IND AS 38: Comprehensive Guide to Intangible Assets Accounting

Welcome to our in-depth guide on IND AS 38, the accounting standard that addresses the recognition, measurement, and disclosure of Intangible Assets. In this article, we will explore the key aspects of Ind As 38 in detail, providing a thorough understanding of how intangible assets are accounted for in financial reporting.

Scope and Definition of Intangible Assets:

IND AS 38 applies to a wide range of intangible assets, including patents, copyrights, trademarks, brands, customer lists, software, licenses, and proprietary technologies. These assets lack physical substance but have a valuable role in generating future economic benefits for an organization.

Recognition Criteria for Intangible Assets:

To be recognized under IND AS 38, an intangible asset must meet certain criteria. It should be identifiable, meaning it can be separated from the entity and sold, transferred, licensed, or exchanged. Additionally, the asset should have probable future economic benefits that can be reliably measured.

Initial Measurement:

Upon recognition, intangible assets are initially measured at cost. This includes all directly attributable costs necessary to bring the asset into use, such as acquisition costs, development costs, and legal fees. If an intangible asset is acquired through a business combination, its fair value at the acquisition date is considered.

Government Grants:

When an intangible asset is acquired with the assistance of a government grant, IND AS 38 addresses the accounting treatment of such grants. Government grants related to the acquisition or development of an intangible asset are usually recognized in the statement of profit and loss over the useful life of the asset as a deduction from the cost of the asset.

Research and Development Costs:

IND AS 38 provides specific guidance on the accounting treatment of research and development (R&D) costs. Research costs, which are incurred to gain new knowledge, are expensed as incurred since they are difficult to differentiate from general business expenses. Development costs, on the other hand, are capitalized if certain criteria are met. These criteria include the technical feasibility of completing the intangible asset, the intention to use or sell the asset, the ability to measure reliably the expenditure attributable to the asset, and the availability of resources to complete the development.

Subsequent Measurement:

After initial recognition, intangible assets are measured at cost less accumulated amortization and accumulated impairment losses. Amortization is the systematic allocation of the asset’s cost over its useful life, reflecting the pattern of economic benefits expected to be derived from the asset. The useful life of an intangible asset can be finite or indefinite.

Impairment of Intangible Assets:

IND AS 36, the impairment accounting standard, is applicable to intangible assets. Businesses are required to assess whether there are any indicators of impairment for their intangible assets on an ongoing basis. If such indicators exist, an impairment test is performed to determine if the carrying amount of the asset exceeds its recoverable amount. If it does, an impairment loss is recognized.

Intangible Assets with Indefinite Useful Lives:

Certain intangible assets, such as brands or trademarks, may have indefinite useful lives. In such cases, they are not amortized but are subject to impairment testing at least annually. The impairment test involves comparing the asset’s carrying amount with its recoverable amount. If the recoverable amount is lower, an impairment loss is recognized.

Derecognition of Intangible Assets:

This standard also provides guidance on when and how to derecognize an intangible asset. An intangible asset is derecognized when it is disposed of, is no longer in use, or its legal rights have expired. The gain or loss on derecognition is calculated as the difference between the net disposal proceeds and the carrying amount of the asset.

Disclosure Requirements:

IND AS 38 imposes extensive disclosure requirements to provide relevant and useful information to users of financial statements. These requirements include disclosing:

• The carrying amount of each class of intangible asset.
• The amortization methods used.
• The useful lives assigned to intangible assets.
• Significant assumptions or judgments made in determining the asset’s recoverable amount.

Conclusion:

IND AS 38 is a vital accounting standard that ensures proper recognition, measurement, and disclosure of intangible assets. By adhering to its guidelines, organizations can accurately represent the value of their intangible assets, enhancing transparency and providing valuable insights to stakeholders. It is crucial for businesses to understand and apply this standard in their financial reporting to maintain compliance and effectively communicate the value of their intangible assets.

FAQ: