IND AS 38 - Intangible assets

Question 1

What is the treatment of Intangible assets contained in or on a physical substance?

Answer 1

Question 2

What is the definition of Intangible asset as per the definition provided as a part of IND AS 38 - Intangible assets?

Answer 2

An asset is a resource

(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.

Question 3

What is the definition of development as per the provisions of IND AS 38 - Intangible assets?

Answer 3

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 before the start of commercial production or use.

Question 4

What is the definition of entity specific value as per the IND AS 38?

Answer 4

Entity-specific value is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability. AKA Recoverable amount

Question 5

What is the definition of Intangible asset as per the provisions of IND AS 38?

Answer 5

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

Question 6

What is the definition of Research as per the provisions of IND AS 38 - Intangible assets?

Answer 6

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

All cost incurred in this phase has to be expensed to PL simply due to the logic that we do not know how much time will the research phase will go on.

Question 7

What is the detailed meaning of Identifiability in the definition of Intangible assets?

Answer 7

An asset is identifiable if it either:

(a) is separable, ie 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
(b) 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.

Question 8

What is the treatment of Internally generated goodwill as per the provisions of IND AS 38?

Answer 8

This standard prohibits the recognition of internally generated goodwill as an asset.
Internally generated goodwill is not recognised as an asset because it is not an identifiable resource (i.e. it is not separable nor does it arise from contractual or other legal rights) controlled by the entity that can be measured reliably at cost.

Even in case of purchased goodwill, we are only permitted to recognize an Intangible asset and we are not allowed to amortize the same, since it is an asset which has an indefinite useful life which has to be tested for impairment regularly.

Question 9

In the definition of Intangible asset it says that Intangible assets are non monetary assets without physical substance? what is it’s relation to IND AS 21?

Answer 9

• It basically means assets whose realizable value may differ from the values appearing in the balance sheet - IND AS 21 and IN AS 16 - Exchange of non monetary assets etc.

Question 10

What is the criteria for recognition of asset in case exchange of Non Monetary assets ? is the guidance similar to the one provided for IND AS 16 read in terms of the intangible asset?

Answer 10

Question 11

When does an expenditure incurred on an intangible item should be recognised as an expense when it is incurred unless?

Answer 11

(a) it forms part of the cost of an intangible asset that meets the recognition criteria; or
(b) the item is acquired in a business combination and cannot be recognised as an intangible asset. In such case, it forms part of the amount recognised as goodwill at the acquisition date.

Question 12

What are the nature or types of expenses that the standard prescribes are to be expensed off to PL A/c?

Answer 12

These are pretty important to be kept in mind while solving problems in this regard

Question 13

What is the recognition criteria for goodwill and other Intangible assets acquired as a part of business combination as per the provisions of IND AS 103?

Answer 13

An acquirer recognises at the acquisition date, separately from goodwill, an intangible asset of the acquiree, irrespective of whether the asset had been recognised by the acquiree before the business combination.

This means that the acquirer recognises as an asset separately from goodwill an in-process research and development project of the acquiree if the project meets the definition of an intangible asset.

the definition of an intangible asset when it:

(a) meets the definition of an asset; and
(b) is identifiable, ie is separable or arises from contractual or other legal rights.

Question 14

Whether Market share for the service provided be recognised as an intangible asset as per the provisions of IND AS 38?

Answer 14

No, Base your reasoning on the understanding obtained from previous Flash cards and also See solution book for Q1.

Question 15

Can a customer list generate internally over a period of time be recognized as an Intangible asset as per the provisions of IND AS 38?

Answer 15

Cost cannot be reliably measured and hence customer list cannot be recognised in the balance sheet - See Q9 of solution book.

Question 16

Whether human resources who are engaged in the development of software for a company which has a well drafted HR policy and the company reasonable does not expect it’s employees to leave in the near future be recognized as an intangible asset?

Answer 16

No, since we do not have control over the employees legally and we cannot enforce contractual obligation on them to make them stay. The answer will be yes if the employee is a player of a football club and is locked for a period of 5 years. Here in this case if the player has to withdraw, he has to incur serious legal ramifications, and hence the resource can be said to be controlled in this case. -See ans in Q.12 and 13 of solution book.

