AS 26 Intangible Assets

Intangible asset is an non-physical non-monetary asset which is held for use in the production or supply of goods and services, or for rentals to others, etc. AS 26 should be applied by all enterprises in accounting of intangible assets, except: 1. Intangible assets that are within the scope of another standard financial assets 2. Rights and expenditure on the exploration for or development of minerals, oil, natural gas and similar non-regenerative resources 3. Intangible assets arising in insurance enterprise from contracts with policyholders, 4. Expenditure in respect of termination benefits.

Recognition and Initial Measurement of an Intangible Assets

It applies when an item meets the criteria of an Intangible asset and it is probable that the future economic benefits will flow to the enterprise and the cost of the asset can be measured reliably. These recognition criteria applies to cost of acquiring and generating an intangible asset internally. Note: If an intangible asset is acquired separately, that should be measured initially at cost, which includes purchase price that includes import duty, non-refundable purchase taxes, after deducting trade discount and related direct cost.   If an asset is acquired in a business combination, the cost of that asset should be its fair value at the acquisition date which depends on market expectations. When the asset is acquired free of charge or for a normal consideration, by way of government grant, then it is recognized at a nominal value or at the acquisition cost. The cost of an internally generated intangible asset includes all direct expenditures related to creating, producing and making the asset ready for its intended usage from the time it meets the first recognition criteria.

Initial and subsequent expenditure

Expenditure on an intangible item should be recognized as an expense when it is incurred, Subsequent expenditure (after purchase or completion of assets) should be added to the cost of the intangible asset,  when there is a probability that the expenditure will generate future economic benefits and the expenditure can be measured reliably.

Amortization Period

Amortization should start when the asset is available for use. The depreciable amount of an intangible asset should be allocated on the basis of useful life. This AS adopts a presumption that the useful life of intangible assets does not exceed ten years. In some cases, it would be longer than ten years.

Retirements and Disposals  

An intangible asset should be derecognized on disposal or when no future economic benefits are expected from its use, any gain and loss (difference between the net disposal proceeds and the carrying amount of the asset) arising should be recognized as income or expenses in statement of P & L.

An enterprise incurred costs to develop and produce a software product during 2017-18, as follows:
Amount (`)
Completion of detailed programme and design
 Coding and Testing
Other coding costs
Testing costs
Product masters for training materials
What amount should be capitalized as software costs, on Balance Sheet date?

As per AS 26, costs incurred in creating the software product should be charged to research and development expense when incurred until technological feasibility/asset recognition criteria has been established, that criteria have been established   upon completion of detailed programme design or working model. In this case, 75,000 would be recorded as an expense (45,000 + 30,000). Cost incurred from the point of technological feasibility/asset recognition criteria until the time when products costs are incurred are capitalized as software cost (40,000 + 10,000 + 15,000) = 65000

Significant Differences in IND AS 38 and AS 26

S.No. Basis Ind AS 38 AS 26
1. Definition The requirement of definition given by AS 26 has been removed from the definition AS 26 defines an intangible asset 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
2. Separately Acquired Intangible Assets In this case, the criterion of probable inflow of expected future  economic benefits is always considered satisfied, even if there is any uncertainty There is no such provision in AS 26
3. Revenue Based Amortisation Method Ind AS 38 allows use of revenue based method of amortisation of intangible asset, in a limited way AS 26 does not specifically deal that
4. Intangible assets acquired in Business Combination Ind AS 38 deals in detail in respect of intangible assets acquired in a business combination AS 26 refers only to intangible assets acquired in an amalgamation in the nature  of purchase
5. Subsequent Expenditure on in Process Project Ind AS 38 gives guidance for the treatment of such expenditure AS 26 is silent regarding the treatment of subsequent expenditure
6. Intangible Assets Acquired in Exchange Ind AS 38 requires that if an intangible asset is acquired in exchange of a non-monetary asset, it should be recognised at the fair value of the asset Principles of AS 10 to be followed which require Fair market value at the time of consideration
7. Intangible Assets acquired Free of Charge or for a Nominal Consideration by way of Government Grant In that case an entity should,   record both the grant and the intangible asset at fair value As per AS 26, intangible assets is recognised at nominal  value or at acquisition cost
8. Useful Life of an Intangible Asset Ind AS 38 does not define any rebuttable presumption AS 26 define rebuttable presumption that the useful life cannot exceed ten years from the date the asset is available for use
9. Valuation Model as Accounting Policy It standard allow an entity to choose either the cost or revaluation model as its accounting policy Revaluation model is not permitted under AS 26
10. Contractual or Legal Rights may be Shorter than LegaL Life Ind AS 38 acknowledges that the useful life of an intangible asset maybe shorter than the legal life AS 26 does not include such  a provision
11. Change in Method of Amortization: This change consider as a accounting estimate This change consider as a accounting policy
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