ACCOUNTING FOR INTANGIBLES – AS- 26

 The objective of AS-26 is to prescribe the accounting treatment for intangible assets that are not
covered in other standards
 As- 26 shall not be applied to those activities or transactions which are so specialised that give
rise to accounting issues that need to be dealt with in a different way.
 Further, this standard is not applicable to amortisation of share discount, debenture discount or
discounts relating to borrowings.
 An intangible asset may be defined as resource controlled by an enterprise and from
which economic benefits are expected to flow in future to the enterprise.
 In determining whether an asset is to be treated as fixed or intangible, judgement is required. In
case of computer controlled machine, the computer software required to operate the machine is a
fixed asset.
 In order to be categorised as an intangible asset, it must be identifiable, must be controlled by
the enterprise, expected to bring future economic benefits and its costs can be measured
reliably.
 Standard also state that, internally generated goodwill is not recognised as an intangible
asset because it is not an identifiable resource controlled by an enterprise.
 Standard also provides that, Brands, Mastheads, Publishing titles, consumer costs are not
intangible assets because they cannot be separated from the cost of developing the business as
a whole.
 An asset that simply provides future benefits cannot be classified as an intangible asset.
 Standard provides that intangible assets should be amortised over useful life, generally taken as
10 years or justifiable life. However in case of legal rights such as right to generate power,
right to collect toll tax, intangible asset may be amortised over the life of the „right‟.
 Amortisation of intangible asset should be treated as an expense and should be charged to
profit and loss account however if an intangible asset is used to create another asset, the
amortisation should be added to the cost of asset so created.
 Annual charge or initial cost paid to host a website on the server of an Internet service provider is
an expense. The expenditure for purchasing servers, internet hardware, air conditioners is to be
treated as fixed asset under AS- 10
 Expenses to maintain an intangible asset should not be capitalised
 As per AS- 26 expenditure on research should be recognised as an expense when it is
incurred. An Intangible Asset arising from development should be recognised if and only if,
such expenditure can demonstrate all the conditions of para-44, that, it is capable of fetching
returns. An intangible asset should be derecognised if no future economic benefits are expected
from its use.
 As per AS-26 the expenditure on research of new process design for its product, by a Company
should be charged to profit and loss account in the year in which it is incurred.
 Development phase expenditure which meets assets recognition criteria- as per AS- 26, for
measurement of such internally generated intangible asset, fair value can be estimated by
discounting estimated future net cash flow.
 Revision of amortization period is a change in Accounting Estimate. Also as per AS 26 if the
expected useful life of the asset is significantly different from previous estimates, the amortization
period should be changed.

Problems/ cases on AS- 26

 1
Times Now Limited is having a patent at a carrying amount of Rs. 700,000. Company wants to dispose it
off. Hindustan Times Limited purchased this patent at a cost of Rs. 800,000. Useful life of the patent is 15
years. Hindustan times limited spent Rs. 100,000 in getting the patent registered in its name. Find out the
carrying amount of the patent.

Solution-
Should be recognised at Rs. 8,00,000
Cost incurred Rs. 1,00,000 should be expensed
Presuming useful life is determined by competent valuer Patent so acquired should be written off in 15
years

2
Cenex limited purchased assets of Times limited at Rs. 10 lacs and also acquired liabilities of Rs. 2 lacs.
Solution:
Payment made was Rs. 13 lacs. The resultant goodwill is to be dealt with as per AS-26.
Net Assets = 10 – 2 = 8 ; amount of consideration is Rs. 13 lacs
Goodwill = difference of amount paid and Net Assets that is Rs. 5 lacs
Should be amortised in next 10 years

3
Vista limited took over Indian Rayons limited and in the process recognised goodwill of Rs. 9 lacs.
Company decides to write it off in next 4 years. Further it was also considered necessary to urgently incur
a cost of Rs. 1 lacs to maintain the goodwill for the period of next 4 years. Find out the carrying amount of
goodwill.
Solution:
Carrying should be Rs. 9 lacs as 1 lac is an expense to maintain and therefore should not be capitalised
Amount can be written off in 4 years.

4
Triple Five limited incurred Rs. 100,000 as preliminary expense for the incorporation of company. The life
of the company is estimated at 50 years.
AS-26 is not applicable to preliminary expense. It should be treated as an item of miscellaneous
expenditure and should be written off in 10 years.
 5
Hills and Thrills limited spent Rs. 200,000 in connection with issue of capital. How will you deal with it?
Solution:
Such expenses are not covered by AS- 26. Should be treated as normal expense and written off
preferably against security premium account or against profit and loss account

6.
On February 2008, J Ltd. bought a trademark from I Ltd. for Rs.50 lakhs. J Ltd. retained an independent
consultant, who estimated the trademark’s remaining life to be 14 years. Its unamortized cost on I ltd’
records was Rs.35 lakhs. J Ltd. decided to amortize the trademark over the maximum period allowed. In J
st
Ltd.’s Balance Sheet as on 31 December 2008, what amount should be reported as accumulated
amortization?
Answer –
As per Para 23 of AS-26, intangible assets should be measured initially at cost therefore. J Ltd. should
amortize the trademark at its cost of Rs.50 lakhs. The unamortized cost on the seller’s books Rs.35 lakhs
is irrelevant to the buyer. Although the trademark has a remaining useful life of 14 years, intangible assets
are generally amortized over a maximum period of 10 years as per AS-26. Therefore, the maximum
amortization expense and accumulated amortization is Rs.5 lakhs (Rs.50 lakhs /10)

7.
ABC Ltd. developed a know-how by incurring expenditure of Rs.20 lakhs. The know-how was used by
the company from 1.4.2002. The useful life of the asset is 10 years from the year of commencement of
its use. The company has not amortised the asset till 31.3.2009. Pass Journal entry to give effect to the
value of know-how as per Accounting Standard-26 for the year ended 31.3.2009.
CA - Nov. 2009
Solution ;
Profit and Loss A/c (Prior period item) Dr. 12,00,000
Depreciation A/c Dr. 2,00,000
To Know-how A/c 14,00,000
[Being depreciation of 7 years (out of which depreciation of 6 years charged as prior period item)]

Q-8
Nine limited launched a project for producing product A in Nov.2009. The company incurred Rs. 30 lacs
towards Research and development expenses upto 31.3.2011. Due to unfavourable market conditions
the management feels that it is not possible to manufacture and sold the product in the market for next so
many years. The management hence wants to defer the expenditure to write off to future years.
Solution:
As per AS- 26 expenditure on research should be recognised as an expense when it is incurred. An
Intangible Asset arising from development should be recognised if and only if, such expenditure can
demonstrate all the conditions of para- 44 that, it is capable of fetching returns. An intangible asset should
be derecognised if no future economic benefits are expected from its use.
Thus in the present case, management cannot defer the expenditure and should write it off in entire in the
current year’s profit and loss account.

Q- 9
Welkins Corporation is engaged in research on a new process design for its product. It had incurred an
expenditure of Rs. 530 lacs on research upto 31.3.2010.
The development of the process began on 1.4.2010 and development phase expenditure was Rs. 360
lacs upto 31.3.2011 which meets assets recognition criteria.
From 1.4.2011, the company will implement the new process design which will result in after tax saving of
Rs. 80 lacs per annum for the next five years.
The cost of capital is 10%
Explain :
a) Accounting treatment for research expenses
b) The cost of internally generated intangible asset
c) The amount of amortization of the asset
The present value of annuity factor of Rs. 1 for 5 years @ 10% = 3.7908
Solution :
As per AS-26 the expenditure on research of new process design for its product 530 lacs should be
charged to profit and loss account in the year in which it is incurred.
Development phase expenditure amounting to Rs. 360 lacs meets assets recognition criteria. As per AS-
26, for measurement of such internally generated intangible asset, fair value can be estimated by
discounting estimated future net cash flows:
 Savings after tax for next 5 years 80 lacs
 Company‘s cost of capital 10%
 Annuity factor @ 10% for 5 years 3.7908
 Present value of net cash flows 80lacs x 3.7908 303.26 lacs
 The cost of internally generated asset would be lower of cost 360 lacs or PV of net cash flows
303.26 lacs
 The difference 56.74 lacs will be amortized by the enterprise for the financial year 2009-10
 The company can amortize Rs. 303.26 lacs over a period of five years by charging 60.65 lacs per
annum from financial year 2011-12

Question - 10
An intangible item is appearing in the balance sheet of Fine Limited at 20 lakhs on 1.4.2010. The item
was acquired for 25 lacs on 1.4.2009. The enterprise has been following a policy of amortizing the
intangible item over a period of 5 years on SLM basis. The enterprise determines the amortization period
to be 8 years, being the best estimate of its useful life, from the date when the item was available for use
that is 1.4.2009. Comment –
CA Nov. 2010
Solution:

Revision of amortization period from 5 to 8 years is change in Accounting Estimate. Also as per AS 26 if
the expected useful life of the asset is significantly different from previous estimates, the amortization
period should be changed.

