Standard 26: Intangible Assets

Standard 26: Intangible Assets · Complied AI

(d)

goodwill arising on an amalgamation (see AS 14, Accounting for Amalgamations ) and goodwill

arising on consolidation (see AS 21 ,

Consolidated Financial Statements ).

3 This Standard applies to, among other things, expenditure on advertising, training, start-up, research and development

activities. Research and development activities are directed to the development of knowledge. Therefore, although

these activities may result in an asset with physical substance (for example, a prototype), the physical element of

the asset is secondary to its intangible component, that is the knowledge embodied in it. This Standard also applies

to rights under licensing agreements for items such as motion picture films, video recordings, plays, manuscripts,

patents and copyrights. These items are excluded from the scope of AS 19 .

4 In the case of a finance lease, the underlying asset may be either tangible or intangible. After initial

recognition, a lessee deals with an intangible asset held under a finance lease under this Standard.

5 Exclusions from the scope of an Accounting Standard may occur if certain activities or transactions are so

specialised that they give rise to accounting issues that may need to be dealt with in a different way. Such issues

arise in the expenditure on the exploration for, or development and extraction of, oil, gas and mineral deposits in

extractive industries and in the case of contracts between insurance enterprises and their policyholders. Therefore,

this Standard does not apply to expenditure on such activities. However, this Standard applies to other intangible

assets used (such as computer software), and other expenditure (such as start-up costs), in extractive industries or

by insurance enterprises. Accounting issues of specialised nature also arise in respect of accounting for discount

or premium relating to borrowings and ancillary costs incurred in connection with the arrangement of borrowings,

share issue expenses and discount allowed on the issue of shares. Accordingly, this Standard does not apply to such

items also.

Definitions

6 The following terms are used in this Standard with the meanings

specified:

6.1 An 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.

6.2 An asset is a resource:

(c)

prices are available to the public.

6.13 An impairment loss is the amount by which the carrying

amount of an asset exceeds its recoverable amount (see AS 28, Impairment of Assets).

6.14 Carrying amount is the amount at which an

asset is recognised in the balance sheet, net of any accumulated amortisation and accumulated impairment losses

thereon.

Intangible Assets

7 Enterprises frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or

enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new

processes or systems, licences, intellectual property, market knowledge and trademarks (including brand names and

publishing titles). Common examples of items encompassed by these broad headings are computer software, patents,

copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas,

franchises, customer or supplier relationships, customer loyalty, market share and marketing rights. Goodwill is

another example of an item of intangible nature which either arises on acquisition or is internally generated.

8 Not all the items described in paragraph 7 will meet the definition of an intangible asset, that is,

identifiability, control over a resource and expectation of future economic benefits flowing to the enterprise. If

an item covered by this Standard does not meet the definition of an intangible asset, expenditure to acquire it or

generate it internally is recognised as an expense when it is incurred. However, if the item is acquired in an

amalgamation in the nature of purchase, it forms part of the goodwill recognised at the date of the amalgamation

(see paragraph 55 ).

9 Some intangible assets may be contained in or on a physical substance such as a compact disk (in the case of

computer software), legal documentation (in the case of a licence or patent) or film (in the case of motion

pictures). The cost of the physical substance containing the intangible assets is usually not significant.

Accordingly, the physical substance containing an intangible asset, though tangible in nature, is commonly treated

as a part of the intangible asset contained in or on it.

10 In some cases, an asset may incorporate both intangible and tangible elements that are, in practice, inseparable.

In determining whether such an asset should be treated under AS 10, Property, Plant and Equipment , or as an

intangible asset under this Standard, judgement is required to assess as to which element is predominant. For

example, 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 a fixed asset. The same applies to the operating

system of a computer. Where the software is not an integral part of the related hardware, computer software is

treated as an intangible asset.

Identifiability

11 The definition of an intangible asset requires that an intangible asset be identifiable. To be identifiable, it is

necessary that the intang ible asset is clearly distinguished from goodwill. Goodwill arising on an amalgamation in

the nature of purchase represents a payment made by the acquirer in anticipation of future economic benefits. The

future economic benefits may result from synergy between the identifiable assets acquired or from assets which,

individually, do not qualify for recognition in the financial statements but for which the acquirer is prepared to

make a payment in the amalgamation.

12 An intangible asset can be clearly distinguished from goodwill if the asset is separable. An asset is separable if

the enterprise could rent, sell, exchange or distribute the specific future economic benefits attributable to the

asset without also disposing of future economic benefits that f low from other assets used in the same revenue

earning activity.

