OBJECTIVE

The objective of this Standard is for authorizing the accounting treatment for intangible assets that aren’t dealt with specifically in another Standard. This Standard also requires an entity for recognizing an intangible asset if, and only if, specified criteria are met. This standard specifies the requirement of recognition, measurement and disclosures of Intangible Assets.

Complete details of Ind AS 38 Intangible Assets applicability

The Standard states that intangible assets are measured initially at cost which is also subsequently measured at cost or using the model of revaluation, and amortizing the systematic basis over their useful lives unless the asset is having an indefinite useful life, in which case it is not amortized but tested for impairment.

SCOPE Ind AS 38 Intangible Assets

Applicability:

This Standard should be applied to all intangible assets, except:

(a)         Intangible assets those are included within the extent of another Standard.

(b)         Financial assets, which are defined in Ind AS 32.

(c)          The measurement and recognition of exploration and evaluation assets.

(d)         Exploration for and Evaluation of Mineral Resources.

(e)         Expenditure on developing and extracting minerals, oil, natural gas, and similar non-regenerative resources.

Intangible assets  also known as fictitious assets:

Some intangible assets might be containing in or on a physical substance such as a compact disc if it is in the case of computer software, legal documentation (in the case of a license or patent) or film. While determining whether an asset that incorporates both tangible and intangible elements should be managed under Ind AS 16, P,P&E or as an intangible asset should be included under this Standard, an entity uses judgment to assess which element is more significant.

Research and development activities have been directed by the development of knowledge. Therefore, although these activities might be resulting in an asset with physical substance such as a prototype, the physical element of the asset can be secondary for its intangible component, i.e., the knowledge embodied in it.

fictitious assets  on leases in Ind AS 38 Intangible Assets

Rights which are coming under the agreements of licensing of items such as films from motion pictures, video recordings, plays, manuscripts, patents, and copyrights are excluded from the scope of Ind AS 116. They are included within the scope of this Standard.

Intangible assets used in the extractive and insurance industries:

This Standard doesn’t apply to expenditure on the exploration for or have developed and extracted oil, gas, and various mineral deposits in extractive industries and the case of insurance contracts. However, this Standard can be applies to other intangible assets used (such as computer software) and other incurred expenditures (such as start-up costs) in extractive industries or insurers.

Amortization method specified in this standard not to apply to intangible assets arising from service concession arrangements in respect of toll roads:

The amortization method specified in this Standard does not apply to an entity that opts to amortize the intangible assets arising from service concession arrangements in respect of toll roads recognized in the financial statements for the period which is ending immediately before the beginning of the first Ind AS reporting period as per the optional exemption given in Ind AS 101, First-time Adoption of Indian Accounting Standards.

RELEVANT DEFINITIONS of  Ind AS 38 Intangible Assets

The following are the key terms used in this standard:

Amortization is the structured allocation of the depreciable amount of useful life over an intangible asset.

An asset is a resource:

(a) It can be controlled by an entity as a result of events of the past.

(b) From which future economic benefits can be expected for flowing to the entity.

The carrying amount is when an asset is recognized in the balance sheet after deducting any accumulated amortization and accumulated impairment losses thereon.

Cost is the value of cash or cash equivalents which is paid or the fair value of other consideration which is given for acquiring an asset at the time of its construction or acquisition, or, when applicable, the amount attributed to that asset when initially recognized following the specific requirements of other Indian Accounting Standards, e.g., Ind AS 102,  Share-based Payment.

A depreciable amount can be the cost of an asset or other amount which is substituted for a cost which is less than its residual value.

Development is the petition of research findings or other knowledge for planning or designing of a produce which is new or substantially improved services, materials, products,  devices, processes, systems before the start of commercial production or use.

The present value is the entity-specific value of the cash flows of an entity’s expectation for arising from the continuing use of an asset and its disposal at the end of its useful life or expectation, which is incurring when settling a liability.

Fair value is the price that can be received for selling an asset or paying for transferring a liability in an orderly manner of the transaction between market participants at the measurement date. (See Ind AS 113, Fair Value Measurement.)

An impairment loss is the value by which the carrying amount of an asset can exceed its recoverable amount.

An intangible asset which is considered as a non-monetary asset that can be identified without physical substance.

Monetary assets are money which are held and assets which are received from fixed or determinable amounts of money.

Research planned and original investigation which are undertaken with the prospect of gaining new technical or scientific knowledge and understanding.

The residual amount of an intangible asset is the estimated amount that an entity would be currently obtaining from the disposal of the asset, after the deduction of the estimated costs of disposal, if the asset is already aged in the condition in which can be expected at the end of its useful life.

Useful life can be in Ind AS 38 Intangible Assets  or fictitious assets :

(a) The interval over which an asset is having expectation in which it can be available for use by an entity.

(b) The no. of production or similar units which are expected to be obtained from the asset by an entity.

IDENTIFICATION OF INTANGIBLE ASSETS

Meaning of intangible asset:

An intangible asset can be an identifiable non-monetary asset without physical substance. The essential components of this definition are:

(i)           Identifiability.

(ii)          Asset.

Non-monetary asset

Identifiable

Intangible Asset

Without physical substance

Entities can frequently expend resources or can even incur liabilities on the acquisition, maintenance, development, or enhancement of resources which are intangible such as:

• Technical or scientific knowledge.
• Designing and implementing new processes or systems.
• Intellectual property.
• Licenses.
• Market knowledge and trademarks, which also includes brand names and publishing titles. Common examples of items can be encompassed by these broad headings are:
• Computer software.
• Patents.
• Copyrights.
• Motion picture films.
• Customer lists.
• Mortgage servicing rights.
• Fishing licenses.
• Import quotas.
• Franchises.
• Customer or supplier relationships.
• Customer loyalty.
• Market share and marketing rights.

Ind AS 38 Intangible Assets MCA details 

Let’s run through some examples of each broad category listed above:

Not necessarily all of the above items meet the conditions of recognizing as Intangible Assets within the purview of this standard:

• Identifiability.
• Control over a Resource.
• Existence of Future Economic Benefits.

Note: If an item that is included within the scope of this Standard is not meeting the definition of an intangible asset, expenditure for acquiring it or generate it internally is recognized as an expense when it is incurred. However, if the item have been received in a business combination, it forms part of the goodwill recognized at the acquisition date.

Let us understand each concept one by one.

Identifiability:

The definition of an intangible asset needs an intangible asset to be identifiable to distinguish it from goodwill. Goodwill can be recognized in a business combination that can be an asset which is representing the future economic benefits which is arisen from other assets. It is acquired in a business combination that are not individually identified and separately recognized.

The future economic benefits may result from the synergy between the assets which are identifiable and acquired or from assets that are individual and are not qualifying for recognition in the financial statements.

An asset is identifiable if it either:

(a) Is separable, i.e., can be separated or divided from the entity and have been sold or been transferred, licensed, rented, or even exchanged, either individually or together with a contract which is related, identifiable asset or liability, regardless of whether the entity intends to do so.

(b) Arises from legal or other contractual rights, regardless of whether those rights which can be transferred or separated from the entity or other rights and obligations.

Asset in Ind AS 38 Intangible Assets :

An asset is a resource-

(a) Controlled by an entity as a consequence of past events.

(b) From which future economic benefits can be expected to flow to the entity.

Control:

An entity can control an asset if the entity is having the power to obtain the future economic benefits which are flowing from the underlying resource and for restricting the access of others for those benefits. The capacity of an entity for controlling the future economic benefits from an intangible asset which normally can be a stem from legal rights that have been enforced in a court of law.

In the absence of legal rights, it will be more difficult to demonstrate control. However, the legal enforceability of a right is not a necessary condition for control because an entity may control the future economic benefits in some other way.

Technical and market knowledge may be giving rise to future economic benefits. An entity can control those benefits if the knowledge is protected with several legal rights such as a restraint of trade agreement where it is permitted, copyrights, or by a legal duty on employees to maintain confidentiality.

Future economic benefits:

The future economic benefits can be a flowing from an intangible asset which may include-

(a) Revenue from the sale of products or services.

(b) Cost savings.

(c) Other benefits resulting from the use of the asset by the entity.

For example, intellectual property in a production process may reduce future production costs rather than increase future revenues.

RECOGNITION OF INTANGIBLE ASSET

Recognition of Intangible assets – general principles:

Provided that an item is meeting the definition of an intangible asset, it should be recognized in the financial statements if:

(a) Probably, the expected future economic benefits that are attributable to the asset will flow to the entity.

(b) The cost of asset that can be reliably measured.

This requirement also applied to:

(a) Costs which are incurred initially to acquire or internally generate an intangible asset.

(b) that cost can be incurred subsequently to add to, replace part of, or service it.

An entity should be assessing the probability of expected future economic benefits by using supportable and reasonable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the asset’s useful life.

The behaviour of intangible assets is such that, in many cases, there can be no additions for such an asset or replacements of part of it. Accordingly, most following expenditures are likely can maintain the expected benefits from future economic which is embodied in an present intangible asset rather than meeting the definition and recognition criteria in this Standard.

In addition, it is often not easy for attributing subsequent expenditure directly to a particular intangible asset rather than on the business as a whole. Therefore, only rarely will subsequent expenditure are incurred after the initial recognition of an acquired intangible asset or after the completion of an intangible asset which is internally generated and can be recognized under the carrying amount of an asset.

Subsequent expenditure on mastheads, brands, publishing titles, customer lists, and items similar in substance (whether externally acquired or internally generated) is always recognized in profit or loss as incurred. It is because such expenditure cannot be distinguished from expenditure to develop the business as a whole.

MEASUREMENT OF INTANGIBLE ASSET in Ind AS 38 Intangible Assets

An intangible asset that can be measured initially at cost.

Intangible assets might be acquiring or can be self-generated. The below diagram reflects the method and mode by which Intangible assets may arise:

Separate acquisition-

Recognition criteria for intangible assets can be separately acquired=

Generally, the price of an entity which is paying for acquiring separately an intangible asset will be reflecting expectations about the probability that the expected future economic benefits associated with the asset will flow to the entity. In other words, the entity can expects an inflow of economic benefits, even if there is any uncertainty about the timing or the amount of the inflow.

Therefore, the probability recognition criterion which are specified above can be always considered to be satisfied for acquiring intangible assets separately.

In addition, the amount of a separately acquired intangible asset usually can be measured reliably. It is particularly so when the purchase consideration is in the form of cash or other monetary assets.

Measurement of cost for intangible assets acquired separately=

The amount of a separately acquired intangible asset comprises:

(a) Its purchase price includes import duties and non-refundable purchase taxes.

(b) Any directly attributed cost of preparing the asset for its intended use.

Deferred Consideration in Ind AS 38 Intangible Assets

If the payment of an intangible asset which is deferred beyond normal credit terms, then such an Intangible asset’s cost is the equivalent cash price. The contrast between this value and the total payments is recognized as interest expense throughout credit unless it is capitalized following Ind AS 23, Borrowing Costs.

Cessation of capitalization-

Recollection of costs in the carrying amount of an intangible asset can be ceased when the asset is in a particular condition where it is necessary for it to be capable of operating in the manner intended by management.

For e.g., the following costs aren’t included in the carrying amount of an intangible asset:

(a) Costs incurred in using or redeploying an intangible asset.

(b) Costs incurred while an asset capable of operating in the manner intended by management has yet to be brought into use.

(c) Initial operating losses, such as those incurred while demand for the asset’s output builds up.

Acquisition as part of a business combination-

Criteria for recognizing intangible assets can be acquired as part of a business combination=

Following Ind AS 103, in Business Combinations, if an intangible asset is acquiring in a business combination, then the cost of that intangible asset can be its fair value at the date of acquisition. The market value of an intangible asset that would be reflecting the expectations of market participants at the date of acquisition about the probability that the expected future economic benefits embodied in the asset will flow to the entity.

In other words, the entity can expects an inflow of economic benefits, even if there is any uncertainty about the amount or the timing of the inflow. Therefore, the probability recognition criterion is always satisfied for intangible assets acquired in business combinations.

An acquirer recognizes at the acquisition date, separately from goodwill, an intangible asset of the acquire, irrespective of whether the acquire had recognized the asset before the business combination.

It means that the acquirer can be recognized as an asset separately from goodwill an in-process of development and research project of the acquire if the project is meeting the definition of an intangible asset. An acquirer’s in-process development and research project meets the definition of an intangible asset when it:

(a) Meets the definition of an asset.

(b) It is identifiable, i.e., is separable or arises from contractual or other legal rights.

Summary

Suppose an intangible asset or fictitious assets acquired in a business combination is separable or arises from contractual or other legal rights. In that case, sufficient information exists to measure the fair value of the asset reliably.

When, for the estimates which can be used for measuring an intangible asset’s fair value, there can be a range of possible outcomes with different probabilities that uncertainty enters into the measurement of the asset’s fair value.

An intangible asset can be acquired in a business combination that might be separable, but only with a contract which is related, identifiable asset, or liability. In such cases, the acquirer recognizes the intangible asset separately from goodwill and the related item in Ind AS 38 Intangible Assets. 

The acquirer may be recognizing a group of complementary intangible assets as a single asset which provides the individual assets that are having similar useful lives. E.g., the terms ‘brand’ and ‘brand name’ are often used to the synonym for trademarks and other marks.