IAS 38

• Intangible Assets

International Accounting Standard - Intangible Assets

- Scope

- Meaning

- Recognition and Measurement

- Amortisation

- SIC 32

- Disclosures

- Extract from Selected Annual Reports

- Key differences

- Case Studies

SCOPE The Standard is to be applied in accounting for all

intangible assets except: Those that are within the scope of another

standard Financial assets as defined in IAS 39, Financial

Instruments: Recognition & Measurement Mineral rights and expenditure on the

exploration for, or development and extraction of, minerals, oil, natural gas, and similar nonregenerative resources

The standard does not apply to those intangible assets covered by other standards, such as

Intangible assets held for sale in the ordinary course of business (IAS 2)

Deferred tax assets (IAS 12) Leases within the scope of IAS 17 Assets arising from employee benefit plans

(IAS 19) Financial assets covered by IAS 39, 27, 28 or

31 Goodwill acquired in a business combination

(IFRS 3) Deferred acquisition costs and intangible

assets arising from insurance contracts (IFRS 4) (However disclosure requirements for such intangible assets are applicable.)

Non current intangible assets classified as held for sale in accordance with IFRS 5.

Resources controlled by an entity from which the entity expects to derive future economic benefits.

Lack physical substance

Are identifiable to be distinguished from goodwill

Exists when an entity has the power to obtain the future economic benefits from an underlying resource and to restrict the access of others to these benefits

An entity is usually not considered to exercise

sufficient control over its workforce for the workforce to be recognised as an intangible asset unless it is protected by legal rights to use it and to obtain the future economic benefits

Future economic benefits include not only future revenues from the sale of products or services but also cost savings or other benefits resulting from the assets.

Another essential characteristic of an intangible asset is that it lacks physical substance. It may, however be difficult to categories as asset as tangible or intangible. An intangible asset is often contained in or on a physical substance.

Therefore an entity needs to exercise judgment

in determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 – Property, Plant and Equipment – or as an intangible asset’ under IAS 38.

Is separable, that it is capable of being

separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually of together with a related contract, asset or liability; or

Arises from contractual or other legal rights,

regardless of whether the rights are transferable or separable from the entity or from other rights and obligations.

Recognition of intangible assets under IAS 38 is based on a general principle that ‘applies to costs incurred initially to acquire or internally generate an intangible asset and those incurred subsequently to add to, replace part of, or service it’. An item that meets the definition of an intangible asset should only be recognised if: The cost of the asset can be measured reliably It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

Acquired separately Acquired as a part of business combination Acquired by way of government grant Obtained in an exchange of assets Generated internally

Recognition When an entity separately acquires an intangible

asset the standard: Always considers future economic benefits

probable and

Assumes that the cost of a separately acquired intangible asset can usually be measured reliably, especially in the case of a monetary purchase consideration

Components of cost

Costs to be expensed The following types of expenditure are not considered to be part

of the cost of a separately acquired intangible asset: Costs of introducing a new product or service, including costs

of advertising and promotional activities; Costs of conducting business in a new location or with a new

class of customer including costs of staff training Administration and other general overhead costs Costs incurred in using or redeploying an intangible asset Costs incurred while an asset capable of operating in the

manner intended by management has yet to be brought into use and

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

Incase of Business Combination an acquirer

recognizes 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.

An intangible asset may sometimes be acquired free of charge, or for nominal consideration, by way of government which permits initial recognition of intangible assets received at either fair value or a nominal amount.

Obtained in exchange of assets The intangible asset acquired is measured at

its fair value. If its fair value cannot be reliably measured, then the entity shall measure the fair value of assets given up. (IAS 16)

Internally generated intangible assets are not recognised because it is extremely difficult to distinguish the costs of such items from the cost of developing the business as a whole. The standard therefore includes a specific prohibition on recognizing those items as intangible assets

Internally generated intangible assets shall be

recognised provided it satisfies the criteria of recognition as intangible assets

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Research is defined as ‘original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding’

Expenditure on research phase on internal project should be expensed as incurred.

Development expenses after the technological feasibility should be capitalised.

IAS 38 provides an entity the option to choose between two alternative treatment:

Cost model Revaluation Model

Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life.(IAS 16)

Intangibles having infinite useful life need not be amortized.

Useful Life is 1. The period over which an asset is

expected to be available for use by an entity. 2. The number of production or similar

units expected to be obtained from an assets by an entity.

Intangible components relate to website development and operation. Examples are (1) Planning :It covers undertaking feasibility study, evaluating alternatives, choosing the preferred alternatives, etc. (2) Application and Infrastructure Development: Expenditure incurred to obtain domain name, purchasing and developing operating hardware and software, installing developed application, stress testing, etc. (3) Graphic design and Content Development: Expenditure incurred for web page designing, creating, purchasing and uploading information, etc. (4) Operational Activities: They include maintaining and enhancing application, infrastructure, graphical design and content of the website.

Recognition of internally developed website as an intangibles shall satisfy the intangible recognition criteria set out in Para 21 IAS 38.

The following item is not covered under Intangible Assets : 1. Expenditure on purchasing, developing and operating hardware (e.g. web servers, staging servers, production servers and Internet Connections) 2. Additionally, when an entity expenditure on an internet service provider hosting the entity’s website, it is recognised as an expense. 3. Also IAS 38 intangible Asset does not apply to intangible asset held by an entity for sale in the ordinary course of business or leases that fall within the scope of IAS 17

CA. KISHOR PARIKH 23

The useful lives of the assets Amortisation method Gross carrying amount and accumulated amortisation

at the beginning and the end of the period. The line items in the income statement in which

amortisation is included. Additions separately showing those internally

generated , those acquired separately and those acquired through business combinations

Assets classified as held for sale under IFRS 5 Increases or decreases during the period resulting

from revaluations Impairment losses Reversals of impairment losses

Amortisation recognised during the period Net exchange differences on retranslation Other changes during the period For assets with indefinite useful lives, the carrying amount of the

asset and the reasons supporting such an assessment Description, carrying amount and remaining amortization period

of any intangible assets that are material to the entity’s financial statements

The existence and carrying amounts of intangible assets whose title is restricted or pledged as security for liabilities

Contractual commitments for the acquisition of intangible assets Intangible assets acquired by way of government grant and

initially recognized at fair value including their fair values their carrying amounts and whether subsequently carried under the cost or revaluation model

The amount of research and development expenditure expensed during the year

Particulars IND-AS Requirement IFRS Requirement Intangible through Govt. Grant - Recognition

Allows only fair value for recognizing the intangible asset and grant in accordance with Ind AS 20.

With regard to the acquisition of an intangible asset by way of a government grant, IAS 38, Intangible Assets, provides the option to an entity to recognise both asset and grant initially at fair value or at a nominal amount plus any expenditure that is directly attributable to preparing the asset for its intended use.

Research and development Expenditures on research activities undertaken with the prospect of

gaining new scientific or technical knowledge and understanding are recognized in profit or loss when incurred. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. The expenditures capitalized include the cost of materials and other costs directly attributable to preparing the asset for its intended use. Other development expenditures are recognized in profit or loss as incurred. The Company’s internal drug development expenditures are capitalized only if they meet the recognition criteria as mentioned above. Where regulatory and other uncertainties are such that the criteria are not met, the expenditures are recognized in profit or loss as incurred. This is almost invariably the case prior to approval of the drug by the relevant regulatory authority. Where, however, the recognition criteria are met, intangible assets are capitalized and amortized on a straight-line basis over their useful economic lives from product launch.

As of March 31, 2009, no internal drug development expenditure amounts have met the recognition criteria. Payments to in-license products and compounds from third parties generally taking the form of up-front payments and milestones are capitalized and amortized, generally on a straight-line basis, over their useful economic lives from product launch. Intangible assets relating to products in development, other intangible assets not available for use and intangible assets having indefinite useful life are subject to impairment testing at each balance sheet date. All other intangible assets are tested for impairment when there are indications that the carrying value may not be recoverable. Any impairment losses are recognized immediately in the income statement.

Other intangible assets Other intangible assets that are acquired by the Company, which have finite

useful lives, are measured at cost less accumulated amortization and accumulated impairment losses. Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which they relate.