13 Separability is not a necessary condition for identifiability since an enterprise may be able to identify an asset

in some other way. For example, if an intangible asset is acquired with a group of assets, the transaction may

involve the transfer of legal rights that enable an enterprise to identify the intangible asset. Similarly, if an

internal project aims to create legal rights for the enterprise, the nature of these rights may assist the

enterprise in identifying an underlying internally generated intangible asset. Also, even if an asset generates

future economic benefits only in combination with other assets, the asset is identifiable if the enterprise can

identify the future economic benefits that will flow from the asset.

Control

14 An enterprise controls an asset if the enterprise has the power to obtain the future economic benefits flowing

from the underlying resource and also can restrict the access of others to those benefits. The capacity of an

enterprise to control the future economic benefits from an intangible asset would normally stem from legal rights

that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control.

However, legal enforceability of a right is not a necessary condition for control since an enterprise may be able to

control the future economic benefits in some other way.

15 Market and technical knowledge may give rise to future economic benefits. An enterprise controls those benefits

if, for example, the knowledge is protected by legal rights such as copyrights, a restraint of trade agreement

(where permitted) or by a legal duty on employees to maintain confidentiality.

16 An enterprise may have a team of skilled staff and may be able to identify incremental staff skills leading to

future economic benefits from training. The enterprise may also expect that the staff will continue to make their

skills available to the enterprise. However, usually an enterprise has insufficient control over the expected future

economic benefits arising from a team of skilled staff and from training to consider that these items meet the

definition of an intangible asset. For a similar reason, specific management or technical talent is unlikely to meet

the definition of an intangible asset, unless it is protected by legal rights to use it and to obtain the future

economic benefits expected from it, and it also meets the other parts of the definition.

17 An enterprise may have a portfolio of customers or a market share and expect that, due to its efforts in building

customer relationships and loyalty, the customers will continue to trade with the enterprise. However, in the

absence of legal rights to protect, or other ways to control, the relationships with customers or the loyalty of the

customers to the enterprise, the enterprise usually has insufficient control over the economic benefits from

customer relationships and loyalty to consider that such items (portfolio of customers, market shares, customer

relationships, customer loyalty) meet the definition of intangible assets.

Future Economic Benefits

18 The future economic benefits flowing from an intangible asset may include revenue

from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the

enterprise. For example, the use of intellectual property in a production process may reduce future production costs

rather than increase future revenues.

Recognition and Initial Measurement of an Intangible Asset

19 The recognition of an item as an intangible asset requires an enterprise to

demonstrate that the item meets the:

(b)

the cost of the asset can be measured reliably.

21 An enterprise should assess the probability of future economic

benefits using reasonable and supportable assumptions that represent best estimate of the set of economic conditions

that will exist over the useful life of the asset.

22. An enterprise uses judgement to assess the degree of certainty attached to the

flow of future economic benefits that are attributable to the use of the asset on the basis of the evidence

available at the time of initial recognition, giving greater weight to external evidence.

23. An intangible asset should be measured initially at cost.

Separate Acquisition

24 If an intangible asset is acquired separately, the cost of the intangible asset can usually be measured reliably.

This is particularly so when the purchase consideration is in the form of cash or other monetary assets.

25 The cost of an intangible asset comprises its purchase price, including any import duties and other taxes (other

than those subsequently recoverable by the enterprise from the taxing authorities), and any directly attributable

expenditure on making the asset ready for its intended use. Directly attributable expenditure includes, for example,

professional fees for legal services. Any trade discounts and rebates are deducted in arriving at the cost.

26 If an intangible asset is acquired in exchange for shares or other securities of the reporting enterprise, the

asset is recorded at its fair value, or the fair value of the securities issued, whichever is more clearly evident.

Acquisition as Part of an Amalgamation

27 An intangible asset acquired in an amalgamation in the nature of purchase is accounted for in accordance with

Accounting Standard (AS) 14, Accounting for Amalgamations . Where in preparing the financial statements of the

transferee company, the consideration is allocated to individual identifiable assets and liabilities on the basis of

their fair values at the date of amalgamation, paragraphs 28 to 32 of this Standard need to be considered.

28 Judgement is required to determine whether the cost (i.e. fair

value ) of an intangible asset acquired in an amalgamation can be measured with sufficient reliability for

the purpose of separate recognition. Quoted market prices in an active market provide the most reliable measurement

of fair value. The appropriate market price is usually the current bid price. If current bid prices are unavailable,

the price of the most recent similar transaction may provide a basis from which to estimate fair value, provided

that there has not been a significant change in economic circumstances between the transaction date and the date at

which the asset's fair value is estimated.

29 If no active market exists for an asset, its cost reflects the amount that the enterprise would have paid, at the

date of the acquisition, for the asset in an arm's length transaction between knowledgeable and willing parties,

based on the best information available. In determining this amount, an enterprise considers the outcome of recent

transactions for similar assets.