Question 17

Whether a franchise agreement mentions that the franchisee would have to pay royalty as a percentage of sales made. can the rights on the franchisee be treated as an intangible asset as per IND AS 38?

Answer 17

Yes, since it meets the identification criteria and contractual rights criteria - See Q -16.

Question 18

Is the brand name and the Expenditure incurred to increase the FEB be recognised as IA as per IND AS 38?

Answer 18

No, It might increase FEB, but does not result in creation of an intangible asset, hence the expense should be written off accordingly.

Question 19

What is the course of action when if an entity cannot istinguish the research phase from the development phase of an internal project to create an intangible asset?

Answer 19

The entity treats the expenditure on that project as if it were incurred in the research phase only - That is, it will be fully expensed to PL.

Question 20

What are some items which are prohibited from being recognised as internally generated Intangible assets?

Answer 20

This standard prohibits the recognition of internally generated goodwill as an asset. Some other internally generated items that are prohibited to be recognised as intangible assets are brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets.

Question 21

What is the research phase in relation to internally generated IA? and what is the treatment to be given for those expenses?

Answer 21

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

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.

In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred.

Question 22

What is the Development phase in relation to internally generated IA? and what is the treatment to be given for those expenses?

Answer 22

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 before the start of commercial production or use.

Question 23

In the development phase of an internal project, what are the conditions on the basis of which that we should demonstrate that the same can be capitalized in the books of accounts?

Answer 23

IA under development should not be amortized till the time they are ready for use. However they should be tested for impairment annually - That is we should compare the carrying value with the recoverable value at each BS date till the time the development phase continues. IA should be recorded at lower of the above two values accordingly.

Question 24

What is the cost - Inclusions and exclusions in relation to cost of an internally generated IA?

Answer 24

The cost of an internally generated intangible asset for the purpose of initial measurement at recognition is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria including the additional criteria specified above.

Question 25

What is the treatment when an entity engaged in medical research and drug manufacturing segment has incurred substantial expenditure for the development of a new vaccine for COVID 19? can the entity recognize the IA for the same?

Answer 25

• Whatever expenditure pertaining to the research phase has to be expensed and the expenditure in the development phase has to be capitalized based on technical feasibility etc.

Question 26

Whether amortisation is required or not based on the useful life of the asset and also the whether it has finite or indefinite life?

Answer 26

Question 27

What is the period of review of amortisation period when the asset has finite and Infinite life etc?

Answer 27

The amortisation period for an intangible asset with a finite useful life should be reviewed at least at each financial year-end. If the expected useful life of the asset is different from previous estimates, the amortisation period should be changed accordingly. Such change is accounted for as a change in accounting estimates in accordance with Ind AS 8.

In the case of asset with Infinite life, they should not be amortized, but should be tested for impairment annually, comparing the carrying value with the recoverable amount at each balance sheet date.

Question 28

What is the amortisation method that must be used while accounting for IA as per IND AS 38?

Answer 28

The amortisation method used should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method should be used.

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 units of production method.

Identification of such a predominant limiting factor could serve as the starting point for the identification of the appropriate basis of amortisation, but another basis may be applied if it more closely reflects the expected pattern of consumption of economic benefits.

Question 29

What is the applicability of an amortisation method based on revenue? Is it valid? or can it be applied in peculiar circumstances etc?

Answer 29

There is a rebuttable presumption that an amortisation method that is based on the revenue generated by an activity that includes the use of an intangible asset is inappropriate.

Question 30

Majority of the remaining areas which are pending are ditto similar to that of IND AS 16 - PPE and the provisions shall apply in the same manner here as well in the context of Intangible assets

Answer 30

Practice once again the important questions marked along with the flashcards made.

Question 31

What is the treatment of Non compete fee paid as as to restrict other person from performing an activity?

Answer 31

We should recognise as an intangible asset the consideration paid towards non compete fees. This should be added to the fair value of the net assets acquired accordingly.

Question 32

What is the useful life of an intangible asset arising from contractual or other legal rights ?

Answer 32

The useful life of an intangible asset that arises from contractual or other legal rights shall not exceed the period of the contractual or other legal rights, but may be shorter depending on the period over which the entity expects to use the asset.

Question 33

Give an overall chart for amortisation, when it has finite and infinite life etc?

Answer 33