Ind AS 38 – Intangible Assets; Scope, Definition and Initial Recognition

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Scope of the standard:

This standard shall be applied while accounting for all intangible assets (IA), except:

1. IA in the scope of another standard. E.g. – IA as inventory, deferred tax, purchased goodwill, assets arising from employee benefits, leases that are within the scope of Ind AS 17, non-current IA classified as held for sale (Ind AS 105) etc.

2. Financial assets as defined in Ind AS 32 (Financial Instruments – Presentation).

3. Recognition and measurement of exploration and evaluation assets.

4. Expenditure on the development and extraction of minerals, oil, natural gas and similar non-regenerative resources.

Definitions:

An asset is a resource controlled by an entity as a result of a past event from which future economic benefits are expected to flow in.

Monetary assets are money held and assets to be received in fixed or determinable amounts of money.

An intangible asset is an identifiable non-monetary asset without physical substance.

Attributes of an IA:

Without physical substance:

This attribute specifies that an IA does not have any physical substance and thus implies that it cannot be touched and felt.

This leads to a predicament when for example when accounting software (which cannot be physically touched) is given to an entity in a compact disc (CD). In this case, the CD technically provides a physical substance to the software.

In determining whether an asset that incorporates both intangible and tangible elements should be treated under Ind AS 16, Property, Plant and Equipment (PPE), or as an IA under this Standard, an entity uses judgment to assess which element is more significant. In the given situation the value of the CD when compared to the software it contains is very insignificant and thus even with the physical substance the software will be treated as an IA and not a PPE.

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 property, plant and equipment. The same applies to the operating system of a computer.

When the software is not an integral part of the related hardware, computer software is treated as an IA asset.

Non-monetary asset:

Assets to be received in variable or undeterminable amounts of money.

Identifiable:

An asset is identifiable if it either:

1. is separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or

2. Arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

Control:

The entity controls the asset if it has the power to obtain future economic benefits from the underlying resource and the ability to restrict the access of others to those benefits.

This generally comes with legal rights that are enforceable in a court of law. But legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits in some other way.

An entity may have a team of skilled staff and may be able to identify incremental staff skills leading to future economic benefits from training. The entity may also expect that the staff will continue to make their skills available to the entity. However, an entity usually has insufficient control over the expected future economic benefits arising from a team of skilled staff and from training for these items to meet the definition of an IA. The same analogy applies to the portfolio of customers or a market share.

Future economic benefits:

The future economic benefits flowing from an IA may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the entity.

Recognition Criteria of an IA:

An IA can be recognized in the books of accounts only when:

1. Meets the definition of IA.

2. It is probable that future economic benefits will be received.

3. Cost can be measured reliably.

“Probable that future economic benefits will flow to the entity”

Even though it is not stated in any Accounting standard, but generally the norm is that if the probability of future economic benefits to flow in is higher than 50% then it will satisfy the condition of “Probable”.

The inflow of economic benefit can be direct or indirect.

The initial measurement of an IA:

An IA shall be measured initially at cost.

1. Separately acquired IA - Acquisition cost (purchase price including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates and any directly attributable cost of preparing the asset for its intended use.)

2. Acquisition in business combination - Cost equals fair value on the acquisition day.

3. Acquiring a group of IA - Cost allocated at relative FV.

4. Internally generated IA - Expenses incurred in the development phase.

5. Acquisition by way of government grant - IA and government grant to be accounted at fair value.

This article has been published in the Chartered Accountant Study Circle ("CASC") Bulletin.