Fixed assets

Scope, objective and definition

AS 10

Tangible assets (for Intangibles refer to AS 26)

Held for production or supply of goods or services and
not for sale in the normal course of business

Thus fixed assets include those held for rental to others
or those held for administrative purposes
Fixed
assets

Depreciation (AS 6)
Government grants (AS 12)
Other related
accounting
standards

Borrowing costs (AS 16)

Leases (AS 19)
Intangible assets (AS 26)
Impairment (AS 28)
2

Scope, objective and definition

(Continued)

Forests, plantations and similar

regenerative natural resources
AS 10 does not deal with items
to which special considerations
apply

Wasting assets including mineral

rights and similar non-regenerative
resources
Expenditure on real estate
development
Livestock
Except
Fixed assets used to develop or
maintain these activities
but
separable from those activities
3

Recognition

Fixed asset should be recognised as an asset when:



Asset is brought to its working condition for its intended use i.e. ready for
commercial production

Initially, measure at cost

May be appropriate to


Aggregate insignificant items and apply criteria to aggregate value

Expense an item of fixed asset if the amount is not material

Allocate expenditure to material component parts of a fixed asset if

parts are separable and
useful lives for each component can be estimated and are different

Components of cost

Purchase price
(including import duties and non-refundable purchase taxes or levies)
- any trade discounts or rebates deducted
+ any directly attributable costs
+ borrowing costs as per AS 16
+/- exchange differences (para 46 A of AS 11)
= Cost of fixed asset

Site preparation

Initial delivery and handling cost

Installation cost

Professional fee

Other expenses

Administration and other general overhead costs not included

unless
Such expenses are specifically attributable


to construction of a project or

to acquisition of fixed asset or

bringing it to its working condition

Start-up, test runs and similar pre-production costs



Included only till asset is ready for commercial production

Not included if incurred after commercial production even if the plant will be
taken over after satisfactory completion of guarantee period

Expenditure during period of delayed commercial production

Self constructed fixed assets

Same principles as stated earlier



Direct costs

Costs attributable to construction which can be allocated

to the asset

Internal profits are eliminated

Cost

Can the following costs be capitalised?



Administrative, selling and general overheads which cannot

be attributed to making the asset ready for use

Clearly identified abnormal costs including those of

inefficiencies

Expenditure on training the staff to operate the asset

Impact of withdrawal of Guidance Note on Expenditure incurred during preconstruction period

Cost

(Continued)

Changes in duties

Other similar factors
The cost may change subsequently due to:

Exchange fluctuations

Price adjustments

Component accounting - Paragraph 8.3 states the

accounting for an item of fixed asset may

be improved if the total expenditure thereon is allocated to its component parts, provided they are in practice

separable, and estimates are made of the useful lives of these components recommendatory
provision.

Cost of fixed asset acquired in exchange of another asset

Fair value of the consideration given

or
Fair value of asset acquired
(whichever is more clearly evident)
Cost of fixed
asset acquired
in exchange of
another asset

OR

Net book value of the asset given up

Adjust for any balancing payment or receipt of cash/other

consideration
10

Subsequent expenditure

Subsequent expenditure
Add to book value only if it increases the future benefits from the existing asset
beyond its previously assessed standard of performance


extends useful life

increases capacity

substantially improves output quality

substantially reduces operating costs

Addition / extension


Capitalise to existing asset if of capital nature and an integral part of existing

asset

Capitalise separately if separate identity and capable of being used after existing
asset is disposed of

11

Special cases machinery spares

Implication of non-inclusion of ASI 2 (machinery spares) in notified standards

Relevant guidance under notified standards



Para 4 - AS 2, Inventories

Para 8.2 - AS 10, Accounting for Fixed Assets

Inventories do not include machinery spares

which can be used only in connection with an
item of fixed asset and whose use is expected
to be irregular; such machinery spares are
accounted for in accordance with Accounting
Standard (AS) 10, Accounting for Fixed
Assets.

Machinery spares are usually charged to the

profit and loss statement as and when
consumed. However, if such spares can be used
only in connection with an item of fixed asset
and their use is expected to be irregular, it may
be appropriate to allocate the total cost on a
systematic basis over a period not exceeding the
useful life of the principal item.

The principles of ASI 2 were consistent with the above but were prescriptive
12

Special cases machinery spares

(Continued)

Impact of non-inclusion


Machinery spares which can be used only in connection with an item of fixed
asset and whose use is expected to be irregular cannot be included as
inventories in view of specific exclusion in paragraph 4 of AS 2

As per paragraph 8.2 of AS 10, it may be appropriate to capitalise such

spares to be depreciated over a period not exceeding the useful life of the
principal item
Conceptually preferred treatment of such spares is capitalisation
Was made mandatory by ASI 2
Permissive wording of AS 10 viewed with non-inclusion of ASI 2


Company has a CHOICE of expensing such spares when FIRST PUT TO

USE

Pending use, shown SEPARATELY as current assets other than

inventories
13

Special cases machinery spares

(Continued)

If a company changes its treatment of aforesaid machinery spares

pursuant to notified standards


Constitutes a change in accounting policy

Should be applied to all such spares, irrespective of their date of acquisition

14

Special cases
Recorded at their cash value

Hire purchase

If not available then calculate assuming

appropriate rate of interest

Appropriate disclosure that enterprise does
not have full ownership

Disclose:

