. 20 lakhs. At the
end of 20X2, 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 Rs. 19 lakhs.
At the end of the year 20X2, the cost of the production process is Rs. 21
lakhs (Rs. 1 lakh expenditure recognised at the end of 20X1 plus Rs.
20 lakhs expenditure recognised in 20X2). The enterprise recognises
an impairment loss of Rs. 2 lakhs to adjust the carrying amount of the
process before impairment loss (Rs. 21 lakhs) to its recoverable amount
(Rs. 19 lakhs). This impairment loss will be reversed in a subsequent
period if the requirements for the reversal of an impairment loss in
Accounting Standard on Impairment of Assets9, are met.
Recognition of an Expense
55. 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 (see paragraphs 19-54); or
(b) the item is acquired in an amalgamation in the nature of
purchase and cannot be recognised as an intangible asset.
If this is the case, this expenditure (included in the cost of
acquisition) should form part of the amount attributed to
goodwill (capital reserve) at the date of acquisition (see AS
14, Accounting for Amalgamations).
56. 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
9 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements
relating to impairment of assets.
Intangible Assets 521
recognised as an expense when it is incurred. For example, expenditure on
research is always recognised as an expense when it is incurred (see
paragraph 41). 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 itemof 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 newfacility 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;
(c) expenditure on advertising and promotional activities; and
(d) expenditure on relocating or re-organising part or all of an
enterprise.
57. Paragraph 55 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
58. Expenditure on an intangible item that was initially recognised as
an expense by a reporting enterprise 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.
SubsequentExpenditure
59. 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
522 AS 26 (issued 2002)
(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.
60. Subsequent expenditure on a recognised intangible asset is recognised
as an expense if this expenditure is required to maintain the asset at its
originally assessed standard of performance. The nature of intangible assets
is such that, inmany cases, it is not possible to determinewhether subsequent
expenditure is likely to enhance or maintain the economic benefits that will
flow to the enterprise from those assets. In addition, it is often difficult to
attribute such expenditure directly to a particular intangible asset rather than
the business as a whole. 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.
61. Consistent with paragraph 50, subsequent expenditure on brands,
mastheads, publishing titles, customer lists and items similar in substance
(whether externally purchased or internally generated) is always recognised
as an expense to avoid the recognition of internally generated goodwill.
Measurement Subsequent to InitialRecognition
62. After initial recognition, an intangible asset should be carried at
its cost less any accumulated amortisation and any accumulated
impairment losses.
Amortisation
Amortisation Period
63. The depreciable amount of an intangible asset should be allocated
on a systematic basis over the best estimate of its useful life. 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.
64. As the future economic benefits embodied in an intangible asset are
Intangible Assets 523
consumed over time, the carrying amount of the asset is reduced to reflect
that consumption. This is achieved by systematic allocation of the cost of
the asset, less any residual value, as an expense over the asset's useful life.
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 themarket 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
(h) whether the useful life of the asset is dependent on the useful life
of other assets of the enterprise.
65. 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.
66. Estimates of the useful life of an intangible asset generally become
less reliable as the length of the useful life increases. This Statement adopts
a presumption that the useful life of intangible assets is unlikely to exceed
ten years.
524 AS 26 (issued 2002)
67. 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 (see paragraph
83); and
(c) discloses the reasons why the presumption is rebutted and the
factor(s) that played a significant role in determining the useful
life of the asset (see paragraph 94(a)).
Examples
A. An enterprise has purchased an exclusive right to generate
hydro-electric power for sixty years. The costs of generating hydroelectric
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 sixty years.
The enterprise amortises the right to generate power over sixty
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 thirty 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 thirty years.
The enterprise amortises the right to operate the motorway over
thirty years, unless there is evidence that its useful life is shorter.
68. The useful life of an intangible asset may be very long but it is always
finite. Uncertainty justifies estimating the useful life of an intangible asset
on a prudent basis, but it does not justify choosing a life that is unrealistically
short.
69. If control over the future economic benefits from an intangible
Intangible Assets 525
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:
(a) the legal rights are renewable; and
(b) renewal is virtually certain.
70. There may be both economic and legal factors influencing the useful
life of an intangible asset: economic factors determine the period overwhich
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.
