CA Intermediate · Advanced Accounting

AS 26 Intangible Assets: formula sheet

Full chapter guide

Key formulas

Definition of intangible asset: Intangible asset = identifiable + non-monetary + no physical substance + held for use, rent or administration; All parts must be present. Monetary items such as receivables do not qualify.
Three tests of the definition: Identifiability + Control + Future economic benefits; If any one fails, the item is not an intangible asset and the cost is expensed.
Recognition criteria: Probable future economic benefits + Cost can be measured reliably; Both conditions apply in addition to meeting the definition.
Failing the test: Item fails definition or recognition → expense when incurred. Exception: item acquired in an amalgamation in the nature of purchase that cannot be recognised → included in goodwill or capital reserve, not expensed; In the normal case, once expensed, the amount cannot be capitalised later as part of the cost of the asset.
Internally generated items never recognised: Internally generated goodwill, brands, mastheads, publishing titles, customer lists and similar items → not recognised as assets; Their cost cannot be distinguished from the cost of developing the business as a whole.
Cost of separately acquired intangible: Cost = Purchase price + import duties + non-refundable taxes − trade discounts and rebates + directly attributable costs; Exclude general overheads, advertising, training, and initial operating losses.
Deferred payment: Interest = Total payments − Cash price equivalent; Cost is the cash price equivalent. Interest is a finance cost expensed over the credit period (unless capitalised under AS 16).
Amalgamation in the nature of purchase: Cost = Fair value at date of amalgamation; Where fair value cannot be measured by reference to an active market, the amount recognised initially is limited to an amount that does not create or increase any capital reserve arising at the date of the amalgamation.
Amalgamation in the nature of merger: Recorded amount = Existing carrying amount (book value) in transferor's books; Dealt with under AS 14 using the pooling of interests method. The transferee records the transferor's assets at existing carrying amounts. AS 26 initial measurement does not apply.
Government grant: Recorded amount = Fair value at date of acquisition, or acquisition cost (may be nil) + directly attributable expenditure to prepare the asset for intended use; Choice is allowed. The grant is accounted for as per AS 12.
Exchange of assets: Cost = Fair value of asset given up (adjusted for cash), also considering fair value of asset received if more clearly evident; AS 26 refers to the principles of AS 10 for exchanges. Apply the rule to the facts given and do not treat it as universal.
Internally generated goodwill: Recognised amount = Nil; Never recognised as an asset.
Research phase rule: Research expenditure = expense in the period incurred; No asset is ever recognised from research. If the phases cannot be separated, treat the whole project spend as research.
Development capitalisation test: Capitalise only if ALL six criteria are met: (1) technical feasibility, (2) intention to complete, (3) ability to use or sell, (4) probable future economic benefits, (5) adequate resources, (6) reliable measurement; Failing even one criterion means the spend is an expense.
Cost of internally generated asset: Cost = Σ expenditure from the date the criteria are first met until the asset is ready for use; Spend before that date stays expensed and is not reinstated.
Internally generated goodwill: Recognised amount = ₹0; Never recognised. Also not recognised: internally generated brands, mastheads, publishing titles and customer lists.
Subsequent expenditure rule: Capitalise only if: (1) it is probable the spend will generate future benefits beyond the original standard of performance, AND (2) it can be measured and attributed to the asset reliably. Otherwise expense.; Both conditions are needed. Most subsequent spending fails, so the default answer is expense.
Costs always expensed when incurred: Start-up costs; training costs; advertising and promotional costs; relocation or reorganisation costs.; Start-up costs include legal and secretarial costs of forming a legal entity, pre-opening costs of a new facility, and pre-operating costs of a new operation or product.
Research and development: Research phase: expense when incurred. Development phase: capitalise only if all the AS 26 development recognition criteria are met; otherwise expense.; Do not put research in the same list as start-up, training or advertising. Development cost is the one that can become an asset.
Items that cannot be recognised as intangible assets: Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance are not recognised as intangible assets. Spend on them is expensed.; The cost of generating them cannot be distinguished from the cost of developing the business as a whole. This is a separate list from the costs above.
No reinstatement of past expenses: Expense once recognised in the Statement of Profit and Loss is never added back to the cost of the intangible asset later.; Applies when an item earlier expensed later meets the recognition criteria.
Prepayments: Expense is recognised when you receive the goods or services, or the right to access them, not when you pay.; Applies to advertising material, catalogues and similar items paid for in advance.
Website costs (ICAI interpretation based on SIC-32, applied with AS 26): Planning stage: expense. Development stage (application, infrastructure, graphic design, content): capitalise if criteria are met. Operating stage (maintenance, updating content): expense, unless it meets the AS 26 subsequent expenditure test (the two conditions above).; Content developed only to advertise or promote your own products is expensed. The stage-wise treatment comes from ICAI's interpretation on website costs, applied within AS 26. SIC-32 itself is not part of AS 26.
Depreciable amount: Depreciable amount = Cost − Residual value; Residual value is taken as zero unless there is a third-party purchase commitment or an active market, as explained in the concept.
Straight-line amortisation: Annual amortisation = (Cost − Residual value) ÷ Useful life in years; Use this when the pattern of benefits cannot be reliably determined. Multiply by months used ÷ 12 for a part year.
Unit of production method: Amortisation for the year = Depreciable amount × Units produced in the year ÷ Total expected units; Use when benefits relate to output, such as a licence to produce a fixed quantity.
Ten-year presumption: Useful life is presumed not to exceed 10 years from the date available for use; Rebuttable. A longer life needs evidence, an annual AS 28 recoverable amount estimate and disclosure of reasons.
Revised amortisation after review: Revised annual charge = (Carrying amount at review date − Residual value) ÷ Revised remaining useful life; Applied prospectively as a change in estimate. Do not restate earlier years.
Start of amortisation: Amortisation begins when the asset is available for use; Not when you pay for it and not when you first use it.
Gain or loss on disposal: Gain or (loss) = Net disposal proceeds − Carrying amount; Net disposal proceeds are sale price less selling costs. Show the result in the Statement of Profit and Loss.
Carrying amount: Carrying amount = Cost − Accumulated amortisation − Accumulated impairment losses; Amortise up to the date of disposal before you work out the gain or loss.
Recoverable amount (AS 28): Recoverable amount = Higher of (Net selling price, Value in use); Net selling price is selling price less costs of disposal. Value in use is the present value of estimated future cash flows.
Impairment loss (AS 28): Impairment loss = Carrying amount − Recoverable amount, if carrying amount is higher; If recoverable amount is higher, there is no impairment loss.
Derecognition trigger: Derecognise on disposal OR when no future economic benefits are expected from use or disposal; Both triggers lead to removal from the books.
Amortisation after impairment (straight-line method): Revised annual amortisation = (Revised carrying amount − Residual value) ÷ Remaining useful life; This applies to the straight-line method. The depreciable amount is the revised carrying amount less any residual value, which is normally assumed to be zero under AS 26. If another method is used, it follows the pattern of benefits.

