CA Final · Financial Reporting

Ind AS 38 Intangible Assets: formula sheet

Full chapter guide

Key formulas

Definition of intangible asset: Intangible asset = identifiable + non-monetary + no physical substance + controlled + future economic benefits expected; All elements must be present. Missing any one means the item is not an intangible asset.
Identifiability test: Identifiable if separable OR arises from contractual or other legal rights; Only one limb is needed. Separable means capable of being sold, transferred, licensed, rented or exchanged.
Control test: Control = power to obtain future benefits + ability to restrict others' access; Usually shown by enforceable legal rights. Absence of legal rights makes control hard to demonstrate.
General recognition criteria: Recognise if (1) future economic benefits are probable AND (2) cost can be measured reliably; Both conditions must be met. Otherwise expense the cost when incurred.
Initial measurement of separately acquired asset: Cost = purchase price (net of trade discounts and rebates, plus import duties and non-refundable taxes) + directly attributable cost of preparing the asset for use; For a separately acquired asset the probability criterion is always taken as satisfied.
Separately acquired intangible: cost: Cost = Purchase price (after trade discounts and rebates, plus import duties and non-refundable purchase taxes) + Directly attributable cost of preparing the asset for its intended use; Directly attributable costs include employee benefits arising directly from bringing the asset to its working condition and professional fees. Exclude costs of introducing a new product, advertising, administration and general overheads, and initial operating losses.
Deferred payment: Cost = Cash price equivalent; difference to total payments = interest expense over the credit period; If payment is deferred beyond normal credit terms, the difference is recognised as interest expense over the credit period, unless it is capitalised in accordance with Ind AS 23 Borrowing Costs.
Business combination: Cost = Fair value at the acquisition date; Recognise separately from goodwill if the asset is identifiable (separable or arising from contractual or legal rights). The probability criterion is treated as always met, and fair value is treated as reliably measurable.
Government grant: Initial cost = Fair value of the intangible acquired by way of government grant (recognised in accordance with Ind AS 20) + Directly attributable expenditure to prepare the asset for its intended use; Ind AS 38 does not allow the nominal-amount option that is available under Ind AS 20 for other assets. The asset is recorded at fair value.
Exchange of assets: Cost = Fair value of asset given up, unless the exchange lacks commercial substance or neither fair value is reliably measurable; then Cost = Carrying amount of asset given up; If the fair value of the asset received is more clearly evident, use that instead. Any difference goes to profit or loss when fair value is used.
Internally generated asset: cost: Cost = Sum of expenditure incurred from the date all six development criteria are first met until the asset is ready for use; Expenditure expensed earlier cannot be reinstated as part of cost.
Research phase: Research expenditure = Expense when incurred; If research and development cannot be distinguished, the whole spend is treated as research.
Classification rule: Web site developed for own use = internally generated intangible asset (Ind AS 38); Apply research and development phase rules stage by stage.
Planning stage: Planning stage cost → expense; Same as research phase: feasibility, objectives, specifications, supplier selection.
Development stages: Application/infrastructure + graphical design + content (non-advertising) → capitalise if Ind AS 38 criteria are met; Criteria include technical feasibility, intention and ability to complete and use, probable future benefits, resources, and reliable measurement of cost.
Promotion-only site: Site mainly to promote own products/services → all cost expensed; Probable future economic benefits cannot be demonstrated.
Operating stage: Operating cost (maintenance, updating) → expense unless asset criteria are met; Costs of enhancing functionality may qualify as capitalisable.
Cost and amortisation: Cost = directly attributable cost of the development stages; amortise over useful life; Useful life should be short, as per Appendix A guidance, and amortisation starts when the site is ready for use.
Advertising and promotion: Advertising and promotional spend → expense as incurred; Includes content developed to advertise the entity's own products.
Cost model carrying amount: Carrying amount = Cost − Accumulated amortisation − Accumulated impairment losses; Applies to all intangibles unless the revaluation model is chosen and an active market exists.
Revaluation model carrying amount: Carrying amount = Fair value at revaluation date − Later accumulated amortisation − Later accumulated impairment losses; Fair value must be measured by reference to an active market. Revalue regularly so the carrying amount does not differ materially from fair value.
Amortisable amount: Amortisable amount = Cost − Residual value; Residual value is presumed zero unless there is a third-party purchase commitment or an active market, as described above.
Straight-line amortisation: Annual amortisation = (Cost − Residual value) ÷ Useful life in years; Default method when the pattern of consumption cannot be determined reliably.
Units of production amortisation: Amortisation for the year = (Cost − Residual value) × Units produced in the year ÷ Total expected units; Use when benefits are consumed in line with output.
Rule: revaluation increase: Not a formula. Rule applied asset by asset: the increase is credited to OCI and accumulated in revaluation surplus.; Exception: to the extent the increase reverses a revaluation decrease of the same asset earlier charged to profit or loss, it is recognised in profit or loss.
Rule: revaluation decrease: Not a formula. Rule applied asset by asset: the decrease is charged to profit or loss.; Exception: to the extent the same asset has a revaluation surplus balance, the decrease is recognised in OCI and reduces that surplus.
Rule: indefinite life: Not a formula. No amortisation; impairment test annually and when there is an indication.; Compare carrying amount with recoverable amount under Ind AS 36. Review the indefinite-life assessment every period.
Rule: revenue-based amortisation: Not a formula. Presumed inappropriate, except in limited cases.; The presumption can be rebutted only when the intangible is expressed as a measure of revenue, or when revenue and consumption of economic benefits are highly correlated.

Quick revision

An intangible asset is an identifiable non-monetary asset without physical substance.
Recognition needs probable future economic benefits and reliably measurable cost.
Identifiable means separable, or arising from contractual or other legal rights.
Research is always expensed; development is capitalised only if all the standard's conditions are met.
Internally generated brands, mastheads, publishing titles, customer lists and goodwill are not recognised as assets.
Expenditure once expensed is not later capitalised as part of an asset's cost.
Cost of a separately acquired intangible is the purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, plus directly attributable costs.
Amortisation begins when the asset is available for use; a finite-life asset is amortised over its useful life.
The residual value of a finite-life intangible is presumed to be zero, unless a third party has committed to buy the asset at the end of its useful life, or there is an active market for it from which the residual value can be determined and that market is probable to exist at that time.
An intangible with an indefinite useful life is not amortised but is tested for impairment annually and when there are indications.
Review useful life and amortisation method at least at each financial year-end; changes are changes in estimate.
Revaluation is allowed only if an active market exists for the asset.
On derecognition, gain or loss is net disposal proceeds less carrying amount, recognised in profit or loss.

Common mistakes

Treating skilled workforce, training or customer loyalty as an intangible asset. Fix: Check control. Without legal rights or other power over the benefits, control is not shown and the item fails the definition. Expense the cost.
Saying identifiability needs both separability and legal rights. Fix: Remember it is either or. A licence that cannot be sold but arises from legal rights is still identifiable.
Capitalising development spend from the start of the project once the project 'looks promising'. Fix: Capitalise only from the date all six criteria are met. Earlier spend stays an expense and is never reinstated.
Capitalising training, advertising or initial operating losses as part of cost. Fix: Only costs of bringing the asset to its working condition count. Costs of introducing a new product, staff training, administration and operating losses are expensed.
Capitalising feasibility study and planning costs because the site eventually goes live. Fix: Planning is always the research equivalent. Expense it, even if the project succeeds.
Capitalising content that is meant to advertise the entity's products. Fix: Capitalise content only to the extent it is not for advertising or promotion. Always split the content cost.
Amortising an indefinite-life intangible Fix: Indefinite life means no amortisation. Test for impairment every year and whenever there is an indication.
Treating indefinite life as infinite life Fix: Indefinite means no foreseeable limit to cash inflows. Review the assessment every period and treat any switch to finite as a change in estimate.

Exam tips

In case scenarios, quote the fact that proves or fails each test. Marks go to application, not to restating the definition.
Always state the order: scope, definition (identifiability, control, benefits), then recognition. Examiners follow this sequence.
Remember that identifiability is satisfied by separability or legal rights, not both. Many MCQ options test this.
Name the other Ind AS when an item is out of scope (Ind AS 2, 16, 103, 116 and so on). It shows you know the boundary.
Conclude in one line: recognise or expense. An answer without a conclusion loses marks.
In case MCQs, scan for the date the criteria were met. That single date decides the answer.
Answer written questions in provision-facts-conclusion form: state the Ind AS 38 rule, apply it to the numbers, then conclude with the amount.
Always list the excluded costs (training, advertising, overheads, operating losses) explicitly. Examiners award marks for the exclusions.