71. The following factors, among others, indicate that renewal of a legal
right is virtually certain:
(a) the fair value of the intangible asset is not expected to reduce as
the initial expiry date approaches, or is not expected to reduce by
more than the cost of renewing the underlying right;
(b) there is evidence (possibly based on past experience) that the
legal rights will be renewed; and
(c) there is evidence that the conditions necessary to obtain the
renewal of the legal right (if any) will be satisfied.
Amortisation Method
72. 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. 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.
73. 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
526 AS 26 (issued 2002)
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. There will rarely, if ever, be persuasive evidence to support
an amortisationmethod for intangible assets that results in a lower amount of
accumulated amortisation than under the straight-line method.
74. Amortisation is usually recognised as an expense. However,
sometimes, the economic benefits embodied in an asset are absorbed by the
enterprise in producing other assets rather than giving rise to an expense. In
these cases, the amortisation charge forms part of the cost of the other asset
and is included in its carrying amount. For example, the amortisation of
intangible assets used in a production process is included in the carrying
amount of inventories (see AS 2, Valuation of Inventories).
Residual Value
75. 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.
76. A residual value other than zero implies that an enterprise expects to
dispose of the intangible asset before the end of its economic life.
77. The residual value is estimated using prices prevailing at the date of
acquisition of the asset, for the sale of a similar asset that has reached the
end of its estimated useful life and that has operated under conditions similar
to those in which the asset will be used. The residual value is not
subsequently increased for changes in prices or value.
Intangible Assets 527
Review of Amortisation Period and Amortisation
Method
78. 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, Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies.
79. During the life of an intangible asset, it may become apparent that the
estimate of its useful life is inappropriate. For example, the useful life may
be extended by subsequent expenditure that improves the condition of the
asset beyond its originally assessed standard of performance. Also, the
recognition of an impairment loss may indicate that the amortisation period
needs to be changed.
80. Over time, the pattern of future economic benefits expected to flow to
an enterprise from an intangible asset may change. For example, it may
become apparent that a diminishing balance method of amortisation is
appropriate rather than a straight-line method. Another example is if use of
the rights represented by a licence is deferred pending action on
other components of the business plan. In this case, economic benefits
that flow from the asset may not be received until later periods.
Recoverability of the Carrying Amount—
ImpairmentLosses
81. To determine whether an intangible asset is impaired, an enterprise
applies Accounting Standard on Impairment of Assets1 0 . That Standard
explains how an enterprise reviews the carrying amount of its assets, how it
determines the recoverable amount of an asset and when it recognises or
reverses an impairment loss.
1 0 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements
relating to impairment of assets.
528 AS 26 (issued 2002)
82. If an impairment loss occurs before the end of the first annual
accounting period commencing after acquisition for an intangible asset
acquired in an amalgamation in the nature of purchase, the impairment loss
is recognised as an adjustment to both the amount assigned to the intangible
asset and the goodwill (capital reserve) recognised at the date of the
amalgamation. However, if the impairment loss relates to specific events or
changes in circumstances occurring after the date of acquisition, the
impairment loss is recognised under Accounting Standard on Impairment of
Assets and not as an adjustment to the amount assigned to the goodwill
(capital reserve) recognised at the date of acquisition.
83. 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.
The recoverable amount should be determined under Accounting
Standard on Impairment of Assets and impairment losses recognised
accordingly.
84. The ability of an intangible asset to generate sufficient future
economic benefits to recover its cost is usually subject to great
uncertainty until the asset is available for use. Therefore, this Statement
requires an enterprise to test for impairment, at least annually, the carrying
amount of an intangible asset that is not yet available for use.
85. It is sometimes difficult to identify whether an intangible asset may be
impaired because, among other things, there is not necessarily any obvious
evidence of obsolescence. This difficulty arises particularly if the asset has
a long useful life. As a consequence, this Statement requires, as aminimum,
an annual calculation of the recoverable amount of an intangible asset if its
useful life exceeds ten years fromthe datewhen it becomes available for use.
86. The requirement for an annual impairment test of an intangible asset
applies whenever the current total estimated useful life of the asset exceeds
ten years from when it became available for use. Therefore, if the useful
Intangible Assets 529
life of an intangible asset was estimated to be less than ten years at initial
recognition, but the useful life is extended by subsequent expenditure to
exceed ten years from when the asset became available for use, an
enterprise performs the impairment test required under paragraph 83(b) and
also makes the disclosure required under paragraph 94(a).
Retirements andDisposals
87. An intangible asset should be derecognised (eliminated from the
balance sheet) on disposal or when no future economic benefits are
expected from its use and subsequent disposal.
88. 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.
89. 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. At least at each financial year end, an enterprise tests the asset
for impairment under Accounting Standard on Impairment of Assets1 1 , and
recognises any impairment loss accordingly.
Disclosure
General
90. The financial statements should disclose the following for each
class of intangible assets, distinguishing between internally generated
intangible assets and other intangible assets:
(a) the useful lives or the amortisation rates used;
(b) the amortisation methods used;
(c) the gross carrying amount and the accumulated
amortisation (aggregated with accumulated impairment
losses) at the beginning and end of the period;
1 1 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements
relating to impairment of assets.
530 AS 26 (issued 2002)
(d) 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 (if any);
(iv) impairment losses reversed in the statement of profit
and loss during the period (if any);
(v) amortisation recognised during the period; and
(vi) other changes in the carrying amount during the period.
91. 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:
(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.
The classes mentioned above are disaggregated (aggregated) into smaller
(larger) classes if this results in more relevant information for the users of
the financial statements.
92. An enterprise discloses information on impaired intangible assets under
Intangible Assets 531
Accounting Standard on Impairment of Assets1 2 in addition to the
information required by paragraph 90(d)(iii) and (iv).
93. An enterprise discloses the change in an accounting estimate or
accounting policy such as that arising from changes in the amortisation
method, the amortisation period or estimated residual values, in accordance
with AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes
in Accounting Policies.
94. 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.
95. When an enterprise describes the factor(s) that played a significant role
in determining the useful life of an intangible asset that is amortised overmore
than ten years, the enterprise considers the list of factors in paragraph 64.
Research and Development Expenditure
96. The financial statements should disclose the aggregate amount of
research and development expenditure recognised as an expense
during the period.
1 2 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements
relating to impairment of assets.
532 AS 26 (issued 2002)
97. Research and development expenditure comprises all expenditure that
is directly attributable to research or development activities or that can be
allocated on a reasonable and consistent basis to such activities (see
paragraphs 53-54 for guidance on the type of expenditure to be included for
the purpose of the disclosure requirement in paragraph 96).
Other Information
98. An enterprise is encouraged, but not required, to give a description of
any fully amortised intangible asset that is still in use.
TransitionalProvisions
99. Where, on the date of this Statement coming into effect, an
enterprise is following an accounting policy of not amortising
an intangible item or amortising an intangible item over a period
longer than the period determined under paragraph 63 of this
Statement and the period determined under paragraph 63 has expired
on the date of this Statement coming into effect, the carrying
amount appearing in the balance sheet in respect of that item
should be eliminated with a corresponding adjustment to the opening
balance of revenue reserves.
In the event the period determined under paragraph 63 has not expired
on the date of this Statement coming into effect and:
(a) if the enterprise is following an accounting policy of not
amortising an intangible item, the carrying amount of the
intangible item should be restated, as if the accumulated
amortisation had always been determined under this
Statement, with the corresponding adjustment to the opening
balance of revenue reserves. The restated carrying amount
should be amortised over the balance of the period as
determined in paragraph 63.
(b) if the remaining period as per the accounting policy followed
by the enterprise:
(i) is shorter as compared to the balance of the period
determined under paragraph 63, the carrying amount
of the intangible item should be amortised over the
Intangible Assets 533
remaining period as per the accounting policy followed
by the enterprise,
(ii) is longer as compared to the balance of the period
determined under paragraph 63, the carrying amount
of the intangible item should be restated, as if the
accumulated amortisation had always been determined
under this Statement, with the corresponding
adjustment to the opening balance of revenue reserves.
The restated carrying amount should be amortised over
the balance of the period as determined in paragraph
63.1 3
100. Appendix B illustrates the application of paragraph 99.
13 See also footnote marked ‘*’ on page 503.
534 AS 26 (issued 2002)
Appendix A
This Appendix, which is illustrative and does not form part of the
Accounting Standard, provides illustrative application of the principles
laid down in the Standard to internal use software and web-site costs.
The purpose of the appendix is to illustrate the application of the
Accounting Standard to assist in clarifying its meaning.
I. Illustrative Application of the Accounting
Standard to InternalUseComputer Software
Computer software for internal use can be internally generated or acquired.
Internally Generated Computer Software
1. Internally generated computer software for internal use is developed or
modified internally by the enterprise solely to meet the needs of the
enterprise and at no stage it is planned to sell it.
2. The stages of development of internally generated software may be
categorised into the following two phases:
• Preliminary project stage, i.e., the research phase
• Development stage
Preliminary project stage
3. At the preliminary project stage the internally generated software should
not be recognised as an asset. Expenditure incurred in the preliminary
project stage should be recognised as an expense when it is incurred. The
reason for such a treatment is that at this stage of the software project an
enterprise can not demonstrate that an asset exists from which future
economic benefits are probable.
4. When a computer software project is in the preliminary project stage,
enterprises are likely to:
(a) Make strategic decisions to allocate resources between alternative
projects at agiven point in time. For example, should programmers
Intangible Assets 535
develop a new payroll system or direct their efforts toward
correcting existing problems in an operating payroll system.
(b) Determine the performance requirements (that is, what it is that
they need the software to do) and systems requirements for the
computer software project it has proposed to undertake.
(c) Explore alternative means of achieving specified performance
requirements. For example, should an entity make or buy the
software. Should the software run on a mainframe or a client
server system.
(d) Determine that the technology needed to achieve performance
requirements exists.
(e) Select a consultant to assist in the development and/or installation
of the software.
Development Stage
5. An internally generated software arising at the development stage
should be recognised as an asset if, and only if, an enterprise can
demonstrate all of the following:
(a) the technical feasibility of completing the internally generated
software so that it will be available for internal use;
(b) the intention of the enterprise to complete the internally generated
software and use it to perform the functions intended. For
example, the intention to complete the internally generated
software can be demonstrated if the enterprise commits to the
funding of the software project;
(c) the ability of the enterprise to use the software;
(d) how the software will generate probable future economic
benefits. Among other things, the enterprise should demonstrate
the usefulness of the software;
(e) the availability of adequate technical, financial and other
resources to complete the development and to use the
software; and
536 AS 26 (issued 2002)
(f) the ability of the enterprise to measure the expenditure
attributable to the software during its development reliably.
6. Examples of development activities in respect of internally generated
software include:
(a) Design including detailed program design - which is the process
of detail design of computer software that takes product function,
feature, and technical requirements to their most detailed, logical
form and is ready for coding.
(b) Coding which includes generating detailed instructions in a
computer language to carry out the requirements described in the
detail program design. The coding of computer software may
begin prior to, concurrent with, or subsequent to the completion
of the detail program design.
At the end of these stages of the development activity, the enterprise has a
working model, which is an operative version of the computer software
capable of performing all themajor planned functions, and is ready for initial
testing ("beta" versions).
(c) Testing which is the process of performing the steps necessary to
determine whether the coded computer software product meets
function, feature, and technical performance requirements set
forth in the product design.
At the end of the testing process, the enterprise has a master version of the
internal use software, which is a completed version together with the related
user documentation and the training materials.
Cost of internally generated software
7. The cost of an internally generated software is the sum of the
expenditure incurred from the time when the software first met the
recognition criteria for an intangible asset as stated in paragraphs 20 and
21 of this Statement and paragraph 5 above. An expenditure which did not
meet the recognition criteria as aforesaid and expensed in an earlier
financial statements should not be reinstated if the recognition criteria
are met later.
Intangible Assets 537
8. The cost of an internally generated software comprises all expenditure
that can be directly attributed or allocated on a reasonable and consistent
basis to create the software for its intended use. The cost include:
(a) expenditure on materials and services used or consumed in
developing the software;
(b) the salaries, wages and other employment related costs of
personnel directly engaged in developing the software;
(c) any expenditure that is directly attributable to generating
software; and
(d) overheads that are necessary to generate the software and that
can be allocated on a reasonable and consistent basis to the
software (For example, an allocation of the depreciation of fixed
assets, insurance premium and rent). Allocation of overheads
aremade on basis similar to those used in allocating the overhead
to inventories.
9. The following are not components of the cost of an internally generated
software:
(a) selling, administration and other general overhead expenditure
unless this expenditure can be directly attributable to the
development of the software;
(b) clearly identified inefficiencies and initial operating losses
incurred before software achieves the planned performance; and
(c) expenditure on training the staff to use the internally generated
software.
Software Acquired for Internal Use
10. The cost of a software acquired for internal use should be recognised
as an asset if it meets the recognition criteria prescribed in paragraphs 20
and 21 of this Statement.
11. The cost of a software purchased for internal use comprises its purchase
price, including any import duties and other taxes (other than those
538 AS 26 (issued 2002)
subsequently recoverable by the enterprise from the taxing authorities) and
any directly attributable expenditure onmaking the software readyfor its use.
Any trade discounts and rebates are deducted in arriving at the cost. In the
determination of cost, matters stated in paragraphs 24 to 34 of the Statement
need to be considered, as appropriate.
Subsequent expenditure
12. Enterprises may incur considerable cost in modifying existing
software systems. Subsequent expenditure on software 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 software to
generate future economic benefits in excess of its originally
assessed standards of performance; and
(b) the expenditure can be measured and attributed to the software
reliably.
If these conditions are met, the subsequent expenditure should be added to
the carrying amount of the software. Costs incurred in order to restore or
maintain the future economic benefits that an enterprise can expect fromthe
originally assessed standard of performance of existing software systems is
recognised as an expense when, and only when, the restoration or
maintenance work is carried out.
Amortisation period
13. The depreciable amount of a software should be allocated on a
systematic basis over the best estimate of its useful life. The amortisation
should commence when the software is available for use.
14. As per this Statement, 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. However, given the history of rapid changes in
technology, computer software is susceptible to technological obsolescence.
Therefore, it is likely that useful life of the softwarewill bemuch shorter, say
3 to 5 years.
Amortisation method
Intangible Assets 539
15. The amortisation method used should reflect the pattern in which the
software's economic benefits are consumed by the enterprise. If that
pattern can not be determined reliably, the straight-linemethod should be used.
The amortisation charge for each period should be recognised as an
expenditure unless another Accounting Standard permits or requires it to be
included in the carrying amount of another asset. For example, the
amortisation of a software used in a production process is included in the
carrying amount of inventories.
II. Illustrative Application of the Accounting
Standard toWeb-Site Costs
1. An enterprise may incur internal expenditures when developing,
enhancing and maintaining its own web site. The web site may be used for
various purposes such as promoting and advertising products and services,
providing electronic services, and selling products and services.
2. The stages of a web site's development can be described as follows:
(a) Planning - includes undertaking feasibility studies, defining
objectives and specifications, evaluating alternatives and
selecting preferences;
(b) Application and Infrastructure Development - includes
obtaining a domain name, purchasing and developing hardware
and operating software, installing developed applications and
stress testing; and
(c) GraphicalDesign and ContentDevelopment - includes designing
the appearance of web pages and creating, purchasing, preparing
and uploading information, either textual or graphical in nature, on
the web site prior to the web site becoming available for use.
This information may either be stored in separate databases that
are integrated into (or accessed from) the web site or coded
directly into the web pages.
3. Once development of a web site has been completed and the web site is
available for use, the web site commences an operating stage. During this
540 AS 26 (issued 2002)
stage, an enterprise maintains and enhances the applications, infrastructure,
graphical design and content of the web site.
4. The expenditures for purchasing, developing, maintaining and
enhancing hardware (e.g., web servers, staging servers, production servers
and Internet connections) related to a web site are not accounted for under
this Statement but are accounted for under AS 10, Accounting for Fixed
Assets. Additionally, when an enterprise incurs an expenditure for having
an Internet service provider host the enterprise's web site on it's own
servers connected to the Internet, the expenditure is recognised as an
expense.
5. An intangible asset is defined in paragraph 6 of this Statement as 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. Paragraph 7 of this Statement provides computer
software as a common example of an intangible asset. By analogy, a web
site is another example of an intangible asset. Accordingly, a web site
developed by an enterprise for its own use is an internally generated
intangible asset that is subject to the requirements of this Statement.
6. An enterprise should apply the requirements of this Statement to an
internal expenditure for developing, enhancing andmaintaining its ownweb
site. Paragraph 55 of this Statement provides expenditure on an intangible
item to be recognised as an expense when incurred unless it forms part of
the cost of an intangible asset that meets the recognition criteria in
paragraphs 19-54 of the Statement. Paragraph 56 of the Statement requires
expenditure on start-up activities to be recognised as an expense when
incurred. Developing a web site by an enterprise for its own use is not a
start-up activity to the extent that an internally generated intangible asset is
created. An enterprise applies the requirements and guidance in paragraphs
39-54 of this Statement to an expenditure incurred for developing its own
web site in addition to the general requirements for recognition and initial
measurement of an intangible asset. The cost of a web site, as described in
paragraphs 52-54 of this Statement, comprises all expenditure that can be
directly attributed, or allocated on a reasonable and consistent basis, to
creating, producing and preparing the asset for its intended use.
The enterprise should evaluate the nature of each activity for which an
expenditure is incurred (e.g., training employees and maintaining the web
site) and the web site's stage of development or post-development:
Intangible Assets 541
(a) Paragraph 41 of this Statement requires an expenditure on
research (or on the research phase of an internal project) to be
recognised as an expensewhen incurred. The examples provided
in paragraph 43 of this Statement are similar to the activities
undertaken in the Planning stage of a web site's development.
Consequently, expenditures incurred in the Planning stage of a
web site's development are recognised as an expense when
incurred.
(b) Paragraph 44 of this Statement requires an intangible asset
arising from the development phase of an internal project to be
recognised if an enterprise can demonstrate fulfillment of the six
criteria specified. Application and Infrastructure Development
and Graphical Design and Content Development stages are
similar in nature to the development phase. Therefore,
expenditures incurred in these stages should be recognised as an
intangible asset if, and only if, in addition to complying with the
general requirements for recognition and initial measurement of
an intangible asset, an enterprise can demonstrate those items
described in paragraph 44 of this Statement. In addition,
(i) an enterprise may be able to demonstrate how its web site
will generate probable future economic benefits under
paragraph 44(d) by using the principles in Accounting
Standard on Impairment of Assets1 4 . This includes
situations where the web site is developed solely or
primarily for promoting and advertising an enterprise's own
products and services. Demonstrating how a web site will
generate probable future economic benefits under
paragraph 44(d) by assessing the economic benefits to be
received from the web site and using the principles in
Accounting Standard on Impairment of Assets, may be
particularly difficult for an enterprise that develops a web
site solely or primarily for advertising and promoting its own
products and services; information is unlikely to be
available for reliably estimating the amount obtainable from
the sale of the web site in an arm's length transaction, or the
future cash inflows and outflows to be derived from its
1 4 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements
relating to impairment of assets.
542 AS 26 (issued 2002)
continuing use and ultimate disposal. In this circumstance,
an enterprise determines the future economic benefits of
the cash-generating unit to which the web site belongs, if it
does not belong to one. If the web site is considered a
corporate asset (one that does not generate cash inflows
independently from other assets and their carrying amount
cannot be fully attributed to a cash-generating unit), then an
enterprise applies the 'bottom-up' test and/or the 'top-down'
test under Accounting Standard on Impairment of Assets.
(ii) an enterprise may incur an expenditure to enable use of
content, which had been purchased or created for another
purpose, on its web site (e.g., acquiring a license to
reproduce information) or may purchase or create content
specifically for use on its web site prior to the web site
becoming available for use. In such circumstances, an
enterprise should determine whether a separate asset, is
identifiable with respect to such content (e.g., copyrights
and licenses), and if a separate asset is not identifiable, then
the expenditure should be included in the cost of developing
the web site when the expenditure meets the conditions in
paragraph 44 of this Statement. As per paragraph 20 of this
Statement, an intangible asset is recognised if, and only if, it
meets specified criteria, including the definition of an
intangible asset. Paragraph 52 indicates that the cost of an
internally generated intangible asset is the sum of
expenditure incurred from the time when the intangible
asset first meets the specified recognition criteria. When
an enterprise acquires or creates content, it may be possible
to identify an intangible asset (e.g., a license or a copyright)
separate from a web site. Consequently, an enterprise
determines whether an expenditure to enable use of
content, which had been created for another purpose, on its
web site becoming available for use results in a separate
identifiable asset or the expenditure is included in the cost
of developing the web site.
(c) the operating stage commences once the web site is available for
use, and therefore an expenditure to maintain or enhance the
web site after development has been completed should be
recognised as an expense when it is incurred unless it meets the
Intangible Assets 543
criteria in paragraph 59 of the Statement. Paragraph 60 explains
that if the expenditure is required to maintain the asset at its
originally assessed standard of performance, then the expenditure
is recognised as an expense when incurred.
7. An intangible asset is measured subsequent to initial recognition by
applying the requirements in paragraph 62 of this Statement. Additionally,
since paragraph 68 of the Statement states that an intangible asset always has
a finite useful life, a web site that is recognised as an asset is amortised over
the best estimate of its useful life. As indicated in paragraph 65 of the
Statement,web sites are susceptible to technologicalobsolescence, and given
the history of rapid changes in technology, their useful life will be short.
8. The following table illustrates examples of expenditures that occur
within each of the stages described in paragraphs 2 and 3 above and
application of paragraphs 5 and 6 above. It is not intended to be a
comprehensive checklist of expenditures that might be incurred.
Nature of Expenditure Accounting treatment
Planning
• undertaking feasibility studies
• defining hardware and software
specifications
• evaluating alternative products
and suppliers
• selecting preferences
Expense when incurred
Application and Infrastructure
Development
• purchasing or developing
hardware
Apply the requirements of AS 10
• obtaining a domain name
• developing operating software
(e.g., operating system and
server software)
• developing code for the
application
• installing developed applications
on the web server
• stress testing
Expense when incurred, unless it
meets the recognition criteria
under paragraphs 20 and 44
544 AS 26 (issued 2002)
Graphical Design and Content
Development
• designing the appearance (e.g.,
layout and colour) of web pages
• creating, purchasing, preparing
(e.g., creating links and
identifying tags), and uploading
information, either textual or
graphical in nature, on the web
site prior to the web site becoming
available for use. Examples of
content include information about
an enterprise, products or
services offered for sale, and topics
that subscribers access
If a separate asset is not
identifiable, then expense when
incurred, unless it meets the
recognition criteria under
paragraphs 20 and 44
Operating
• updating graphics and revising
content
• adding new functions, features
and content
• registering the web site with
search engines
• backing up data
• reviewing security access
• analysing usage of the web site
Expense when incurred, unless in
rare circumstances it meets the
criteria in paragraph 59, in which
case the expenditure is included
in the cost of the web site
Other
• selling, administrative and other
general overhead expenditure
unless it can be directly attributed
to preparing the web site for use
• clearly identified inefficiencies
and initial operating losses
incurred before the web site
achieves planned performance
(e.g., false start testing)
• training employees to operate the
web site
Expense when incurred
Appendix B
Intangible Assets 545
This Appendix, which is illustrative and does not form part of the
Accounting Standard, provides illustrative application of the
requirements contained in paragraph 99 of this Accounting Standard
in respect of transitional provisions.
Example 1 - Intangible Item was not amortised and the amortisation
period determined under paragraph 63 has expired.
An intangible itemis appearing in the balance sheet of A Ltd. at Rs. 10 lakhs as
on 1-4-2003. The item was acquired for Rs. 10 lakhs on April 1, 1990 and was
available for use fromthatdate. The enterprise hasbeen followingan accounting
policy of not amortising the item. Applying paragraph 63, the enterprise
determines that the item would have been amortised over a period of 10 years
from the date when the item was available for use i.e., April 1, 1990.
Since the amortisation period determined by applying paragraph 63
has already expired as on 1-4-2003, the carrying amount of the
intangible item of Rs. 10 lakhs would be required to be eliminated with
a corresponding adjustment to the opening balance of revenue reserves
as on 1-4-2003.
Example 2 - Intangible Item is being amortised and the amortisation
period determined under paragraph 63 has expired.
An intangible item is appearing in the balance sheet of A Ltd. at Rs. 8 lakhs
as on 1-4-2003. The itemwas acquired for Rs. 20 lakhs on April 1, 1991 and
was available for use from that date. The enterprise has been following a
policy of amortising the itemover a period of 20 years on straight-line basis.
Applying paragraph 63, the enterprise determines that the item would have
been amortised over a period of 10 years from the date when the item was
available for use i.e., April 1, 1991.
Since the amortisation period determined by applying paragraph 63
has already expired as on 1-4-2003, the carrying amount of Rs. 8 lakhs
would be required to be eliminated with a corresponding adjustment to
the opening balance of revenue reserves as on 1-4-2003.
546 AS 26 (issued 2002)
Example 3 - Amortisation period determined under paragraph 63
has not expired and the remaining amortisation period
as per the accounting policy followed by the enterprise
is shorter.
An intangible item is appearing in the balance sheet of A Ltd. at Rs. 8 lakhs
as on 1-4-2003. The itemwas acquired for Rs. 20 lakhs on April 1, 2000 and
was available for use from that date. The enterprise has been following a
policy of amortising the intangible item over a period of 5 years on straight
line basis.Applying paragraph 63, the enterprise determines the amortisation
period to be 8 years, being the best estimate of its useful life, from the date
when the item was available for use i.e., April 1, 2000.
On 1-4-2003, the remaining period of amortisation is 2 years as per the
accounting policy followed by the enterprise which is shorter as
compared to the balance of amortisation period determined by applying
paragraph 63, i.e., 5 years. Accordingly, the enterprise would be
required to amortise the intangible item over the remaining 2 years as
per the accounting policy followed by the enterprise.
Example 4 - Amortisation period determined under paragraph 63 has
not expired and the remaining amortisation period as per
the accounting policy followed by the enterprise is longer.
An intangible item is appearing in the balance sheet of A Ltd. at Rs. 18
lakhs as on 1-4-2003. The item was acquired for Rs. 24 lakhs on April 1,
2000 and was available for use from that date. The enterprise has been
following a policy of amortising the intangible item over a period of 12
years on straight-line basis. Applying paragraph 63, the enterprise
determines that the item would have been amortised over a period of 10
years on straight line basis from the date when the item was available for
use i.e., April 1, 2000.
On 1-4-2003, the remaining period of amortisation is 9 years as per the
accounting policy followed by the enterprise which is longer as compared
to the balance of period stipulated in paragraph 63, i.e., 7
years. Accordingly, the enterprise would be required to restate the
carrying amount of intangible item on 1-4-2003 at Rs. 16.8 lakhs (Rs.
24 lakhs -
3xRs. 2.4 lakhs, i.e., amortisation that would have been charged as per the
Standard) and the difference of Rs. 1.2 lakhs (Rs. 18 lakhs-Rs. 16.8
lakhs) would be required to be adjusted against the opening balance of the
revenue
Intangible Assets 547
reserves. The carrying amount of Rs. 16.8 lakhs would be amortised over 7
years which is the balance of the amortisation period as per paragraph 63.
Example 5 - Intangible Item is not amortised and amortisation
period determined under paragraph 63 has not expired.
An intangible item is appearing in the balance sheet of A Ltd. at Rs. 20
lakhs as on 1-4-2003. The item was acquired for Rs. 20 lakhs on April 1,
2000 and was available for use from that date. The enterprise has been
following an accounting policy of not amortising the item. Applying
paragraph 63, the enterprise determines that the item would have been
amortised over a period of 10 years on straight line basis from the date
when the item was available for use i.e., April 1, 2000.
On 1-4-2003, the enterprise would be required to restate the carrying
amount of intangible item at Rs. 14 lakhs (Rs. 20 lakhs - 3xRs. 2 lakhs, i.e.,
amortisation that would have been charged as per the Standard) and the
difference of Rs. 6 lakhs (Rs. 20 lakhs-Rs. 14 lakhs) would be required to
be adjusted against the opening balance of the revenue reserves. The
carrying amount of Rs. 14 lakhs would be amortised over 7 years which is
the balance of the amortisation period as per paragraph 63.
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