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Intangible Assets
Intangible Assets
AS – 26
Contents
Ø Applicability & Nature
Ø Meaning of Intangible Assets
Ø Explanation of Meaning
Ø Out of Scope
Ø Recognition of Intangible Assets
Ø Different Situation of Recognition
Ø Internally Generated Intangible Assets
Ø Subsequent Recognition
Ø Carrying amount of Amortization
Ø Review of Policy
Ø Impairment Loss
Ø Retirement & Disposals
Ø Disclosure
Ø Computer Software
Ø Transitional Provisions
Applicability & Nature
Applicable : Level I 01-04-2003
Level II, III 01-04-2004
Nature : Mandatory
(From 01-04-2003 , Accounting Standard – 8, shall stand withdrawn and all the provisions of AS – 26, will be applicable)
Meaning of Intangible Assets
An Intangible Asset is identifiable non-monetary assets without having physical substance and held by enterprise for the purpose of sale or supply of goods of services.
As per AS – 20, if any asset is to be recognized as an intangible asset the following conditions should be satisfied.
(i) Identifiability
(ii) No physical substance
(iii) Controlled by enterprise
(iv) There should be Future Economic Benefit
Explanation of Meanings
Meaning of Identifiability: Any asset can be recognized as identifiable asset if the asset can be sold or can be exchanged or can be given for the purpose of rent. These transactions are also directly related to existence of assets.
Meaning of Control: If benefit of asset can be used by an enterprise and such enterprise can restrict the other organization to take the benefit then it will be assumed that asset is controlled by the enterprise.
Meaning of Future Benefit: Intangible Assets can be recognized as per definition only if there is future economic benefit. These benefits can also be defined as expected inflows or cost savings.
Out of Scope
AS – 20 is not applicable on the following intangible asset.
(i) If any intangible asset is acquired under amalgamation scheme, then AS – 26 shall not be applicable for the asset taken over. (It will be valued as AS – 14)
(ii) Misc Expenditure such as discount on issue of Share, Debenture or preliminary expenses.
(iii) Deferred Tax Assets as per AS – 22
(iv) Investment in Lease
(v) Accounting of Investment (AS 13, 23, 27 & 21)
Recognition of Asset
An asset can be recognized in the accounting books only if the following conditions are satisfied
(i) It should be certain that there will be future economic benefit on the basis of suitable assumption and estimation.
Cost of purchase of intangible asset is available in accurate amount.
Intangible asset Dr. xxx
To Cash xxx
Different Situation of Recognition
Cash Purchase: If any intangible asset is purchased in cash then cost of intangible can be calculated by the following statement.
Statement showing cost
Purchase Price xxxx
Add: Stamp duty xxxx
Brokerage Commission xxxx
Any other Expenses (Non-recoverable Duties & taxes) xxxx
Less: Rebate & Discount xxxx
Xxxx
Purchase by Shares
Cost of Intangible Assets Fair value or Fair Value of
I.A. taken share issued Whichever is clearly evident
Notes:
(1) If shares of the company are listed on stock exchange then market price can be used directly for the shares issued.
(2) If shares of the company are not listed then fair value of intangible asset acquired can be used.
(3) If fair value of intangible taken & share issued both are available then fair value of taken assets should be preferred.
Exchange by Assets
If any intangible asset is exchanged by asset then fair value of given asset should be recognized as cost of intangible. In the absence of such fair value, book value should be recorded of given asset.
Note: Provisions of AS – 26 are not similar under specified heading as in AS – 13 & AS – 10. As per AS – 26, fair value of given asset or book value of given asset can be used for recognition and no settlement in cash will be considered.
As per AS – 10 & 13, settlement in cash can take place at the time of exchange of asset because fair value of asset taken as well as fair value of asset given are considerable.
Taken in Amalgamation
If any intangible is taken over under the scheme of amalgamation then the following points may be applied.
(i) First Recognition
 |
Fair Value available Fair value not availableShould be recognized separately Should not be recognized separately
By fair value (subject to conditions and should be included in Goodwill
specified below)
(ii) Fair value of intangible asset can be recognized by active market or latest transaction price.
(iii) If active market is available then full amount of intangible asset should be recognized.
(iv) If latest transaction price is used for recognition then cost can be recognized to the extent by which capital reserve is not created. (The above provision can be applicable only for amalgamation in the nature of purchase)
Purchased by Govt Grant
If any intangible asset is purchased by Govt grant then cost of intangible asset can be recorded by net approach or gross approach specified in AS – 12.
Balance Sheet (Disclosure) [Net Approach]
Intangible Asset xxxx
Less: Grant xxxx xxxx
Balance Sheet (Disclosure) [Gross Approach]
Deferred Grant xxxx Intangible Asset xxxx
(Full amount)
Internally Generated Intangible Asset
If any intangible asset is generated internally by the enterprise, then it is generated under two different phases.
1) Research Phase: Research phase is the planed investigation carried by enterprise to create new application of business activities. Research activities may include invention of new products, production techniques, technical system or any other finding for cost saving or future benefits to enterprise. (All the expenses during research phase should be written off in P&L a/c immediately because it is not certain during research phase that any result will be obtained or not from research.)
2) Development Phase: Development phase is the verified application of research activities and all the expenses during the development phase should be capitalized in the cost of intangible asset. Before capitalizing the expenditure during development phase the following conditions should be satisfied.
- Technical should be available with the enterprise.
- The
- After completion of intangible the enterprise should be able to use or sell intangible.
- Future economic benefit should be measured by suitable assumption.
- Financial Resources should be proper to complete the asset.
- There will be proper system to record the cost during development phase.
(i) Cash/Bank/Grant Receivable Dr
To Govt Grant
(ii) Grant A/c Dr
To Deferred Grant A/c (It is transferred to reserve &surplus)
(iii) Deferred Grant A/c Dr
To P&L A/c
Refund of Grant:
Deferred Grant A/c (O/s Bal) Dr
P&L A/c (which is already used) Dr
To Cash/Bank/Grant Receivable
Note: At the time of refund of grant total benefit should be reversed in the current period in total irrespective the effect of these transaction on current year profits.
Disclosure:
(i) Accounting policy should be disclosed separately in relation to classification of nature of grant.
(ii) If any refund has been made during the period then amount of refund should be also disclosed.
Difference between AS/IAS/US GAAP:
If any grant is related to promoter’s contributions then accounting of such grant should be made as capital profits as per as-12. The same grant should be recognized as revenue profits as per other statements. Revenue profits should be recognized on deferred basis as per management intention.
Segment Reporting
Segment Reporting
AS – 17
Contents
Ø Applicability & Nature
Ø Objective
Ø Definitions
Ø Identification of Segments
Ø Reportable Segments
Ø Important Points
Ø Primary Segment / Secondary Segment
Ø Disclosures
Ø Differences
Applicability & Nature
Applicable : 01-04-2001
Nature : Mandatory for Level I enterprises
Objective
AS 17 require disclosure of information relating to product and areas in which the company is involved. Information of products should be disclosed separately and information of areas should also be prepared separately only to improve the financial statement presentation and comparison.
Definitions
(i) Meaning of Segment Reporting: Segment reporting is a disclosure statement which is prepared to disclose two types of segments.
(a) Business Segment
(b) Geographical Segment
(ii) Meaning of Business Segment: Business Segment is the different product of the enterprise which is having different risk and returns from other products.
(iii) Meaning of Geographical Segment: Geographical Segment is the different area of the enterprise which is having different risk and returns from other areas.
Identifications of Segments
If risk and returns of products and areas are not helpful in classification of segment then following points can be considered.
Business Segment
(a) Nature of Products
(b) Production Process
(c) Class of customer
(d) Distribution system of goods
Geographical Segment
(a) Political Boundaries
(b) Foreign currency risk
(c) FEMA
(d) As per AS any area can be disclosed by the enterprise. If management wants to disclose any particular by ignoring the above points (On the basis of such explanation disclose can be made country wise, city wise, town wise, state wise or any other minor disclosure)
Reportable Segments
All the identified segments are not to be disclosed. The identified segment can be disclosed in segment reporting only if at least one condition out of 3 conditions is satisfied.
Condition 1: If segment sale is 10% or more of total sale then such segment should be included in segment reporting. Sale
OR
Condition 2: If segment assets are 10% or more of total assets.
OR
Condition 3: If Segment Result is 10% or more of Total Results in Profits or Total Results in Loss whichever is higher.
Ex. A B C D E
Profit (Loss) 1 Lakh (0.50 Lakh) 1 Lakh (2.50 Lakh) (0.50 Lakh)
Total Profit = A + C = 2 Lakh
Total Loss = B + D + E = 3.50 Lakh
Higher amount is Rs 3,50,000/-
% of Results 28.57% 14.27% 28.57% 71.43% 14.28%
On Loss (1L/3.50L) (0.50L/3.5L) (1L / 3.50L) (2.50L / 3.50L) (0.50L / 3.50L)
R R R R R
Important Points
(1) If any segment is not covered under conditions of reportable segment then such segment should be recognized as unreportable segment. Disclosure of such unreportable segments can be made if management desirous to include such segment in the report even if conditions are not fulfilled.
(2) 75% of external sales of the enterprise should be covered by reportable segment. If disclosure of 75% of external sale is not covered by reportable then additional segment should be classified as reportable segment even if conditions of 10% are not satisfied.
Example
| | A | B | C | D | E | F |
| | 10000 | 20000 | 50000 | 6000 | 7000 | 7000 |
| % of Total | 10% | 20% | 50% | 6% | 7% | 7% |
| | R | R | R | | | |
Comment: In the above example 80% sale is covered by reportable segments and minimum disclosure is required of 75%. So condition of 75% is satisfied.
(3) If any segment is reportable in the current year but was unreportable segment in the previous year then segment reporting of previous year should be revised for comparison purpose.
(4) If any segment is unreportable in the current year but was reportable in the previous year then the disclosure of such unreportable segment should be read in the current year even if it is unreportable according to the conditions.
Ques1:
(In Lacs)
| | A | B | C | D | E |
| Seg. Revenue | 150 | 200 | 200 | 50 | 300 |
| % of Total Rev. | 16.67% | 22.22% | 22.22% | 5.55% | 33.33% |
| | R | R | R | | R |
OR
| | A | B | C | D | E |
| Segment Result | 50 | (70) | 80 | 10 | (25) |
Total Profit = 50 + 80 + 10 = 140
Total Loss = 70 + 25 = 95
Higher Amount is 95.
| Segment Result | 35.70% | 50% | 57.14% | 7.14% | 17.86 |
| | R | R | R | | R |
OR
| | A | B | C | D | E |
| Segment Assets | 40 | 65 | 140 | 20 | 35 |
| % of Total Assets | 13.33% | 21.66% | 46.67% | 6.66% | 11.66% |
| | R | R | R | | R |
Comments: All the segments are reportable segments except Segment D because Segment D has not fulfilled any conditions as specified in the provisions of AS – 17.
Ques4.
Statement showing Reportable Segment
( In Lacs)
| Particulars | A | B | C | D | E | F | G | H |
| Seg. | 200 | 630 | 90 | 30 | 30 | 100 | 50 | 70 |
| % | 16.67% | 52.56% | 7.50% | 2.50% | 2.50% | 8.33% | 4.17% | 5.83% |
| | R | R | | | | | | |
OR
| Particulars | A | B | C | D | E | F | G | H |
| Seg. Assets | 45 | 141 | 15 | 33 | 9 | 15 | 15 | 27 |
| % | 15% | 47% | 5% | 11% | 3% | 5% | 5% | 9% |
| | R | R | | R | | | | |
OR
| Particulars | A | B | C | D | E | F | G | H |
| Seg. Result | 10 | (180) | 30 | (10) | 16 | (10) | 10 | 14 |
Total Profit = 10 + 30 + 16 + 10 + 14 = 80
Total Loss = (180) + (10) + (10) = 200
Higher amount is 200.
| % | 5% | 90% | 15% | 5% | 8% | 5% | 5% | 7% |
| | R | R | R | R | | | | |
W.N. Calculation of External Sale
Total External Sale
Minimum Disclosure
Of Sale
= 600 Lacs
Total Sale
Reportable Segments = A + B + C + D + E
= 510 + 30 + 20 + 30
= 590 Lacs
Comment
(1) Segment A, B C and D are reportable segments becoz condition of 10% as specified by AS is satisfied from the point of view of sales, assets and profit or loss.
(2) Segment E is unreportable segment as per conditions of 10% as specified in the statement. Such segment should be disclosed even if it is unreportable becoz the specified segment was reported in the previous year.
(3) As per the statement 75% of external sale should be covered by segment reporting. As per specified conditions minimum disclosure of Rs 600 Lacs out of Rs 800 Lacs is required. But total of reportable external sale is of Rs 590 Lacs which is lower than 600 Lacs. So additional segment should be recognized for the purpose of segment reporting. For such purpose any segment out of F, G, and H can be disclosed.
Important Calculations
(1) Meaning of Segment Result
Segment Result = Segment Revenue – Segment Expenses
(2) Meaning of Segment Revenue
As per AS, calculation of segment revenue is very important. The following points should be considered in the calculation of segment revenue.
Items to be included:-
| External | xxxx |
| Internal | xxxx |
| Share in Common Income* | xxxx |
| Segment Revenue | xxxxx |
* Share in common income should be calculated on same reasonable basis. Selection of reasonable base is in the hands of management.
Items to be excluded:-
(a) Extraordinary items.
(b) Investment Income (Dividend, Interest and Rental)*
(c) Profit or Loss on sale of investment.
(d) If any common income can’t be divided between the segment in the absence of reasonable base then such income should not be included under the heading of segment revenue. Such income should be recognized as unallocated income or enterprise income.
* Investment income and Profit or loss on sale of investment can be included in the meaning of segment revenue if company is carrying the business as an investment company.
(3) Meaning of Segment Exp
Items to be Included:-
(a) Directly related with segment
(b) Share in common expense on reasonable basis
Items to be Included:-
(a) Extraordinary Expense
(b) Interest Expense
(c) Tax Provision
(d) Un allocated Expense
(4) Meaning of Segment Assets
(a) In the calculation of Segment Asset, all the asset should be included which are directly related with segment.
(b) If any asset is used on common basis for all the segments then such common asset should be divided between the segments on reasonable basis. If in case reasonable basis is not available then such assets should be recognized as unallocated or corporate assets.
(c) If any goodwill is available in the balance sheet then such goodwill should also be included in segment reporting by dividing such amount on some reasonable basis. In the absence of reasonable base amount of goodwill should also be recognized as business assets.
(d) If any deferred tax assets are available in the balance sheet then these assets should not be included in the meaning of segment assets.
(e) In the calculation of segment assets only the carrying amount should be used in place of original value.
(5) Meaning of Segment Liabilities
(a) If any liability is directly related or can be distributed on some reasonable basis between the segments then specified amount should be included in the meaning of segment liabilities.
(b) Income tax liabilities should not be included in the calculation of segment liabilities.
(c) If any liability can’t be distributed on some reasonable basis then such liability should be recognized as corporate liability.
SEGMENT REPORTING
1.
| Particulars | Seg A | Seg B | Seg C | Inter Seg Sale | Total |
| External | xxx | xxx | xxx | - | xxxx |
| Inter Segment | xxx | xxx | xxx | xxx | - |
| Total | xxxx | xxxx | xxxx | xxxx | xxxxx |
| Less: Segment Exp | xx | xx | xx | xx | Xx |
| Segment Result | xxx | xxx | xxx | xxx | xxxx |
| Add: Corporate Income | | | | | xxxx |
| Less: Corporate Expenses | | | | | xxxx |
| Less: Income Tax | | | | | xxx |
| Corporate Income | | | | | xxxx |
2.
| Segment Asset | xxx | xxx | xxx | - | xxxx |
3.
| Corporate Assets | - | - | - | - | xxxx |
4.
| Segment Liabilities | xxx | xxx | xxx | - | xxxx |
5.
| Corporate Liabilities | - | - | - | - | xxxx |
Ques7.
Segment Reporting
| Particulars | Seg A | Seg B | Seg C | Inter Seg Sale | Total |
| External Export Local | 4090 60 | 200 - | 180 - | - - | 4470 60 |
| Total External | 4150 | 200 | 180 | - | 4530 |
| Internal | 3050 | 30 | - | 3080 | - |
| Total Sales | 7200 | 230 | 180 | 3080 | 4530 |
| Profit (Loss) | 160 | 20 | (8) | - | 172 |
| Less: Allocated Cost | (48) | (24) | (24) | - | (96) |
| Net Amount | 112 | (4) | (32) | - | (76) |
| Less: Interest cost | | (10) | |||
| Business / Corporate Profit | | 66 | |||
| Fixed Assets | 200 | 40 | 120 | - | 360 |
| Net Current Assets | 120 | 40 | 90 | - | 250 |
| Total | 320 | 80 | 210 | - | 610 |
Corporate Assets
| Fixed Assets | - | - | - | - | 50 |
| Net Current Assets | - | - | - | - | 48 |
| Total | - | - | - | - | 98 |
| Long Term Liabilities | 20 | 10 | 120 | - | 150 |
| Corporate Liabilities | - | - | - | - | 38 |
Ques 9.
Segment Reporting
| Particulars | Seg A | Seg B | Seg C | Seg D | Inter Seg Sale | Total |
| External | 5595 | 553 | 324 | 155 | - | 6627 |
| Internal | 55 | 72 | 21 | 7 | 155 | - |
| Total | 5650 | 625 | 345 | 162 | 155 | 6627 |
| Less: Segment Exp. | (3335) | (425) | (222) | (200) | (122) | (4060) |
| Profit (Loss) | 2315 | 200 | 123 | (38) | 33 | 2567 |
| Add: Income from Investment | - | 132 | ||||
| Less: General Exp | | (562) | ||||
| Less: Interest | | (65) | ||||
| | Business / Corporate Profit | 2072 | ||||
| Segment Assets | 7320 | 1320 | 1050 | 665 | - | 10355 |
| Corporate Assets | - | - | - | - | - | 722 |
ASI 20
As per Interpretation, no segment reporting will be required if any Level 1 enterprise is having one business segment or one geographical segment. In such case financial statements of the enterprise will be used as segment reporting.
Primary Segment & Secondary Segment
At the time of disclosure, business segment or geographical segment are to be disclosed in the sequence on the basis of principle as specified by the statements.
Disclosures P / S
Particulars Primary Segment Secondary Segment
(a) If product is dominant Source
of the enterprise Business Geographical
(b) If Ares is dominant Source Geographical Business
(c) If Product & Area both are
dominant Business Geographical
(d) If Product & Area both are
not dominant Business or Geographical - do -
Comment
Meaning of Dominant source is not explained in the provision of AS but the total responsibility to explain dominant source is on management.
Disclosures
(a) Disclosures for Primary Segment
(i) External Sale
(ii) Inter Segment Sale
(iii) Segment Expenses
(iv) Segment Profit or Losses
(v) Corporate Income
(vi) Corporate Expenses
(vii) Segment Assets
(viii) Segment Liabilities
(ix) Corporate Assets & Corporate Liabilities
(x) Depreciation (Segment wise & Corporate wise Fixed Assets)
(xi) Any other non-cash exp.
(b) Disclosures for Secondary Segment
(i) External Sale
(ii) Internal Sale
(iii) Segment Result
(iv) Segment Assets
Differences AS / IAS / US
1. Under US GAAP disclosure of 10 segments is assumed practical disclosure. In case reportable segment are higher than 10 segments then disclosure can be reduced by ignoring the provisions. No such provisions as specified above is given in the AS and IAS.
2. As per AS and IAS accounting policies should be same which are used for the preparation of financial statement and segment reporting. As per US GAAP these accounting policies may be different in the financial statement and segment reporting. It can be said that different accounting policies can be used for final accounts and segment reporting.
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