Enterprises share in such asset

Joint assets

Proportion of original costs

Accumulated depreciation

Written down value

OR
Group pro rata costs of such assets with fully
owned assets with appropriate disclosure
15

(Continued)

Special cases

Stand-by and
servicing
equipment

Separate fixed asset in its own right

Where several fixed assets are purchased for a consolidated price

Apportion consideration to various assets on fair basis determined by
competent valuers

Goodwill
Record only when some consideration in money or moneys worth has been
paid for it

16

Subsequent measurement

Benchmark treatment

Allowed alternative

Historical cost

Revaluation

Depreciation of cost
over useful life

Depreciation of
revalued amount
over useful life
17

Revaluation

Revalue atleast all asset of the same class

If not, select assets on a systematic basis (and disclose the basis)

Revaluation increase credited to owners interest (revaluation reserve)

unless the asset was previously revalued downward and the related
charge was made to expense take to profit and loss account

any accumulated depreciation should not be credited to profit and loss

account

Revaluation decrease charged to expense

unless the asset was previously revalued upward and the related credit
was made to revaluation surplus charge against earlier increase

Net book value after revaluation should not exceed recoverable value (see AS 28)

18

Depreciation

Dealt with in AS 6, Depreciation accounting

Fixed asset is subject to systematic allocation of cost minus residual

value to expense (freehold land excluded) over its useful life

Periodically review:

useful life
depreciation method

19

Impairment

Assess at each balance sheet date indications of impaired fixed assets

Yes
Recognise impairment loss* as an
expense immediately

Carrying
value
Lower of
Written
down value

unless carried at revalued

amount (treated as revaluation
decrease as long as it does not
exceed amount held in
revaluation reserve)

use new carrying amount to

calculate future depreciation

Recoverable
amount
Higher of

Net realisable value

Value in use

* Refer to AS 28 on how to compute impairment loss

20

Retirements and disposals

Eliminate items of fixed assets on disposal

If retired from active use and held for disposal


State at the lower of net book value or net realisable value

Loss recognised immediately in profit and loss account

Shown separately in financial statements

Difference between carrying amount and net disposal proceeds

recognised as income or expense
For re-valued assets:


Loss to the extent of unutilised revaluation reserve is charged to that account

Balance of revaluation reserve is transferred to general reserve

21

Disclosure
Distinction, as far as possible, has been made between expenditure upon:
 Goodwill


Land

Freehold

Leasehold

Buildings

Railway sidings

Plant and machinery

Furniture and fittings

Development of property

Patents, trade marks and designs

Livestock

Vehicles

Others (specify)
22

(Continued)

Disclosure

Accounting policy

A reconciliation of gross and net book values of each class of fixed assets at
the beginning and end of period showing:

original cost

any other movements

additions

revaluations

disposals

impairment losses
reversal of impairment losses

acquisitions (through business

combinations etc)

depreciation, for the year and

accumulated

23

(Continued)

Disclosure


The amount of expenditures on account of fixed asset in the course of

construction or acquisition





Existence and amounts of restrictions on title to assets

Fixed assets pledged as securities for liabilities
Capital commitments

If re-valued
amounts:

Reduced/increased figures

Date of reduction/increase

The method to compute revalued amounts

Nature of any indices used

The year of any appraisal made

Whether independent valuer was involved

The revaluation surplus, including movement

The amount of reduction/increase for the five subsequent years

24

Illustrative issues

1.

Is this correct?

Fixed assets, individually costing less than Rs. 5,000 and written off fully in the
year of acquisition are not entered in the Fixed Asset Register

Fixed assets are excluded from the Fixed Asset Register as soon as they are
depreciated to their residual value. No other record of such fully depreciated
assets is maintained

2.

The surplus arising on revaluation of land and buildings has been credited to the profit
and loss account to the extent of depreciation charged thereon in previous years. It is
argued that to this extent, depreciation need not have been charged in those years

3.

The building account has been debited with the cost of land on which the building
stands and depreciation has been provided thereon

25

Illustrative issues

5.








(Continued)

Historical cost of the asset: Rs. 1,00,000

Revalued cost (after three years): Rs. 1,50,000
Book value at the time of revaluation: Rs. 70,000 (Depreciation = SLM 10%)
Asset sold for: Rs. 1,40,000
Book value at the time of sale: Rs. 94,000
Management wants to credit Rs. 1,26,000 as profit from sale by transferring Rs.
80,000 from revaluation reserve

Is this correct?

6.

On the basis of a report of valuers showing that the book value of the
enterprise is much lower than their market value, the difference has been
accounted for as goodwill. Is this correct?

26

Illustrative issues

7.

(Continued)

Deferred revenue expenditure

Paragraph 9.2 of AS 10
However, expenditure incurred during this (construction) period is also sometimes treated as
deferred revenue expenditure to be amortised over a period not exceeding 3 to 5 years after
the commencement of commercial production.

Paragraphs 55(a) and 56 of AS 26

Expenditure on an intangible item should be recognised as an expense when it is incurred
unless: (a) it forms part of the cost of an intangible asset that meets the recognition criteria
(see paragraphs 19-54).

EAC Opinion Query 10 Volume XXIII

The expenditure incurred between the date the project is ready to commence commercial
production and the date at which the commercial production actually begins cannot be treated
as deferred revenue expenditure pursuant to the requirements of paragraphs 55 and 56, since
such an expenditure does not create an intangible asset, and, therefore, will have to be
expensed.