Amortization

Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than for goodwill, intangible assets not available for use and intangible assets having indefinite life, from the date that they are available for use. The estimated useful lives are as follows: Trademarks 3 – 12 years Product related intangibles 6 – 15 years Beneficial toll manufacturing contract 2 years Non-competition arrangements 1.5 – 10 years Marketing rights 3 – 16 years Customer-related intangibles 2 – 11 years Technology related intangibles 6 – 13 years Other intangibles 5 – 15 years

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Research and Development : Research expenditure is charged to income statement in the

year in which it is incurred. Development expenditure is charged to income statement in the year it is incurred, unless it meets the recognition criteria of IAS 38 on Intangible Assets. Intangibles (Patent and Software) :

Patents, being indefinite lived intangible assets, are periodically subjected to impairment test. Software is amortized over the useful lifetime of the asset on straight-line method subject to periodic review of utility. The useful life considered is 5 years. Details of intangible assets (Patent & Software) : 2009 2008 Patents 1112.87 1112.87 Software 1654.44 1472.29 Less: Amortisation 576.48 1077.96 272.92 1199.37 Total 2190.83 2312.24

Internally generated intangible assets are primarily compromised of internally developed software. Such software as well as other internally generated assets for internal use are valued at cost and amortized over their useful lives. Impairments are recorded if the carrying amount of an asset exceeds the recoverable amount.

Development cost also include, in addition to those costs directly attributable to the development of an asset, an appropriate allocation of overhead cost. Borrowing costs are capitalized to the extent that they are material and related to the period over which the asset is generated.

The average amortization period for intangible assets with definite useful lives is 10 years for 2006 and nine years for 2005 on the following expected useful lives : (i) Distribution and similar rights 2-20 (ii) Product rights, licenses, trademarks 2-30 (iii) Know-how, patents, production technologies 3-25 (iv) Internally generated intangible assets 3-5 (v) Other rights and values 2-20

IAS 36 IMPAIRMENT OF ASSETS

CA. KISHOR PARIKH 33

Certain assets not covered by this Standard Inventories (IAS 2) Assets arising from construction contracts (IAS 11) Deferred Tax Assets ( IAS 12) Assets arising from employee benefits (IAS 19) Financial assets dealt with under IAS 39 Investment Property carried at fair value under IAS 40 Biological assets carried at fair value (IAS 41) Assets arising from Insurance Contracts (IFRS 4) Assets that are held for sale (IFRS 5) The standard does apply to Subsidiaries, associates and joint ventures Property, plant and equipment Investment property carried at cost Intangible assets and goodwill

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The standard does apply to Subsidiaries, associates and joint ventures Property, plant and equipment Investment property carried at cost Intangible assets and goodwill

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An asset may not be carried in the balance sheet at more than its recoverable amount. IAS 36 states that “ If, and only if, the recoverable amount of an asset is less its carrying amount, the carrying amount of that asset shall be reduced to its recoverable amount. That reduction is an impairment loss.”

compared with higher of and

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Carrying value Recoverable amount

Fair value less cost to sell Value in use

Value in use is the present value of the future cash flow expected to be derived from the use of an asset or cash generating unit.

The following elements shall be reflected in the calculation of an asset’s value in use :

(a) An estimate of the future cash flows the entity expects to derive from the asset;

(b) Expectations about possible variations in the amount or timing of those future cash flows;

(c) the time value of money, represented by the current market risk-free rate of interest;

(d) the price for bearing the uncertainty inherent in the asset; and (e) other factors, such as illiquidity, that market participants would

reflect in pricing the future cash flows the entity expects to derive from the asset.

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Internal sources of information : (e) Evidence of obsolescence or physical damage of an asset; (f) Significant changes in the extent to which, or manner in which, an

asset is used or expected to be used. These changes include the asset becoming idle, plans to dispose of an asset sooner than expected, reassessing its useful life as finite rather than indefinite or plans to restructure the operation to which the asset belongs;

(g) Internal report that indicates that the economic performance of an asset is, or will be, worse than expected

Relevant evidence from internal reporting indicates that an asset may

be impaired as follows: (i) Cash flows for acquiring the asset, subsequent cash needs for

operating or maintaining it, are significantly higher than originally budgeted;

(ii) operating profit or loss or actual net cash flows are significantly worse than budgeted;

(iii) a significant decline in budgeted net cash flows or operating profit

A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely dependant of the cash inflows from other assets or group of assets. Impairment losses in CGUs can occur in two ways (a) An impairment loss is occurred in CGU on its own, and that CGU may or may not

have a corporate asset or goodwill included in its carrying value; (b) an impairment loss is identified that must be allocated across a group of CGUs

because a corporate asset or goodwill is involved whose carrying value could only be allocated to a group of CGUs as a whole, rather than to individual ones.

The standard lays down that impairment losses in CGUs should be recognised to reduce the carrying amount of the assets of the unit in the following order :

(a) First, to reduce the carrying amount of any goodwill allocated to the CGU or group of units; and

(b) if the goodwill has been written off, to reduce the other assets of the CGU pro rata to their carrying amount.

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Goodwill that relates to minority interest is not recognized currently in the parent’s consolidated financial statements. Part of the recoverable amount of a cash-generating unit is attributable to the minority’s interest in goodwill

For the purpose of impairment testing, the carrying amount

of goodwill is grossed up to include the goodwill attributable to the minority’s interest. This notionally adjusted figure is then compared with recoverable amount of the unit to decide whether the cash-generating unit is impaired

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Corporate assets should be allocated to cash-generating units. If the asset can be allocated on a reasonable and consistent basis.

However if the asset cannot be allocated on such basis, then three processes should occur :

(1) An impairment test should be carried out on the cash-generating unit without the corporate asset.

(2) The smallest group of cash-generating units should be identified that includes the cash-generating unit under review and to which part of the corporate assets can be reasonably allocated.

(3) This group of cash-generating should then be tested for impairment.

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1. At each reporting date, an entity should determine whether an impairment loss recognised in the previous period may have decreased. This does not apply to goodwill.

2. In determining whether an impairment loss has reversed, the entity should consider the same sources of information for the original impairment loss.

3. An impairment loss may be reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss had been recognised. If this is the case, then the carrying amount of the asset shall be increased to its recoverable amount. The increase will effectively be the reversal of the impairment loss.

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4) However, the increase in the carrying value of the asset can only up to what the carrying amount would have been if the impairment loss would not have occurred.

5) Any reversal of an impairment loss is recognised immediately in the income statement unless the asset is carried at a revalued amount; in this case, the reversal will be treated as a revaluation increase.

6) The reversal of an impairment loss may require an adjustment to the depreciation of the asset in the future periods.

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For each class of asset an entity will disclose (a) Impairment losses recognized in the Income Statement.

(b) Impairment losses reversed in the Income Statement

(c) The line item in the Income Statement in which the impairment losses are included.

(d) Additionally, any impairment losses recognized directly in equity should be disclosed, including reversal of impairment losses.

(e) Each segment should disclose these items in terms of primary segments only : impairment losses recognized and reversed in the period both in the Income Statement and directly in equity.

(f) If an individual impairment loss or reversal is material, then this information should be disclosed :

• The events and circumstances leading to the impairment loss

• The amount of the loss

• If it relates to an individual asset, the nature of the asset and the segment to which it relates .

g. For cash-generating unit, the description of the amount of the impairment los or reversal by class of asset and segment should be disclosed.

h. If the recoverable amount is fair value less cost to sell, the basis for determining fair value must be disclosed.

i. If the recoverable amount is the value-in-use, the discount rate should be disclosed.

j. If the impairment loss recognized or reversed are material in

relation to the Financial Statement as a whole, the main classes of assets affected should be disclosed and the main events and circumstances that lead to the recognition of losses should be disclosed.

k. Detailed information about the estimates used to measure the recoverable amounts of the cash-generating units that contain goodwill or intangible assets with an indefinite useful life should be also set out.

CA. KISHOR PARIKH 46

S R No. Particulars IND AS Requirement IFRS Requirement 1. Investment Property

- Impairment Ind AS 36 does not specify such requirement, as Ind AS 40 permits the cost model only.

Paragraph 2(f) of IAS 36 states that the standard shall not be applied for accounting for the impairment of the investment property that is measured at fair value.

Holcim, Annual Report 2006 Notes to the financial Statements Accounting Policies 18. Impairment of Assets At each balance sheet date, the Group whether there is any indication that an

asset may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss, if any.

Where it is not possible to estimate the recoverable amount of the individual asset, the Group estimates the recoverable of the smallest cash-generating unit to which the asset belongs.

If the recoverable amount of the asset or the cash-generating unit is estimated is to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. Impairment Losses are recognised immediately in the income statement.

Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount. However, this increased amount cannot exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in the prior periods. A reversal of an impairment loss is recognised immediately in the Income Statement.

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Mumbai, India

kmparikh1950@yahoo.co.in 09820375766