Q- 11
Super Herbs is showing an intangible asset at Rs. 85 lacs as on 1.4.2012 and that item was acquired for
112 lacs on 1.4.2008 and that item was available for use from that date. Company is has been following
the policy of amortisation of the intangible asset over a period of 12 years on straight-line basis. Comment
Solution
Generally an intangible asset should be written off in 10 years however higher period is justified if
certificate from Actuary is produced justifying the higher period.

Q- 12
Seasons India limited had deferred research and development cost of Rs. 150 lacs. Sales expected in the
subsequent years as under :
Year sales Rs. In lacs
1 400
2 300
3 200
4 100
You are required
a) To suggest how research and development should cost is to be charged to profit and loss
account.
th
b) If at the end of third year, it is felt that no further benefit will accrue in the 4 year, how the
unamortized expenditure would be dealt with in the accounts of the company?
Solution :
(a) Cost allocation
Years Research and Development cost allocation
1 400 / 100 x 150 = 60
2 300 / 1,000 x 150 = 45
3 200 / 1000 x 150 = 30
4 100 / 1000 x 150 = 15

If at the end of any year the circumstances do not justify further deferral as given in the question at the
rd
end of 3 year, Rs. 45 lacs is to be charged as an expense immediately as per AS-26.
As per para 41 of AS 26, expenditure on research (or on the research phase of an internal project) should
be recognised as an expense when it is incurred. As such, the expenditure has been deferred to the
subsequent years assuming that the company can demonstrate all the conditions as mentioned in para
44 of AS 26. Similarly, as per para 87 of AS 26, an intangible asset should be derecognised (eliminated
from the Balance Sheet) on disposal or when no future economic benefits are expected from its use and
subsequent disposal. Thus, the remaining unrealised amount of Rs. 45 lakhs should be written-off as an
expense at the end of III year.

Q- 13
Seasons India limited acquired a patent Right for Rs. 400 lakhs. The product life cycle has been
estimated to be 5 years and the amortization was decided in the ration of future cash flows which are as
under:
Year sales Rs. In lacs
1 200
2 200
3 200
4 100
5 100
If at the end of third year, it is felt that patent would have an estimated balance future life of 3 years and
th
the estimated cash flow after 5 year expected to be Rs. 50 lakhs each year. Determine the amortization
under AS-
Ipcc- May-2013, 5 marks
Year Net cash flow – Rs. In lakhs Amortisation ratio Amortisation amount
1 200 200 / 800 = 0 .25 100
2 200 200 / 800 = 0.25 100
3 200 200 / 800 = 0.25 100
4 100 100 / 250 = 0 .40 Revised 40
5 100 100 / 250 = 0.40 Revised 40
6 50 100 / 250 = 0.40 Revised 40

Q- 14
How is software acquired for internal use accounted for under AS 26?
Solution:
As per Paras 10 and 11 of Appendix A to the AS 26, the cost of software acquired for internal use should
be recognised as an asset if it meets the recognition criteria prescribed in paragraphs 20 and 21 of the
Statement.
The cost of software purchased for internal use comprises its purchase price, including any import duties
and other taxes (other than those subsequently recoverable by the enterprise from the taxing authorities)
and any directly attributable expenditure on making the software ready for its use. Any trade discounts
and rebates are deducted in arriving at the cost. In the determination of cost, matters stated in
paragraphs 24 to 34 of the Statement need to be considered, as appropriate. Recognition criteria as per
Paras 20 and 21: “An intangible assets should be recognised if, and only if: (a) it is probable that
the future economic benefits that are attributable to the asset will flow to the enterprise; and (b)
the cost of the assets can be measured reliably.”
An enterprise should assess the probability of future economic benefits using reasonable and supportable
assumptions that represent best estimate of the set of economic conditions that will exist over its useful
life of the asset.

Q- 15
State how you will deal with the following matters in the account for the year ended 31.3.2012: The
company has spent Rs. 45 lakhs for publicity and research expenses on one of its new consumer product
which was marketed in the accounting year 2011-12 but proved to be a failure.

Solution:
As per para 41 of AS 26, Intangible Assets No intangible asset arising from research (or from the
research phase of an internal project) should be recognised. Expenditure on research (or on the research
phase of an internal project) should be recognised as an expense when it is incurred. So, in this case, the
whole expenses which were incurred for publicity and research and which were found to be unsuccessful
should be recognised as an expense for the year 2011-12. The same should be adjusted against current
year’s statement of Profit and Loss.

Q- 16
What are the Costs that are to be included in Research and Development costs as per AS 8?
Solution:
Note: As per Paras 41 and 43 of AS 26, no intangible assets arising from research (or from the research
phase of an internal project) should be recognised in the research phase. Expenditure on research (or on
the research phase of an internal project) should be recognised as an expense when it is incurred.

Examples of research activities are:

(a) Activities aimed at obtaining new knowledge;
(b) The search for, evaluation and final selection of, applications of research findings or other knowledge;
(c) The search for alternative for materials, devices, products, processes, systems or services; and
(d) The formulation, design, evaluation and final selection of possible alternatives for new or improved
materials, devices, products, processes, systems or services.

Moreover, as per Paras 45 and 46 of 26 in the development phase of a project, an enterprise can, in
some instances, identify an intangible and demonstrate that future economic benefits from the asset are
probable. This is because the development phase of a project is further advanced than the research
phase.
Examples of development activities are:
(a) The design, construction and testing of pre-production or pre-use prototypes and models;
(b) The design of tools, jigs, moulds and dies involving new technology;
(c) The design, construction and operation of a pilot plant that is not of a scale economically feasible for
commercial production; and
(d) The design, construction and testing of a chosen alternative for new or improved materials, devices,
products, processes, systems or services.
 Q- 17
Decide when research and development cost of a project can be deferred to future periods as per AS 26.
Solution:
As per Paras 41 and 44 of AS 26, no intangible asset arising from research should be recognised.
The expenditure incurred on account of research or development phase can be deferred to the
subsequent years if an enterprise can demonstrate all of the following:
(a) The technical feasibility of completing the intangible asset so that it will be available for use or sale;
(b) Its intention to complete the intangible asset and use or sell it;
(c) Its ability to use or sell the intangible asset;
(d) How the intangible asset will generate probable future economic benefits. Among other things, the
enterprise should demonstrate the existence of a market for the output of the intangible asset or the
intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;
(e) The availability of adequate technical, financial and other resources to complete the development and
to use or sell the intangible asset; and
(f) Its ability to measure the expenditure attributable to the intangible asset during its development
reliably.

Q- 18
A Pharma company spent Rs. 33 lakhs during the accounting year ended 31.3.2012 on research project
to develop a drug to treat ‘AIDS’. Experts are of the view that it may take four years to establish whether
the drug will be effective or not, and, even if found effective, it may take two or three more years to
produce the medicine, which can be marketed. The company wants to treat the expenditure as deferred
revenue expenditure. Comment.
Solution:
As per para 44 of AS 26, an intangible asset arising from development (or from the development phase of
an internal project) should be recognised if, and only if, an enterprise can demonstrate all of the following:
(a) The technical feasibility of completing the intangible asset so that it will be available for use or sale;
(b) Its intention to complete the intangible asset and use or sell it;
(c) Its ability to use or sell the intangible asset;
(d) How the intangible asset will generate probable future economic benefits. Among other things, the
enterprise should demonstrate the existence of a market for the output of the intangible asset or the
intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;
(e) The availability of adequate technical, financial and other resources to complete the development and
to use or sell the intangible asset; and
(f) Its ability to measure the expenditure attributable to the intangible asset during its development
reliably.
From the above it becomes clear in this case that it is not possible for the company to satisfy all the
above conditions and, hence, the entire amount of the expenditure should be treated as expense when it
is incurred. In short, no intangible asset arising from research (or from research phase of an internal
project) should be recognised. So expenditure on research should be recognised as an expense when it
is incurred (para 41).
 Q- 19
Aims India Ltd., in the past three years, spent Rs. 75,00,000 to develop a drug to treat cancer, which is
charged to Profit and Loss A/c since they did not meet AS 8 criteria for capitalisation. In the current year,
approval of the concerned Govt. Authority has been received. The company wishes to capitalise Rs.
75,00,000 and disclose it as a prior period item. Is it correct? Give reasons for your answer.
Solution:
As per Paras 58 and 59 of AS 26, expenditure on an intangible item that was initially recognised as an
expense by a reporting enterprise in previous annual financial statements or interim financial reports
should not be recognised as part of the cost of an intangible asset at a later date.
Similarly, subsequent expenditure on an intangible asset, after its purchase or its completion, should be
recognised as an expense when it is incurred unless:
(a) It is probable that the expenditure will enable the asset to generate future economic benefits in excess
of its originally assessed standard of performance; and
(b) The expenditure can be measured and attributed to the asset reliably.
Thus, from the above, it becomes clear that AS 26 prohibits reinstating the expenditure as recognised
expenses. So, the company cannot capitalise the amount of Rs. 75,00,000 as it has already been
adjusted against Profit and Loss Account in the previous accounting periods.

Q- 20:
TQM Ltd. launched a project for producing product P in Oct. 2010. The company incurred Rs. 20 lakhs
towards Research and Development expenses up to 31.3.2012. Due to prevailing market conditions, the
management came to the conclusion that the product cannot be manufactured and sold in the market for
the next 10 years. The management, hence, wants to defer the expenditure write-off to future years.
Advise the company as per applicable Accounting Standard.
Solution:
As per para 41 of AS 26, expenditure on research should be recognised as an expense when it is
incurred. Moreover, as per para 44 of the said Standard, an intangible asset arising from development
should be recognised if, and only if, an enterprise can demonstrate all the conditions laid down in para 44.
Similarly, as per para 87 of AS 26, an intangible asset should be derecognised on disposal or when no
future economic benefits are expected from its use and subsequent disposal.
In the present case, it is needless to say that the expenses amounting to Rs. 20 lakhs, which was
incurred for research and development, should be written-off in the current year i.e., year ending March
2012.
So, the management cannot defer the expenditure to be written-off in future years.

Q- 21
An intangible asset appears in Balance Sheet of C Ltd. at Rs. 16 lakhs as on 31.3.2004. The asset was
acquired for Rs. 40 lakhs in April 1991. The company has been amortizing the asset value on Straight
Line Basis. The policy is to amortize it for 20 years.
Do you advise the company to amortize the entire asset value in the books of the company as on
31.3.2004?
Solution:
As per para 67 of AS 26, if there may be persuasive evidence that the useful life of an intangible asset will
be longer than 10 years then, in the circumstances, no adjustment is needed as on 1.4.2003.
Para 63 states that the depreciable amount of an intangible asset should be allocated on a systematic
basis over the best estimate of the useful life. There is a rebuttable presumption that the useful life of an
intangible asset will not exceed ten years from the date when the asset is available for use.
Amortisation should commence when that asset is available for use.
As such, in the present case, as the amortisation period has already been expired on 1.4.2003, as per
para 63, Rs. 16 lakhs should be eliminated along with an adjustment to be made with the opening
balance of revenue reserve as on that date.

Q- 22
What will be the treatment of the following in the final statement of accounts for the year ended31.3.2012,
of a limited company?
In 2010-11, the company has spent and carried forward in the books a total of Rs. 5,00,000 on
developing a cure for cancer. During the current year, i.e., 2011-12, it is decided to terminate this product,
as test results in the current year have proved adverse.
Solution:
As per para 87 of AS 26, an intangible asset should be derecognised on disposal or when no future
economic benefits are expected from its use and subsequent disposal. As per para 88 of AS 26, gains or
losses arising from the retirement or disposal of an intangible asset should be recognised as income or
expense in the Statement of Profit and Loss.
In this case, however, the company decided ultimately to discontinue the product due to adverse test
result. As such, the entire amount of ` 5 lakhs should be treated as an expense which should be adjusted
against current year’s P&L A/c.

Q- 23
Lamp and Oil Ltd. acquired a patent at a cost of Rs. 80,00,000 for a period of 5 years and the product
life-cycle is also 5 years. The company capitalised the cost and started amortizing at Rs. 10,00,000 p.a.
After two years it was found that the product life cycle may continue for another 5 years from then. The
net cash flow from the product during these 5 years are expected to be Rs. 36,00,000; Rs. 46,00,000; Rs.
44,00,000; Rs.40,00,000; and Rs. 34,00,000.
Find out the amortisation cost of the patent for each of the years.
Solution:
Total cost of the patent is Rs. 80,00,000.
Amortizations for 1st 2 years @ Rs. 10,00,000 x 2 = Rs. 20,00,000
Unamortized amount of Rs. 60,00,000 (i.e. Rs. 80,00,000 – Rs. 20,00,000) to be written-off for next 5
years as per net cash flows of the product (assuming that the company got it renewed after 5 years)
which is calculated as:
Year Net cash flow – Rs. In Amortisation amount
lakhs
3 36 60 x 36/200 =10.80
4 46 60 x 46/200 = 13.80
5 44 60 x 44/200 = 13.20
6 40 60 x 40/200 = 12.00
7 34 60 x 34/200 = 10.20
200 60.00