27

AS-6 Depreciation

Non - Applicability of Standard

Forests, plantations and similar regenerative natural resources

Wasting assets including expenditure on the exploration for and extraction of

minerals, oils, natural gas and similar non-regenerative resources;

Expenditure on research and development;

Goodwill and other intangible assets;

Livestock.

This standard also does not apply to land unless it has a limited useful life for
the enterprise.

29

Meaning of depreciation

Depreciation is a measure of the wearing out, consumption or other loss of

value of a depreciable asset arising from use, effluxion of time or
obsolescence through technology and market changes. Depreciation is
allocated so as to charge a fair proportion of the depreciable amount in each
accounting period during the expected useful life of the asset. Depreciation
includes amortization of assets whose useful life is pre-determined.

30

Meaning of depreciable asset

Depreciable assets are assets which



are expected to be used during more than one accounting period; and

have a limited useful life; and

are held by an enterprise for use in the production or supply of goods and
services, for rental to others, or for administrative purposes and not for the
purpose of sale in the ordinary course of business.

31

Meaning of useful life of depreciable asset

Useful life is either

(i) the period over which a depreciable asset is expected to be used by the
enterprise; or
(ii) the number of production or similar units expected to be obtained from the
use of the asset by the enterprise.
Factors to be considered
1. Pre-determined by legal or contractual limits
2. Directly governed by extraction or consumption
3. Dependent on the extent of use and physical deterioration
4. Obsolescence etc.

32

Methods of Depreciation

Straight Line Method

(SLM)

Written Down Method

(WDV)

Basis of selection of most appropriate method are:

1.Type of asset
2. the nature of the use of such asset
3. circumstances prevailing in the business

33

Straight Line Method (SLM)

Depreciation =
Original Cost Estimated Scrap Value
-----------------------------------------------------------Estimated useful life

1. Original Cost: Cost of acquisition, installation and commissioning as well as

for additions to or improvement thereof
2. Scrap Value: Estimated residual value of asset at the end of useful life.
(Generally assumed as Nil).
3. As explained in earlier slide

34

Written Down Method (WDV)

Under this method depreciation is calculated on the reduced balance of the

fixed asset. Reduced balance is calculated by deducting accumulated
depreciation from the original cost or revalued amount.

The statute governing an enterprise may provide the basis for computation of
the depreciation. For example, the Companies Act, 2013 lays down the rates
of depreciation in respect of various assets.

Depreciation for the year = WDV * Rate

1. WDV : Original cost Accumulated depreciation
2. Rate : Prescribed by the governing statue

35

Change in Depreciation Method

Conditions

Required by statute

Required by accounting standard

Management judgment

36

Effect of Change in Depreciation Method

Recalculation of depreciation from the date of put to use to the date of

Change of method
Actual Depreciation Charged till date Depreciation should be charged

Surplus

Deficiency

Should be adjusted in the statement of profit & loss in the year in which the
Method of depreciation Is changed.

37

Change in Useful Life

In case of useful life of the depreciable asset then it is necessary to charge

the depreciation on the basis of remaining useful life of the asset as per the
re-estimated useful life. The change should be given effect prospectively.

What would be the treatment in the event of remaining useful life of an asset
being increased as compared to the original estimate.

Can there be an scenario where the method of depreciation changes and

there is also a change in the estimate of remaining useful life?

38

Capitalization of Foreign Exchange Loss/Gain

Where the historical cost of a depreciable asset has undergone a change due
to increase or decrease in long term liability on account of exchange
fluctuations, the depreciation on the revised unamortized depreciable amount
should be provided prospectively over the useful life of the asset.

At point in time do you recognize and capitalize exchange differences (where

an enterprise elects to apply paragraph 46A of AS 11 whether monthly,
quarterly, half-yearly or annually?

Practical difficulty in maintaining trail of exchange differences which were

capitalised at the respective period-end and depreciating such differences at
a rate which is different from the rate being applied to the base cost originally
capitalised.

Whether the fixed asset accounting is in an ERP environment or is it done on

MS Excel sheets, practical difficulties in maintaining audit trail.

39

Revaluation and depreciation

In case of revaluation of depreciable asset, the depreciation charge should be

based on the revalued amount.

Revaluation

Upward

Depreciation will be charged on

revalued amount of asset and an
equal amount will be transferred
from revaluation reserve to profit
& loss account.

Downward

Depreciation will be charged on

revalued amount of asset.

40

Disclosures

The following information should be disclosed in the financial statements :

the historical cost or other amount substituted for historical cost of each class
of depreciable assets;

total depreciation for the period for each class of assets; and

the related accumulated depreciation.

depreciation methods used; and

depreciation rates or the useful lives of the assets, if they are different from
the principal rates specified in the statute governing the enterprise.

41

Accounting Standard
16 - Accounting for
Borrowing Costs

AS 16 Recognition

Capitalised


Borrowing costs directly attributable to acquisition, construction or production

of a qualifying asset to be capitalised as part of cost of that asset. Borrowing
costs capitalised as part of cost of qualifying asset when probable that they
will result in future economic benefits to enterprise and costs measured
reliably

Amount of borrowing costs eligible for capitalisation to be determined in

accordance with Statement.

Charged Off


Other borrowing costs recognised as expenses in period incurred.

43

AS 16 Qualifying assets

Concept of qualifying assets whether land can be a qualifying asset? What

if an enterprise has borrowings to set up a power project and a portion of
such borrowings are used to acquire land (on which a power plant will be
constructed)? Should such interest be capitalised to land?

Practical challenges in allocating interest cost to different components of

qualifying assets which take a long gestation period to construct, for e.g. a
period of 3-5 years, how would one allocate interest to different classes of
assets which got constructed at different points of time during the period of
construction?

Whether a period less than 1 year can be considered what about interest on
loans taken by a company for opening retail outlets which usually take 6-9
months to construct.

44

AS 16 Borrowing costs eligible for capitalisation

Where funds borrowed generally and used for obtaining a qualifying asset,
borrowing costs eligible for capitalisation to be determined by applying a
capitalisation rate to expenditure on that asset.

Capitalisation rate should be weighted average of borrowing cost applicable

to borrowings outstanding during the period other than borrowings specifically
for obtaining a qualifying asset.

Amount of borrowing costs capitalised during a period not to exceed

borrowing costs incurred during period.

Borrowing costs for the period where there is cessation of construction

activity? How about costs where such cessation is necessary and incidental
to such construction.

45

As 16 Excess of carrying amount of qualifying asset over

recoverable amount

When carrying amount or expected ultimate cost of qualifying asset exceeds

recoverable amount or net realisable value, carrying amount written down/off
in accordance with other Accounting Standards.

In certain circumstances, amount of write down/off is written back in

accordance with those other Accounting Standards.

46

AS 26 Intangible
assets

Applicability

Mandatory in nature for all enterprises

Notified by Central Government w.e.f. accounting periods commencing on or

after 7 December 2006

What is the purpose of the Standard?



To set forth criteria for recognition, measurement and disclosures about

intangible assets

48

Effect on other standards

From the date of the Standard becoming mandatory:

AS 8 (R & D) to stand withdrawn fully
AS 6, Depreciation Accounting, to stand superseded with respect to the
amortisation of intangible assets
Paragraphs 16.3 to 16.7, 37 and 38 of AS 10, which deal with expenditure
on patents and know-how, to stand withdrawn

49

Exclusions from scope of standard

Standard does not apply to

Intangible assets covered by another Accounting Standard
Financial assets
Mineral rights and expenditure on exploration, development or extraction
of minerals, oil, natural gas and similar non-regenerative resources
Intangible assets arising in insurance enterprises from contracts with
policyholders
Expenditure in respect of termination benefits
Discount or premium relating to borrowings and ancillary costs incurred in
connection with arrangement of borrowings, share issue expenses and
discount allowed on issue of shares

50

What is an Intangible Asset

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

An asset is a resource controlled by an enterprise from which future

economic benefits are expected to flow to the enterprise

51

Criteria

Identifiability

Control

Future benefits

Without substance but non monetary

52

Identifiability

Clearly distinguished from goodwill

Enterprise can rent/sell/exchange/distribute future benefits

Asset is identifiable even if it generates future benefits in combination with

other assets

53

Control

Power to obtain future benefits

Also can restrict access of others to those benefits

Normally stems from legal rights

In absence of legal rights, more difficult to demonstrate control

54

Future economic benefits

Revenue

Cost savings

Other benefits from the use of asset

55

Composite assets

Intangible assets contained in or on a physical substance, e.g. software

contained on a CD, motion picture contained on celluloid film

Assets incorporating both intangible and tangible elements e.g, computer

hardware containing also the operating system as well as applications
software

56

What qualifies as intangible asset

AS 26 applies to expenditure on advertising, training, start-up, research and

development activities, rights under licensing agreements (for items such as
motion picture films, video recordings, plays, manuscripts)

AS 26 also covers intangible resources such as scientific or technical

knowledge, design and implementation of new processes or systems,
expenditure on prototypes, 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

Not all the items described above will meet the definition of an intangible
asset

57

Recognition of intangible assets

An intangible asset to be recognised if,

it is probable that the future economic benefits that are attributable to the
asset will flow to the enterprise; and
the cost of the asset can be measured reliably.

58

Recognition of intangible assets

An intangible asset should be measured initially at cost. After initial

recognition, an intangible asset should be carried at its cost less any
accumulated amortisation and any accumulated impairment losses.

Per AS 10 (para 15.3) - where several assets are purchased for a

consolidated price, the consideration is apportioned to the various assets on
a fair basis as determined by competent valuers (eg. Assets/business
purchase on Slump basis)

As per AS 26 (para 27), an intangible asset acquired in an amalgamation in

the nature of purchase is accounted for in accordance with Accounting
Standard 14

Indian GAAP does not permit Revaluation of Intangibles; under IFRS,

intangibles which have an active market (eg. Emission allowance) may be
revalued to fair value; US GAAP does not permit revaluation of intangibles.

59

Cost of an intangible asset

Acquired in exchange for shares or other securities of the reporting enterprise

- cost is assets fair value, or fair value of securities issued, whichever is more
clearly evident.

Acquired in exchange for another asset - apply AS 10

Acquired by way of government grants - apply AS 12

Acquired in an amalgamation in the nature of purchase

Record at existing carrying amount or
Allocate consideration based on fair values at amalgamation date.

60

Internally generated assets

Internally generated goodwill not to be recognised as an asset

Internally generated brands, mastheads, publishing titles, customer lists, etc.

not to be recognised as intangible assets

For other internally generated assets, generation of asset to be classified into:

Research phase
Development phase

61

Research phase

Examples of research phase activities

Activities aimed at obtaining new knowledge
Search for, evaluation and final selection of, applications of research
findings or other knowledge
Search for alternatives for materials, devices, products, processes,
systems or services
Formulation, design, evaluation and final selection of possible alternatives
for new or improved materials, devices, products, processes, systems or
services

Research phase costs to be expensed in all cases

62

Development phase

Examples of development phase activities:



Design, construction and testing of pre-production or pre-use prototypes and

models

Design of tools, jigs, moulds and dies involving new technology

Design, construction and operation of a pilot plant that is not of a scale

economically feasible for commercial production

Design, construction and testing of a chosen alternative for new or improved

materials, devices, products, processes, systems or services

63

Development phase

(Continued)

An intangible asset should be recognised if enterprise can demonstrate the

following:

Technical feasibility of completing the asset

Its intention to complete the asset and use/sell it

Its ability to use or sell the intangible asset

How the asset will generate probable future economic benefits

Availability of adequate technical, financial and other resources to complete the

development and to use or sell the intangible asset and

its ability to measure the expenditure attributable to the intangible asset during its
development reliably

Cost of internally generated intangible asset comprises expenditure incurred

from the time when it first meets the recognition criteria

64

Exclusions from cost of internally generated intangible assets

Selling, administrative, other general overheads unless they can be directly

attributed to making the asset ready for use

Clearly identified inefficiencies and initial operating losses incurred before an

asset achieves planned performance

Expenditure on training the staff to operate the asset

65

Recognition as expense

Expenditure on an intangible item to be expensed when incurred

unless:
it forms part of the cost of an intangible asset that meets the recognition
criteria or
the item is acquired in an amalgamation in the nature of purchase and
cannot be recognised as an intangible asset. In this case, the expenditure
(included in the cost of acquisition) should form part of goodwill/capital
reserve

66

Examples of expenditure to be expensed

Expenditure on research

Start-up costs other than

Expenditure which can be capitalised as per AS 10
Share/debenture issue expenses
Discount on shares/debentures (Preliminary expenses other than the
above are to be expensed)

Expenditure on training activities

Expenditure on advertising/promotional activities

Expenditure on relocation/re-organisation

Expenditure initially recognised as expense in previous annual/interim

financial reports cannot later be recognised as part of cost of an intangible
asset
67

Subsequent expenditure

To be expensed unless it is probable that the expenditure will result in future economic benefits in
excess of its originally assessed standard of performance and
the expenditure can be measured and attributed to the asset reliably

Only rarely will subsequent expenditure be added to the cost of the

intangible asset

68

Amortisation

Depreciable amount to be amortised over useful life

Amortisation should commence when the asset is available for use

Requirements concerning amortisation method, useful life and depreciable

amount are significantly at variance from those of AS 6

69

Amortisation method

Should reflect the pattern in which the asset's economic benefits are
consumed

If that pattern cannot be determined reliably, straight-line method should be

used

There will rarely, if ever, be persuasive evidence to support an amortisation

method that results in a lower amount of accumulated amortisation than
under straight-line method

Eg. Extractive industry - Costs incurred to gain access to mineral reserves

are capitalised and amortised over the life of the quarry, which is based on
the estimated tonnes of raw materials to be extracted from the reserves
Eg. Pharma - Intangible assets comprise patents, trademarks, designs and
licenses and computer software which are stated at cost less accumulated
amortization (determined on a straight line basis) and impairment losses, if
any
70

Useful life

Rebuttable presumption that the useful life of an intangible asset will not
exceed ten years. Reasons for taking useful life exceeding ten years to be
disclosed highlighting the factors that played a significant role in determining
useful life

Computer software and many other intangible assets are susceptible to

technological obsolescence and their useful life is thus likely to be short

If control is achieved through legal rights granted for limited period, useful life
not to exceed the period of the legal rights unless:
the legal rights are renewable and
renewal is virtually certain

71

Useful life

Eg. Consumer goods - For various brands acquired by the Company,

estimated useful life has been determined ranging between 20 to 25 years.
The Company believes this based on number of factors including the
competitive environment, market share, brand history, product life cycles,
operating plan, no restrictions on title and the macroeconomic environment of
the countries in which the brands operate. Accordingly, such intangible assets
are being amortised over the determined useful life.

72

Useful life

Computer software and many other intangible assets are susceptible to

technological obsolescence and their useful life is thus likely to be short

(Continued)

Eg. Mfg co. Expenditure on computer software is amortised on straight line method
over the period of expected benefit not exceeding five years

If control is achieved through legal rights granted for limited period, useful life
not to exceed the period of the legal rights unless:

the legal rights are renewable and renewal is virtually certain

Eg. Mfg co. - Licenses for Technical know-how have been amortised on a straight line
basis over the License term of forty two months
Eg. Telecom - Bandwidth / Fibre taken on Indefeasible Right of Use (IRU) is amortised
over twenty years being the agreement period


Under International GAAP (IFRS/US GAAP), Intangibles can also have indefinite
useful life (eg Brands)

73

Residual value

In determining depreciable amount, residual value should be assumed to be

zero unless:
there is a commitment by a third party to purchase the asset at the end of
its useful life or
there is an active market for the asset and:

residual value can be determined by reference to that market and

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

74

Review of amortisation period/method

Amortisation period to be reviewed at least at each financial year end and to

be changed if expected useful life is significantly different from previous
estimates, the amortisation period should be changed accordingly

Amortisation method to be similarly changed if there has been a significant

change in expected pattern of economic benefits

Both are changes in accounting estimates

75

Impairment losses

Recoverable amount of following assets to be determined at least at each

financial year end even if there is no indication of impairment:

intangible assets not yet available for use

intangible assets being amortised over a period exceeding ten years from the date
when they became available for use

Intangible assets with indefinite useful life (under International GAAP)

76

Derecognition

Asset to be derecognised on disposal or when no future economic benefits

are expected from its use and subsequent disposal.

77

Transitional provisions

Assess remaining useful life (as per standard) of each intangible item on the
date of initial application of standard (say 3 years in the case of Asset A and 4
years in the case of Asset B and 6 years for Asset C)

Determine remaining amortisation period as per books of account (say 4

years for each)

In case of Assets B and C write off net book value in 4 years

In case of Asset A, increase accumulated amortisation so that it can be

written off in 3 years. Increase to be adjusted against opening revenue
reserves

78

Transitional provisions - another example

Amortisation period 10 years, 6 years have elapsed

Remaining life as per AS 26 is 3 years. Hence total life as per AS 26 is

9 years. Hence amortisation for each year would be 100/9 or Rs 67 should
have been written off. Adjust Rs 7 against opening reserve

79

Case study on intangible assets

Facts
During the year ended 31 March X3, Company A purchased intellectual
property rights (IPR) in the Product X, a treasury management product, from
Company B for use by its Banking group. The aggregate consideration paid
for the IPR is Rs. 5 crores. Management estimates the useful life of the IPR
as two years

Analysis of the case

Applicability of AS 26 Intangible assets to the above case
In accordance with the definition of intangible assets in para 6 of AS 26 on
Intangible Assets, the IPR above constitutes an identifiable non-monetary
asset without physical substance, held for use in the supply of the services
to others. Further, intellectual property is explicitly included in examples of
intangible resources in Para 7 of the standard.
80

Case study on intangible assets

Recognition and initial measurement of the asset

(Continued)

The facts above represent a case of separate acquisition. Accordingly

the consideration paid to Company B for the acquisition of the IPR has
been used for recording the asset in the books.

Amortisation

Management of Company A believes that the economic benefits

embodied in the IPR shall be received over a period of two year which
represent the best estimate of the useful life of the IPR. Further, this
estimate does not exceed the period of the legal rights. In accordance
with Para 63, amortisation has commenced from the date when asset is
available for use to Company A. The amortisation is performed in
accordance with Para 72 using the straight-line method over the
estimated useful life

81

Case study on accounting for software development

Stage

Examples

Accounting treatment

Preliminary stage
 Strategic decision to
allocate resources

Payroll costs

Administration costs
eg. traveling, rent,
communications

Recognised as expense
as incurred

Reason enterprises
cannot demonstrate
that an asset exists
from which future
economic benefits are
probable

 Determination of
performance requirements
 Exploration of alternative
performance requirements

External consultants

Purchase of software

 Determination of
technology

Cost of external
software services

 Appointment of consultant
for development/
installation of software

82

Case study on accounting for software development

(Continued)
Stage

Examples

Accounting treatment

Development stage




Software including
program design
Coding of computer
software

Beta testing (initial

testing)

Testing of function,
feature and technical
performance of product
design

Same as above

Costs not considered for

capitalisation

Recognised as assets, if & only

if:

Technical feasibility has been

achieved

Selling, administration and

other general overhead
expenditure

Enterprise has intention to

complete software project and
use it for intended purpose

Clearly defined
ineffectiveness and initial
operating losses before
software achieves planned
performance

Enterprise has ability to use the

software

Software will generate future

economic benefits

Availability of adequate
technical, financial and other
resources to complete
development and use software

Staff training costs

Expenditure can be measured

83

Case study on accounting for software development

(Continued)


Costs incurred subsequent to development of software shall be

capitalised if
probable that future economic benefits are in excess of originally
assessed standards of performances
expenditure can be reliably measured and attributed to software
development

Amortisation period
3 to 5 years or if useful life is a shorter period or software is susceptible to
technological obsolescence. Testing for impairment to be carried out
annually

84

IPR Definition

As per World Trade Organisation

Intellectual Property Rights (IPR) are the rights given to persons over the creations of their minds. They
usually give the creator an exclusive right over the use of his/her creation for a certain period of time
I

II

Copyright and rights related to copyright



The rights of authors of literary and artistic works (such as books and other writings, musical
compositions, paintings, sculpture, computer programs and films) are protected by copyright, for a
minimum period of 50 years after the death of the author

Also protected through copyright and related (sometimes referred to as neighbouring) rights are the
rights of performers (e.g. actors, singers and musicians), producers of phonograms (sound recordings)
and broadcasting organizations. The main social purpose of protection of copyright and related rights
is to encourage and reward creative work

Industrial property


One area can be characterized as the protection of distinctive signs, in particular trademarks (which
distinguish the goods or services of one undertaking from those of other undertakings) and
geographical indications (which identify a good as originating in a place where a given characteristic of
the good is essentially attributable to its geographical origin)

Other types of industrial property are protected primarily to stimulate innovation, design and the
creation of technology. In this category fall inventions (protected by patents), industrial designs and
trade secrets
85

IPR Definition

(Continued)

As per Development Commissioner - Micro, Small and Medium Enterprises

Intellectual Property Rights (IPR) are legal rights, which result from intellectual activity in
industrial, scientific, literary & artistic fields. These rights safeguard creators and other
producers of intellectual goods & services by granting them certain time-limited rights to
control their use. Protected IP rights like other property can be a matter of trade, which
can be owned, sold or bought
Types of IPR
a. Patents
b. Trademarks/ Brands
c. Copyrights and related rights
d. Geographical Indications
e. Industrial Designs
f.

Trade Secrets

g. Layout Design for Integrated Circuits

h. Protection of New Plant Variety
86

IPR accounting relevance and challenges

As corporations around the world are awakening to the revenue-generating

potential of intangible assets, the issue of accounting for intellectual property
gains importance

Varying accounting practices are prevalent resulting in differing Balance

sheets and Profit and loss accounts

Due to absence of organised and transparent markets, and subjectivity

involved, there are difficulties in determining value of IPRs

Accounting rules are evolving to enhance reporting/disclosures of IPR

Differences between economic framework of accounting and legal framework

lead to disparity between what Companies show in the balance sheet and
own. Therefore, not all IPR are recognised as intangible assets in accounting
and some intangible assets considered as IP are not recognised as IPR by
law

Is IP Report a need of the hour (in case of internally generated IPs)??

87

IPR recorded on the balance sheets.

Pepsi has perpetual brands of USD 4,839 million representing 6% of its total
assets

Walt Disney has copyrights and trademarks aggregating USD 4,273 million
representing 6% of its total assets

Microsoft has technology based and marketing related intangibles of USD

3,083 million representing 2% of its total assets

Coca Cola has perpetual trademarks of USD 6,527 million representing 8% of

its total assets

Google has patents and developed technology of USD 5,987 million

representing 6% of its total assets

88

Applicability of accounting literature for IPR

Under Indian GAAP, accounting for IPR is guided by:

-

Accounting Standard 26 Intangible Assets

Accounting Standard 10 Fixed assets

As per AS 10, assets are grouped into various categories, such as

land, buildings, plant and machinery, vehicles, furniture and fittings,
goodwill, patents, trade marks and designs

Accounting Standard 14 Accounting for Amalgamations

Typical industries with IPRs

-

Technology - Microsoft, IBM, Google, Wipro

Pharma - Ranbaxy, Pfizer

Media and Entertainment Time Warner, Walt Disney

Manufacturing - Pepsi, Coca Cola, Nokia

89

Impairment losses

Recoverable amount of following assets to be determined at least at

each financial year end even if there is no indication of impairment:
intangible assets not yet available for use
intangible assets being amortised over a period exceeding ten years from
the date when they became available for use
Intangible assets with indefinite useful life (under International GAAP)

90

Derecognition

Asset to be derecognised
on disposal or
when no future economic benefits are expected from its use and
subsequent disposal

91

AS 28 Impairment
of Assets

What is Impairment?
Angry young man

Sober old man

Tiger in the Woods

96

What is Impairment?

(Continued)

At 16, Heroine

At 40, Bhabhi
At 60, Dadi
97

What is Impairment?

(Continued)

You are
Beautiful
With this dress

Again a new
dress ?

Married since 7
days

How much ?

Married since 7
months

Married since 7 years

98

Applicability

w.e.f April 1, 2004

 Listed & in process of listing

w.e.f April 1, 2005

All Enterprises

 Turnover > 500 Mn

Excludes
Inventory

Financial Assets

Construction
contracts
Deferred Tax Asset
99

Impairment Concept

Impairment Loss = Carrying Amount - Recoverable Amount

Recoverable
amount is greater
of:

Net Selling Price (NSP)

determined by either of:

Value in Use: NPV of

Cash Flows

Binding Sale

Bid price in
Active Market

Number
of Years
Discount
Rate

Best Estimate
100

(Continued)

Impairment Concept

Impairment
Indications exist
No
No
Impairment
Review

Yes
Identify Asset

Determine Recoverable
Amount
If indeterminate,
identify CashGenerating Unit
(CGU)

101

Case # 1 Recoverability / Fair value

A land is rented as a parking space as a result of which there is impairment.

However the land owner argues that an impairment provision is not required
since the land will soon be converted into a bowling alley, a highly profitable
business. Is that argument acceptable for not making an impairment
provision?

Recoverability Test Continuing use of asset

Not a Fair Value Test Market place assumption
Future change Not yet committed

102

Case # 2 Impairment - CWIP

70% of the Printing Press New Plant has been completed. Due to some
financial problems further work came to a halt since the past one year. Is
impairment required to be provided on capital work-in-progress?

Yes, Impairment is required.

Existing Carrying Amount is without expected future cash outflows

Value in use to include future cash outflows before use/sale

103

Walt Disney Company

Amusement Park

Film Production

Merchandise

104

Case # 3A Identification of CGU

The Roller coaster in a theme park is damaged and is to be repaired

This ride generates independent cash inflows

The rides NSP (which is negligible) < Carrying Amount

Value in use can be estimated

The smallest identifiable CGU is the Theme park ? Or the ride? The Theme park taken
as a whole is not impaired

Assume no commitment to sell & replace the machine

What is impaired?

Recoverable Amount Can be estimated for machine as well as the Theme Park

However, Theme Park is not impaired

Only reassess depreciation method/period for machine

105

Case # 3B Identification of CGU

Now assume, a commitment to sell and replace the machine

Also, Cash flows from continuing use to be negligible

What is impaired?

Machine

Recoverable Amount Can be estimated for machine

Commitment to sell the machine &

NSP > Value in Use

Hence, no consideration to CGU

106

How to arrive at Carrying Amount of CGU?

Roller Coaster

Ferry Wheel

Assets Under CGU

Admin

Allocable Assets

Liabilities on Disposal
107

Case # 4 Useful life of CGU

While doing cash projection of following CGU that has assets with different remaining useful lives,
how is the maximum period, up to which the cash flows should be projected is determined?

Identify Primary asset of the CGU

The Primary Asset is Rides, since

Availability of Rides determines possibility of cash generation of the CGU

No need of other assets unless entity has exciting Rides

Cannot be the asset not being amortized e.g. Land

Assets

Balance Life

Carrying Amt.

Sets

100 Mn

Building

20 Mn

Rides

10

85 Mn

Furniture

12

50 Mn

Computer

2 Mn
108

Level at which Impairment required...

Admin

Roller Coaster

Carrying
Amount of Admin
Carrying Amount
50 Mn
Carrying Amount of Others
NPV of rentals

60 Mn

NPV of Business Income

Impairment
Impairment

Nil

Ferry Wheel

50 Mn
200 Mn
230 Mn
20 Mn
109

Allocation of Impairment Loss on CGU

Goodwill allocated, if any

Other assets: Pro-rata

Ensure, Carrying Amount = Recoverable Amount

Else, balance Loss to be allocated to other assets

110

Indicators

External Sources

Internal Sources

Market Value

Physical Damage

Adverse External Env

Adv chg in Asset use

Market ROI

Poor Economic performance

Book Value > Mkt. Cap.

Formally estimate Recoverable Amount
111

How is Impairment determined for Goodwill and

Corporate Asset?

Apply Bottom-Up test, if allocable

Else, apply both Bottom-Up & Top-Down Tests

112

Application of Top-Down Test

(Rs in Mn)

Goodwill

Total

Carrying Amount

250

100

20

370

Impairment Loss for A under

Bottom up test

(20)

(20)

Carrying Amount after loss

230

100

20

350

Recoverable Amount

340

Impairment Loss - Top Down

(10)
113

Accounting Treatment

 Initial Losses to be adjusted against opening revenue reserves

 The Loss should be recognised as

Revaluation decrease if asset was revalued earlier, else

Expense in P&L


After recognition, revise depreciation charge

Recognise liability if, Loss > Carrying Amount

114

Treatment of Reversals

 Annually identify if Loss recognised earlier no longer exists

 Reversal if change in Cash Flow or Discount rate

 Carrying Amount <= original amortised Carrying Amount

 The Reversal should be recognised as

Revaluation Increase if asset was revalued earlier, else

Income in P&L

115

Disclosure requirements

For each class of assets and reportable Segment, seperately

Loss / Reversals recognised in P&L Account
Loss / Reversals recognised against Revaluation Reserves

116

Disclosure requirements

(Continued)

If material to the financial statements as a whole:

Relevant events and circumstances

Nature of asset / CGU
Reportable Segment
Reasons for change, current and former CGU
Measurement of Recoverable Amount

117

Summary

Im p a irm e n t
In d ic a tio n s e x is t

Yes

Id e n tify A s s e t

No

D e te rm in e
R e c o v e ra b le A m o u n t

No
Im p a irm e n t
R e v ie w

If U n d e te rm in e d , id e n tify
C a s h -G e n e ra tin g U n it

R e c o v e ra b le
A m o u n t is g re a te r
o f:

N e t S e llin g P ric e
d e te rm in e d b y
e ith e r o f:

V e r ify

C a rry in g A m o u n t >
R e c o v e r a b le A m o u n t
V a lu e in U s e :
NPV of CF

No
No
Im p a irm e n t
P ro v is io n

Yes
B in d in g
S a le
B id p ric e in
A c tiv e
M a rk e t
Best
E s tim a te

Num ber of
Y e a rs

D is c o u n t
R a te

Im p a irm e n t L o s s =
C a rry in g A m o u n t - N e t
R e c o v e r a b le A m o u n t

T o b e fo llo w e d u p b y
A n n u a l Im p a irm e n t
R e v ie w

118

Key practice management issues

119

Cash Flows

Financial forecasts for maximum 5 years

Steady / declining growth rate for extrapolating

Do not consider

Financial activities, receivables, payables and provisions

Income tax receipts and payments

Non-committal future restructuring

Proposed capital expenditure

Foreign currency cash flows discounted at a rate appropriate to such currency. NPV to
be translated using the exchange rate at balance sheet date

Cash Flow & Discount rate must reflect consistent assumptions about Inflation

120

Discount Rate

A pre-tax rate that reflects current time value of money and asset specific
risks

Ignore risks for which future Cash Flows have been adjusted

Rate of return that investors would expect from similar asset

Weighted Average Cost of Capital (WACC) of a listed entity with similar

service potential and risks

If benchmark not available, then consider entitys own WACC or incremental

borrowing rate adjusted for:
asset-specific risks

country risks

currency risks

121