30 Certain enterprises that are regularly involved in the purchase and sale of unique intangible assets have

developed techniques for estimating their fair values indirectly. These techniques may be used for initial

measurement of an intangible asset acquired in an amalgamation in the nature of purchase if their objective is to

estimate fair value as defined in this Standard and if they reflect current transactions and practices in the

industry to which the asset belongs. These techniques include, where appropriate, applying multiples reflecting

current market transactions to certain indicators driving the profitability of the asset (such as revenue, market

shares, operating profit, etc.) or discounting estimated future net cash flows from the asset.

31 In accordance with this Standard:

(b)

if the cost (i.e. fair value) of an intangible asset acquired as part of an amalgamation in the nature of

purchase cannot be measured reliably, that asset is not recognised as a separate intangible asset but is

included in goodwill (see paragraph 55 ).

32 Unless there is an active market for an intangible asset acquired in an amalgamation in the nature of purchase,

the cost initially recognised for the intangible asset is restricted to an amount that does not create or increase

any capital reserve arising at the date of the amalgamation.

Acquisition by way of a Government Grant

33 In some cases, an intangible asset may be acquired free of charge, or for nominal consideration, by way of a

government grant. This may occur when a government transfers or allocates to an enterprise intangible assets such as

airport landing rights, licences to operate radio or television stations, import licences or quotas or rights to

access other restricted resources. AS 12,

Accounting for Government Grants , requires that government grants in the form of non-monetary assets , given at a concessional rate should be accounted for on the

basis of their acquisition cost. AS 12 also requires that in case a non- monetary asset is given free of cost, it

should be recorded at a nominal value. Accordingly, intangible asset acquired free of charge, or for nominal

consideration, by way of government grant is recognised at a nominal value or at the acquisition cost, as

appropriate; any expenditure that is directly attributable to making the asset ready for its intended use is also

included in the cost of the asset.

Exchanges of Assets

34 An intangible asset may be acquired in exchange or part exchange for another asset. In such a case, the cost of

the asset acquired is determined in accordance with the principles laid down in this regard in AS 10, Property, Plant and Equipment .

Internally Generated Goodwill

35. Internally generated goodwill should not be recognised as an asset.

36 In some cases, expenditure is incurred to generate future economic benefits, but it does not result in the

creation of an intangible asset that meets the recognition criteria in this Standard. Such expenditure is often

described as contributing to internally generated goodwill. Internally generated goodwill is not recognised as an

asset because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost.

37 Differences between the market value of an enterprise and the carrying amount of its identifiable net assets at

any point in time may be due to a range of factors that affect the value of the enterprise. However, such

differences cannot be considered to represent the cost of intangible assets controlled by the enterprise.

Internally Generated Intangible Assets

38 It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition. It

is often difficult to:

(d)

the design, construction and testing of a chosen alternative for new or improved materials, devices,

products, processes, systems or services.

47. To demonstrate how an intangible asset will generate probable future economic benefits, an enterprise assesses

the future economic benefits to be received from the asset using the principles in Accounting Standard (AS) 28 , Impairment of Asset s

. If the asset will generate economic benefits only in combination with other assets, the

enterprise applies the concept of cash- generating units as set out in (AS) 28.

48. Availability of resources to complete, use and obtain the benefits from an intangible asset can be demonstrated

by, for example, a business plan showing the technical, financial and other resources needed and the enterprise's

ability to secure those resources. In certain cases, an enterprise demonstrates the availability of external finance

by obtaining a lender's indication of its willingness to fund the plan.

49. An enterprise's costing systems can often measure reliably the cost of generating an intangible asset internally,

such as salary and other expenditure incurred in securing copyrights or licences or developing computer software.

50. Internally generated brands, mastheads, publishing titles, customer

lists and items similar in substance should not be recognised as intangible assets.

51. This Standard takes the view that expenditure on internally generated brands, mastheads, publishing titles,

customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a

whole. Therefore, such items are not recognised as intangible assets.

Cost of an Internally Generated Intangible Asset

52. The cost of an internally generated intangible asset for the purpose of paragraph 23 is the sum of expenditure incurred from the time when

the intangible asset first meets the recognition criteria in paragraphs

20 - 21 and 44 .

Paragraph 58 prohibits reinstatement of expenditure recognised as an expense in previous annual financial statements

or interim financial reports.

53. The cost of an internally generated intangible asset comprises all expenditure

that can be directly attributed, or allocated on a reasonable and consistent basis, to creating, producing and

making the asset ready for its intended use. The cost includes, if applicable:

(c)

expenditure on training the staff to operate the asset.

Example Illustrating Paragraph 52

An enterprise is developing a new production process. During the year 20X1, expenditure incurred was Rs.

10 lakhs, of which Rs. 9 lakhs was incurred before 1 December 20X1 and 1 lakh was incurred between 1

December 20X1 and 31 December 20X1. The enterprise is able to demonstrate that, at 1 December 20X1, the

production process met the criteria for recognition as an intangible asset. The recoverable amount of

the know-how embodied in the process (including future cash outflows to complete the process before it

is available for use) is estimated to be Rs. 5 lakhs.

At the end of 20X1, the production process is recognised as an intangible asset at a cost of Rs. 1

lakh (expenditure incurred since the date when the recognition criteria were met, that is, 1

December 20X1). Rs. 9 lakhs expenditure incurred before 1 December 20X1 is recognised as an expense

because the recognition criteria were not met until 1 December 20X1. This expenditure will never

form part of the cost of the production process recognised in the balance sheet.

During the year 20X2, expenditure incurred is Rs. 20 lakhs. At the end of 20X2, the recoverable amount

of the know-how embodied in the process (including future cash outflows to complete the process before

it is available for use) is estimated to be Rs. 19 lakhs.

At the end of the year 20X2, the cost of the production process is Rs. 21 lakhs (Rs. 1 lakh expenditure

recognised at the end of 20X1 plus Rs. 20 lakhs expenditure recognised in 20X2). The enterprise

recognises an impairment loss of Rs. 2 lakhs to adjust the carrying amount of the process before

impairment loss (Rs. 21 lakhs) to its recoverable amount (Rs. 19 lakhs). This impairment loss will be

reversed in a subsequent period if the requirements for the reversal of an impairment loss in AS 28 are

met.

Recognition of an Expense

55. Expenditure on an intangible item should be recognised as an expense

when it is incurred unless:

(b)

the expenditure can be measured and attributed to the asset reliably.

If these conditions are met, the subsequent expenditure should be added to the cost of the intangible

asset.

60. Subsequent expenditure on a recognised intangible asset is recognised as an expense if this

expenditure is required to maintain the asset at its originally assessed standard of performance. The nature of

intangible assets is such that, in many cases, it is not possible to determine whether subsequent expenditure is

likely to enhance or maintain the economic benefits that will flow to the enterprise from those assets. In addition,

it is often difficult to attribute such expenditure directly to a particular intangible asset rather than the

business as a whole. Therefore, only rarely will expenditure incurred after the initial recognition of a purchased

intangible asset or after completion of an internally generated intangible asset result in additions to the cost of

the intangible asset.

61. Consistent with paragraph 50, subsequent expenditure on brands,

mastheads, publishing titles, customer lists and items similar in substance (whether externally purchased or

internally generated) is always recognised as an expense to avoid the recognition of internally generated goodwill.

Measurement Subsequent to Initial Recognition

62. After initial recognition, an intangible asset should be carried at

its cost less any accumulated amortisation and any accumulated impairment losses.

Amortisation

Amortisation Period

63. The depreciable

amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful

life. There is a rebuttable presumption that the useful life of an

intangible asset will not exceed ten years from the date when the asset is available for use. Amortisation should

commence when the asset is available for use.

64. As the future economic benefits embodied in an intangible asset are consumed over

time, the carrying amount of the asset is reduced to reflect that consumption. This is achieved by systematic

allocation of the cost of the asset, less any residual value, as an

expense over the asset's useful life. Amortisation is recognised whether or not there has been an increase in, for

example, the asset's fair value or recoverable amount. Many factors need to be considered in determining the useful

life of an intangible asset including:

(b)

there is an active market for the asset and:

(i)

residual value can be determined by reference to that market; and

(ii)

it is probable that such a market will exist at the end of the asset's useful life.

76. A residual value other than zero implies that an enterprise expects to dispose of the intangible asset before the

end of its economic life.

77. The residual value is estimated using prices prevailing at the date of acquisition of the asset, for the sale of

a similar asset that has reached the end of its estimated useful life and that has operated under conditions similar

to those in which the asset will be used. The residual value is not subsequently increased for changes in prices or

value.

Review of Amortisation Period and Amortisation Method

78. The amortisation period and the amortisation method should be reviewed at least at each

financial year end. If the expected useful life of the asset is significantly different from previous estimates,

the amortisation period should be changed accordingly. If there has been a significant change in the expected

pattern of economic benefits from the asset, the amortisation method should be changed to reflect the changed

pattern. Such changes should be accounted for in accordance with AS 5, Net Profit or Loss for the Period, Prior Period Items

and Changes in Accounting Policies.

79. During the life of an intangible asset, it may become apparent that the estimate of its useful life is

inappropriate. For example, the useful life may be >extended by subsequent expenditure that improves the

condition of the asset beyond its originally assessed standard of performance. Also, the recognition of an

impairment loss may indicate that the amortisation period needs to be changed.

80. Over time, the pattern of future economic benefits expected to flow to an enterprise from an intangible asset may

change. For example, it may become apparent that a diminishing balance method of amortisation is appropriate rather

than a straight-line method. Another example is if use of the rights represented by a licence is deferred pending

action on other components of the business plan. In this case, economic benefits that flow from the asset may not be

received until later periods.

Recoverability of the Carrying Amount — Impairment Losses

81. To determine whether an intangible asset is impaired, an enterprise applies AS 28. That Standard explains how an

enterprise reviews the carrying amount of its assets, how it determines the recoverable amount of an asset and when

it recognises or reverses an impairment loss.

82. If an impairment loss occurs before the end of the first annual accounting period commencing after acquisition

for an intangible asset acquired in an amalgamation in the nature of purchase, the impairment loss is recognised as

an adjustment to both the amount assigned to the intangible asset and the goodwill (capital reserve) recognised at

the date of the amalgamation. However, if the impairment loss relates to specific events or changes in circumstances

occurring after the date of acquisition, the impairment loss is recognised under AS 28 and not as an adjustment to

the amount assigned to the goodwill (capital reserve) recognised at the date of acquisition.

83. In addition to the requirements of AS 28, an enterprise should

estimate the recoverable amount of the following intangible assets at least at each financial year end even if there

is no indication that the asset is impaired:

(b)

an intangible asset that is amortised over a period exceeding ten years from the date when the

asset is available for use.

The recoverable amount should be determined under AS 28 and impairment losses recognised

accordingly.

84. The ability of an intangible asset to generate sufficient future economic benefits to recover its cost is usually

subject to great uncertainty until the asset is available for use. Therefore, this Standard requires an enterprise

to test for impairment, at least annually, the carrying amount of an intangible asset that is not yet available for

use.

85. It is sometimes difficult to identify whether an intangible asset may be impaired because, among other things,

there is not necessarily any obvious evidence of obsolescence. This difficulty arises particularly if the asset has

a long useful life. As a consequence, this Standard requires, as a minimum, an annual calculation of the recoverable

amount of an intangible asset if its useful life exceeds ten years from the date when it becomes available for use.

86. The requirement for an annual impairment test of an intangible asset applies whenever the current total estimated

useful life of the asset exceeds ten years from when it became available for use. Therefore, if the useful life of

an intangible asset was estimated to be less than ten years at initial recognition, but the useful life is extended

by subsequent expenditure to exceed ten years from when the asset became available for use, an enterprise performs

the impairment test required under paragraph 83(b) and also makes the disclosure required under paragraph 94(a).

Retirements and Disposals

87. An intangible asset should be derecognised (eliminated from the balance sheet) on disposal or when

no future economic benefits are expected from its use and subsequent disposal.

88. Gains or losses arising from the retirement or disposal of an intangible asset should be determined

as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as

income or expense in the statement of profit and loss.

89. An intangible asset that is retired from active use and held for disposal is carried at its carrying amount at

the date when the asset is retired from active use. At least at each financial year end, an enterprise tests the

asset for impairment under AS28, and recognises any impairment loss accordingly.

Disclosure

General

90. The financial statements should disclose the following for each class of intangible assets,

distinguishing between internally generated intangible assets and other intangible assets:

(b)

if the remaining period as per the accounting policy followed by the enterprise:

(i)

is shorter as compared to the balance of the period determined under paragraph 63, the

carrying amount of the intangible item should be amortised over the remaining period as per the

accounting policy followed by the enterprise,

(ii)

is longer as compared to the balance of the period determined under paragraph 63, the

carrying amount of the intangible item should be restated, as if the accumulated amortisation had always

been determined under this Standard, with the corresponding adjustment to the opening balance of revenue

reserves. The restated carrying amount should be amortised over the balance of the period as determined

in paragraph 63.

100. Illustration B attached to the Standard illustrates

the application of paragraph 99.

Illustration A

This illustration which does not form part of the Accounting Standard, provides illustrative application

of the principles laid down in the Standard to internal use software and web-site costs. Its purpose is to

illustrate the application of the Accounting Standard to assist in clarifying its meaning.

I Illustrative Application of the Accounting Standard to Internal Use Computer Software

Computer software for internal use can be internally generated or acquired.

Internally Generated Computer Software

1. Internally generated computer software for internal use is developed or modified internally by the enterprise

solely to meet the needs of the enterprise and at no stage it is planned to sell it.

2. The stages of development of internally generated software may be categorised into the following two phases:

Preliminary project stage, i.e., the research phase

Development stage

Preliminary project stage

3. At the preliminary project stage the internally generated software should not be recognised as an asset.

Expenditure incurred in the preliminary project stage should be recognised as an expense when it is incurred. The

reason for such a treatment is that at this stage of the software project an enterprise cannot demonstrate that an

asset exists from which future economic benefits are probable.

4. When a computer software project is in the preliminary project stage, enterprises are likely to:

(b)

the expenditure can be measured and attributed to the software reliably.

If these conditions are met, the subsequent expenditure should be added to the carrying amount of the software. Costs

incurred in order to restore or maintain the future economic benefits that an enterprise can expect from the

originally assessed standard of performance of existing software systems is recognised as an expense when, and only

when, the restoration or maintenance work is carried out.

Amortisation period

13. The depreciable amount of a software should be allocated on a systematic basis over the best estimate of its

useful life. The amortisation should commence when the software is available for use.

14. As per this Standard, there is a rebuttable presumption that the useful life of an intangible asset will not

exceed ten years from the date when the asset is available for use. However, given the history of rapid changes in

technology, computer software is susceptible to technological obsolescence. Therefore, it is likely that useful life

of the software will be much shorter, say 3 to 5 years.

Amortisation method

15. The amortisation method used should reflect the pattern in which the software's economic benefits are consumed by

the enterprise. If that pattern can not be determined reliably, the straight-line method should be used. The

amortisation charge for each period should be recognised as an expenditure unless another Accounting Standard

permits or requires it to be included in the carrying amount of another asset. For example, the amortisation of a

software used in a production process is included in the carrying amount of inventories.

II Illustrative Application of the Accounting Standard to Web-Site Costs

1. An enterprise may incur internal expenditures when developing, enhancing and maintaining its own web site. The web

site may be used for various purposes such as promoting and advertising products and services, providing electronic

services, and selling products and services.

2. The stages of a web site's development can be described as follows:

(c)

Graphical Design and Content Development - includes designing the appearance of web pages and creating,

purchasing, preparing and uploading information, either textual or graphical in nature, on the web site prior to

the web site becoming available for use. This information may either be stored in separate databases that are

integrated into (or accessed from) the web site or coded directly into the web pages.

3. Once development of a web site has been completed and the web site is available for use, the web site commences an

operating stage. During this stage, an enterprise maintains and enhances the applications, infrastructure, graphical

design and content of the web site.

4. The expenditures for purchasing, developing, maintaining and enhancing hardware (e.g., web servers, staging

servers, production servers and Internet connections) related to a web site are not accounted for under this

Standard but are accounted for under AS 10, Property, Plant and Equipment. Additionally, when an enterprise incurs

an expenditure for having an Internet service provider host the enterprise's web site on it's own servers connected

to the Internet, the expenditure is recognised as an expense.

5. An intangible asset is defined in paragraph 6 of this Standard 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. Paragraph 7 of this Standard provides computer software as a common example of an

intangible asset. By analogy, a web site is another example of an intangible asset. Accordingly, a web site

developed by an enterprise for its own use is an internally generated intangible asset that is subject to the

requirements of this Standard.

6. An enterprise should apply the requirements of this Standard to an internal expenditure for developing, enhancing

and maintaining its own web site. Paragraph 55 of this Standard provides expenditure on an intangible item to be

recognised as an expense when incurred unless it forms part of the cost of an intangible asset that meets the

recognition criteria in paragraphs 19 - 54 of the Standard. Paragraph 56 of the Standard requires expenditure on start-up

activities to be recognised as an expense when incurred. Developing a web site by an enterprise for its own use is

not a start-up activity to the extent that an internally generated intangible asset is created. An enterprise

applies the requirements and guidance in paragraphs 39-54 of this Standard to an expenditure incurred for developing

its own web site in addition to the general requirements for recognition and initial measurement of an intangible

asset. The cost of a web site, as described in paragraphs 52-54 of this Standard, comprises all expenditure that can

be directly attributed, or allocated on a reasonable and consistent basis, to creating, producing and preparing the

asset for its intended use.

The enterprise should evaluate the nature of each activity for which an expenditure is incurred (e.g., training

employees and maintaining the web site) and the web site's stage of development or post-development:

(b)

Paragraph 44 of this Standard requires an intangible asset

arising from the development phase of an internal project to be recognised if an enterprise can demonstrate

fulfillment of the six criteria specified.Application and Infrastructure Development and Graphical Design and

Content Development stages are similar in nature to the development phase. Therefore, expenditures incurred in

these stages should be recognised as an intangible asset if, and only if, in addition to complying with the

general requirements for recognition and initial measurement of an intangible asset, an enterprise can

demonstrate those items described in paragraph 44 of this Standard. In addition,

(i)

an enterprise may be able to demonstrate how its web site will generate probable future economic

benefits under paragraph 44(d) by using the principles in AS 28. This includes situations where the web

site is developed solely or primarily for promoting and advertising an enterprise's own products and

services. Demonstrating how a web site will generate probable future economic benefits under paragraph

44(d) by assessing the economic benefits to be received from the web site and using the principles in AS

28, may be particularly difficult for an enterprise that develops a web site solely or primarily for

advertising and promoting its own products and services; information is unlikely to be available for

reliably estimating the amount obtainable from the sale of the web site in an arm's length transaction,

or the future cash inflows and outflows to be derived from its continuing use and ultimate disposal. In

this circumstance, an enterprise determines the future economic benefits of the cash-generating unit to

which the web site belongs, if it does not belong to one. If the web site is considered a corporate

asset (one that does not generate cash inflows independently from other assets and their carrying amount

cannot be fully attributed to a cash- generating unit), then an enterprise applies the 'bottom-up' test

and/or the 'top- down' test under AS 28.

(ii)

an enterprise may incur an expenditure to enable use of content, which had been purchased or

created for another purpose, on its web site (e.g., acquiring a license to reproduce information) or may

purchase or create content specifically for use on its web site prior to the web site becoming available

for use. In such circumstances, an enterprise should determine whether a separate asset, is identifiable

with respect to such content (e.g., copyrights and licenses), and if a separate asset is not

identifiable, then the expenditure should be included in the cost of developing the web site when the

expenditure meets the conditions in paragraph 44 of this Standard. As per paragraph 20 of this Standard,

an intangible asset is recognised if, and only if, it meets specified criteria, including the definition

of an intangible asset. Paragraph 52 indicates that the

cost of an internally generated intangible asset is the sum of expenditure incurred from the time when

the intangible asset first meets the specified recognition criteria. When an enterprise acquires or

creates content, it may be possible to identify an intangible asset (e.g., a license or a copyright)

separate from a web site. Consequently, an enterprise determines whether an expenditure to enable use of

content, which had been created for another purpose, on its web site becoming available for use results

in a separate identifiable asset or the expenditure is included in the cost of developing the web site.

(c)

the operating stage commences once the web site is available for use, and therefore an expenditure

to maintain or enhance the web site after development has been completed should be recognised as an

expense when it is incurred unless it meets the criteria in paragraph 59 of the Standard. Paragraph 60

explains that if the expenditure is required to maintain the asset at its originally assessed standard

of performance, then the expenditure is recognised as an expense when incurred.

7. An intangible asset is measured subsequent to initial recognition by applying the requirements in paragraph 62 of this Standard. Additionally, since paragraph 68 of the Standard

states that an intangible asset always has a finite useful life, a web site that is recognised as an asset is

amortised over the best estimate of its useful life. As indicated in paragraph 65 of the Standard, web sites are

susceptible to technological obsolescence, and given the history of rapid changes in technology, their useful life

will be short.

8. The following table illustrates examples of expenditures that occur within each of the stages described in

paragraphs 2 and 3 above and application of paragraphs 5 and 6 above. It is not intended to be a comprehensive

checklist of expenditures that might be incurred.

Nature of Expenditure

Accounting treatment

Planning

undertaking feasibility studies

defining hardware and software

specifications

evaluating alternative products and

suppliers

selecting preferences

Expense when incurred

Application and Infrastructure

Development

purchasing or developing hardware

Apply the requirements of AS 10

obtaining a domain name

developing operating software (e.g.,

operating system and server software)

developing code for the application

installing developed applications on

the web server

stress testing

Expense when incurred, unless it

meets the recognition criteria under

paragraphs 20 and 44

Graphical Design and Content

Development

Graphical Design and Content

Development

designing the appearance (e.g.,

layout and colour) of web pages

creating, purchasing, preparing

(e.g., creating links and identifying

tags), and uploading information, either

textual or graphical in nature, on the

web site prior to the web site becoming

available for use. Examples of content

include information about an enterprise,

products or services offered for sale,

and topics that subscribers access

If a separate asset is not

identifiable, then expense when

incurred, unless it meets the

recognition criteria under

paragraphs 20 and 44

Operating

updating graphics and revising

content

adding new functions, features and

content

registering the web site with search

engines

Expense when incurred, unless in rare

circumstances it meets the criteria in

paragraph 59, in which case the

expenditure is included in the cost of

the web site

Other

selling, administrative and other

general overhead expenditure unless

it can be directly attributed to

preparing the web site for use

clearly identified inefficiencies and

initial operating losses incurred

before the web site achieves planned

performance (e.g., false start testing)

training employees to operate the

Expense when incurred

Illustration B

This Illustration which does not form part of the Accounting Standard, provides illustrative application

of the requirements contained in paragraph 99 of this Accounting Standard in respect of transitional provisions.

Illustration 1 - Intangible Item was not amortised and the amortisation period determined under

paragraph 63 has expired.

An intangible item is appearing in the balance sheet of A Ltd. at Rs. 10 lakhs as on 1-4-2003. The item was acquired

for Rs. 10 lakhs on April 1, 1990 and was available for use from that date. The enterprise has been following an

accounting policy of not amortising the item. Applying paragraph 63, the enterprise determines that the item would

have been amortised over a period of 10 years from the date when the item was available for use i.e., April 1, 1990.

Since the amortisation period determined by applying paragraph 63 has already expired as on 1-4-2003, the

carrying amount of the intangible item of Rs. 10 lakhs would be required to be eliminated with a corresponding

adjustment to the opening balance of revenue reserves as on 1-4-2003.

Illustration 2 - Intangible Item is being amortised and the amortisation period determined under paragraph

63 has expired.

An intangible item is appearing in the balance sheet of A Ltd. at Rs. 8 lakhs as on 1-4-2003. The item was acquired

for Rs. 20 lakhs on April 1, 1991 and was available for use from that date. The enterprise has been following a

policy of amortising the item over a period of 20 years on straight-line basis. Applying paragraph 63, the

enterprise determines that the item would have been amortised over a period of 10 years from the date when the item

was available for use i.e., April 1, 1991.

Since the amortisation period determined by applying paragraph 63 has already expired as on 1-4-2003, the

carrying amount of Rs. 8 lakhs would be required to be eliminated with a corresponding adjustment to the opening

balance of revenue reserves as on 1-4-2003.

Illustration 3 - Amortisation period determined under paragraph 63 has not expired and the remaining

amortisation period as per the accounting policy followed by the enterprise is shorter.

An intangible item is appearing in the balance sheet of A Ltd. at Rs. 8 lakhs as on 1-4-2003. The item was acquired

for Rs. 20 lakhs on April 1, 2000 and was available for use from that date. The enterprise has been following a

policy of amortising the intangible item over a period of 5 years on straight line basis. Applying paragraph 63, the

enterprise determines the amortisation period to be 8 years, being the best estimate of its useful life, from the

date when the item was available for use i.e., April 1, 2000.

On 1-4-2003, the remaining period of amortisation is 2 years as per the accounting policy followed by the

enterprise which is shorter as compared to the balance of amortisation period determined by applying paragraph 63,

i.e., 5 years. Accordingly, the enterprise would be required to amortise the intangible item over the remaining 2

years as per the accounting policy followed by the enterprise.

Illustration 4 - Amortisation period determined under paragraph 63 has not expired and the remaining

amortisation period as per the accounting policy followed by the enterprise is longer.

An intangible item is appearing in the balance sheet of A Ltd. at Rs. 18 lakhs as on 1-4-2003. The item was acquired

for Rs. 24 lakhs on April 1, 2000 and was available for use from that date. The enterprise has been following a

policy of amortising the intangible item over a period of 12 years on straight- line basis. Applying paragraph 63,

the enterprise determines that the item would have been amortised over a period of 10 years on straight line basis

from the date when the item was available for use i.e., April 1, 2000.

On 1-4-2003, the remaining period of amortisation is 9 years as per the accounting policy followed by the

enterprise which is longer as compared to the balance of period stipulated in paragraph 63, i.e., 7 years.

Accordingly, the enterprise would be required to restate the carrying amount of intangible item on 1-4-2003 at Rs.

16.8 lakhs (Rs. 24 lakhs - 3xRs. 2.4 lakhs, i.e., amortisation that would have been charged as per the Standard) and

the difference of Rs. 1.2 lakhs (Rs. 18 lakhs-Rs. 16.8 lakhs) would be required to be adjusted against the opening

balance of the revenue reserves. The carrying amount of Rs. 16.8 lakhs would be amortised over 7 years which is the

balance of the amortisation period as per paragraph 63.

Illustration 5 - Intangible Item is not amortised and amortisation period determined under paragraph 63

has not expired.

An intangible item is appearing in the balance sheet of A Ltd. at Rs. 20 lakhs as on 1-4-2003. The item was acquired

for Rs. 20 lakhs on April 1, 2000 and was available for use from that date. The enterprise has been following an

accounting policy of not amortising the item. Applying paragraph 63, the enterprise determines that the item would

have been amortised over a period of 10 years on straight line basis from the date when the item was available for

use i.e., April 1, 2000.

On 1-4-2003, the enterprise would be required to restate the carrying amount of intangible item at Rs. 14

lakhs (Rs. 20 lakhs - 3xRs. 2 lakhs, i.e., amortisation that would have been charged as per the Standard) and the

difference of Rs. 6 lakhs (Rs. 20 lakhs-Rs. 14 lakhs) would be required to be adjusted against the opening balance

of the revenue reserves. The carrying amount of Rs. 14 lakhs would be amortised over 7 years which is the balance of

the amortisation period as per paragraph 63.

Footnotes

* The Standard was earlier notified as part of Companies

(Accounting Standards) Rules, 2006, under Companies Act, 1956. The Standard has been notified as part of Companies

(Accounting Standards) Rules, 2021, under Companies Act, 2013.

1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting

Standards are intended to apply only to items which are material

2 A financial asset is any asset that is: