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Quick Reference on Accounting Standard (AS) 26

Download Quick Reference on Accounting Standard (AS) 26 Intangible Assets

AS 26 prescribes the accounting treatment for intangible assets.

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.

Scope Exclusions

  • Financial assets
  • Intangible assets covered by other AS
  • Intangible assets arising in insurance enterprises from contracts with policy holders
  • Mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil, natural gas and similar non-regenerative resources
  • Expenditure in respect of termination benefits

Initial Recognition

An intangible asset should be recognised in the financial statements as an intangible asset if it meets the definition of intangible asset and it meets the recognition criteria as specified in the Standard.

Recognition Criteria

  • Probable that future economic benefits will flow to the enterprise
  • Costs can be reliably measured

Measurement

An intangible asset should be measured initially at cost.

Direct Purchase Purchase price, including non-refundable import duties and other taxes, net of any trade discounts and rebates, and any directly attributable expenditure on making the asset ready for its intended use
Exchange of Asset In accordance with AS 10
Issue of Securities Fair value of securities issued or of asset acquired whichever is clearly evident
Acquisition by way of government grant Nominal value or acquisition cost as per AS 12 plus any expenditure that is directly attributable making the asset ready for its intended use
Research & Development expenses
Research expenses- Expensed off in P/L

Development expenses- Capitalise if certain criteria are met

Acquired in an amalgamation in the nature of purchase
Recognise in accordance with AS 14
Internally generated Goodwill
Not to be recognised

Recognition as Expense

Expenditure on an intangible item should be recognised as an expense when it is incurred unless:

a) it forms part of the cost of an intangible asset that meets the recognition criteria; or

b) the item is acquired in an amalgamation in the nature of purchase and cannot be recognised as an intangible asset. 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 (as per AS 14).

Expenditure on an intangible asset that was initially recognised as an expense in previous annual financial statements or interim financial reports should not be recognised as part of the cost of an intangible asset at a later date.

Subsequent expenditure

An expenditure that has been incurred on an intangible asset subsequent to its purchase or completion may be added to the cost of the asset provided:

  • it is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance
  • the expenditure can be measured and attributed to the asset reliably.

Subsequent Measurement

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

Amortisation:

The depreciable amount should be allocated on a systematic basis over the best estimate of its useful life. Method of amortisation should be based on the pattern of consumption of asset’s economic benefits.

There is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years.

Amortisation should commence when the asset is available for use.

If control over future economic benefits from an intangible asset is achieved through legal rights that have been granted for a finite period, the useful life of the intangible asset should not exceed the period of legal rights, unless (a) the legal rights are renewable and (b) renewal is virtually certain.

Amortisation period & method should be reviewed at least at each financial year end. Changes should be accounted for in accordance with AS 5.

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 that asset and:

(i) residual value can be determined by reference to that market; &

(ii) it is probable that such a market will exist at the end of the asset’s useful life.

Retirements and Disposals

An intangible asset should be derecognised on disposal or when no future economic benefits are expected from its use and subsequent disposal.

Gain or loss arising from the retirement or disposal is the difference between the net disposal proceeds and the carrying amount of the asset.

Gain or loss should be recognised as income or expense in the Statement of Profit and Loss.

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