ol. Classify each of the following assets as either tangible or intangible >) The operating system of a personal computer a ‘An off-the-shelf integrated publishing software package (iid specialized software embedded in computer controlled machine tools ‘A firewall’ controlling access to restricted section of an internet website. @) i ; solution ): Tangible: The operating system (e.g, DOS or Windows) of a personal computer is an integral part of the related hardware and should be accounted for under AS-10 ‘Fixed Assets’ (i) Intangible: Such computer of the hardware on which it i (iii) Tangible: Specialized software integrated into production line “robots” is | gmilar in nature to (i). is not an integral part fuware (c.g. QuarkXPress sed, | (v) Intangible: Companies developing “firewall” software to protect their own website may also sell the technology to other companies. Q2. On January 2, 2010 NDA Corp. bought a trademark from Induga Corp. for | Rs. 500,000. NDA retained an independent consultant, who estimated the trademark’s remaining life to be 20 years. Its unamortised cost on Induga accounting records was Rs. 380,000. NDA decided to amortize the trademark over the maximum period allowed. In NDA’s December 31, 2010 balance sheet, what amount should be reported as accumulated aniortization? aRs.7,600 b. Rs. 9,500 c. Rs. 25,000 d. Rs. 50,000. Solution: (d) . As per para 23 of AS-26 (refer point 25.16), intangible assets should be measured initially at cost therefore, NDA Company should amortize the trademark at its cost of Rs. 500,000. The. unamortised cost on the seller's books (Rs. 3,80,000) is irrelevant to the buyer. Although the trademark has a remaining useful life of 20 years, intangible assets are generally amortized over a maximum period of 10 years per AS-26 (refer point 25.16-2). Therefore, the 2010 amortization expense and accumulated amortization is 50,000 (Rs. 5,00,000 + 10 years). 03. On January 2,2010, NDA Co. purchased Induga Co. at a cost that resulted in recognition of goodwill of Rs. 2,00,000 having an expected benefit period of 10 years. During the first quarter of 2010, NDA spent an additional sum of Rs. 80,000 on expenditures designed to maintain goodwill. At December 31, 2010, NDA estimated that the benefit period of goodwill was 20 years. In its December 31, 2010 balance sheet, what amount should NDA report as goodwill? (AS-14 not appli- cable) , Rs. 1,80,000 b. Rs. 1,90,000 c. Rs. 2,52,000 d. Rs. 2,73,000. Solution: (b) As per paras 23 and 27 of AS- 26 (refer point 25.16), the company should record anasset the cost of intangible assets such as goodwill acquired from other Para 60 of AS-26 (refer point 25.15) also states that subsequent experecognized intangible asset is recognized as an expense if this expendituc> required to maintain the asset at its originally assessed standard of Performan. In addition, it is difficult to attribute Rs. 80,000 expenditure directly to Bood rather than the business as a whole, Cost of developing intangible A8sets such i goodwill “which are not ally identifiable, have indetermin ¢ lives, op pa inherent ina continuing business and related to an enterprise as a whole" shoulg be expensed when incurred. Therefore, only Rs. 2,00,000 (and not the additiong| Rs. 80,000) should be capitalized as goodwill. Amortization at 31-12-2019 is recorded using the best estimate of useful life at that time (20 years). T herefore, the net amount reported for goodwill at 31-12-2010 is Rs. J 30,000 IRs. 2,00,000.. Rs. 2,00,000 X 1/20]. Goodwill has been amor" zed Pee Be a Corp, hag sufficient evidence that benefit of goodwill is 20 years instead o! 0 year (refer | point 25.16-2). Yast daeralan and nradiuce a rating 1Keven” DA Inc. has two patents that have allegedly been infringe : . vestigation, legal counsel informed NDA eee x Tala ee Hrandastrong ease i regard ‘0 patent B19. NDA incurred additional legal fees 7 stop in NDA & Sea i oth patents have a remaining legal life of 8 years. How shoul ccount for these legal costs incurred relating to the two patents: ~q. Expense costs for A34 and capitalize costs for B19, - 4, Expense costs for both A34 and B19, « Capitalize costs for both A34 and B19, . Capitalize costs for A34 and expense costs for B19, solution: (2) “As per para 59 of AS-26 (refer point 25.15), subsequent expenditure on an intangible asset after its purchase or its completion should be recognized as an expense when it is incurred unless: Qo". after (@ It is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of perfor- | mance; and | (b) The expenditure can be measured and attributed to the asset reliably. Ifthese conditions are met, the subsequent expenditures should be added to the cost of the intangible asset. Because NDA Inc. has a weak case on patent A34; the legal fees incurred in its defence should be expensed, rather than capitalized as an asset. This is in accordance with the doctrine of conservatism. Asa result of this occurrence, NDA Inc. should also consider whether the patent would provide benefit to future Periods, NDA Inc, has a strong case in regard to patent B19, however, and oo" expect to receive benefits in the future as a result of its successful ecen Consequently, the legal fees to stop infringement on B19 should be capitalized as an asset and answers (b), (c) and (d) are incorrect. ao /awaliminaryTIE anata ee S66 Lid has got the license to manufacture particular medicines for 10, 08.» fecof Rs.200 lakhs, given belowis the pattern of expected production alec d operating cash inflow. x] - Production in bottles Net operating cash flow year (In thousands) (Rs. in lakhs) 300 900 A; 600 1800 650 2300 A 800 3200 : 800 3200 i 800 3200 ‘ 800 3200 ; 800 3200 800 3200 ‘ 800 3200 Net operating cash flow has increased for third year because of better inventory management and handling method. Suggest the amortization method. Solution : As per para 72 of Accounting Standard 26 (refer point 25.17) on intangibles, the amortization method used should reflect the pattern in which economic benefits are consumed by the enterprise. If pattern cannot be determined reliably, then straightline method should be used. In the instant case, the pattern of economic benefit in the form of net operating cash flow vis-a-vis production is determined reliably. Initially net operating cash flow per thousand bottles is Rs. 3 lakhs for first two years and Rs. 4 lakhs from fourth year onwards, the pattern is established and therefore the X Ltd should amortize the license fee of Rs. 200 lakhs as under : Year Net operating Ratio Amortize amount Cash inflow (Rs. in lakhs) i 900 0.03 6 : 1800 0.06 12 i 2300 0.08 16 i 3200 0.12 24 : 3200 0.12 24 ; 3200 0.12 24 ‘ 3200 . 0.12 24 : 3200 0.12 24 b 3200 0.12 24 3200 0.11 (balance) 22 27400 1.00 200, | Q12. Himalaya Ltd. in the past three year spent Rs. 75,00,000 to develop a Drug to treat Cancer, which was charged to Profit and Loss Account since they did not meet AS-26 criteria for capitalization. In the current year approval of the con- cerned Govt. Authority has been received. The Company wishes to capitalize Rs. 75,00,000 and disclose it as a prior period item. Is it correct? Give reason for your [CA Final Nov. 2005] views. Solution: As per 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. Hence Himalaya Ltd. cannot capitalize Rs, 75,00,000.