Quick revision

An intangible asset is an identifiable, non-monetary asset without physical substance, held for use.
Identifiability means it is separable, or arises from contractual or legal rights.
Recognise only if future benefits are probable and cost can be measured reliably.
Research cost is always an expense when incurred.
Development cost is capitalised only when every stated condition is demonstrated, such as technical feasibility and intention to complete.
Internally generated brands, mastheads, customer lists and publishing titles are not recognised as assets.
Amortise on a systematic basis over the useful life. Residual value is presumed zero unless (a) a third party has committed to buy the asset at the end of its life, or (b) an active market exists, residual value can be determined by reference to it, and such a market will probably exist at the end of the useful life.
Useful life is presumed not to exceed ten years; a longer life needs to be justified and the reasons disclosed. If useful life exceeds ten years, the recoverable amount must be estimated annually under AS 28.
Review the amortisation period and method at least at each financial year end.
Expenditure on start-up, training and advertising is expensed, not capitalised.
Gain or loss on disposal is net proceeds less carrying amount, taken to profit or loss.
Impairment is tested under AS 28. An intangible asset not yet available for use must have its recoverable amount estimated at least annually, as must one amortised over more than ten years.

Common mistakes

Treating internally generated goodwill or brands as assets. Fix: Remember that internally generated goodwill, brands, mastheads, publishing titles and customer lists are not recognised. Expense them.
Naming only two of the three tests in the definition. Fix: Learn the trio: identifiability, control, future economic benefits. Write all three in the answer.
Adding training, advertising or administration costs to the cost of a purchased intangible. Fix: Only costs directly attributable to bringing the asset to working condition for use are capitalised. Expense the rest.
Deducting trade discount but forgetting import duties and non-refundable taxes. Fix: Follow the full formula: price plus duties and non-refundable taxes, less discounts, plus attributable costs.
Capitalising development cost from the start of the project Fix: Capitalise only from the date all six criteria are met. Earlier development spend is an expense.
Adding back earlier expensed costs once the criteria are met Fix: AS 26 prohibits reinstating expenditure already recognised as an expense. The asset includes only later spend.
Capitalising staff training cost because the new software needs trained users. Fix: AS 26 expenses training costs always. Capitalise only the directly attributable cost of preparing the asset for its intended use, not training.
Capitalising advertising spent to launch a new product or brand. Fix: Advertising and promotional costs are expensed when incurred, including launch campaigns. Remember them as always expense.
Treating the ten-year limit as an absolute maximum. Fix: Write it as a presumption. A longer life is allowed with evidence, an annual AS 28 recoverable amount estimate and disclosure of reasons.
Starting amortisation from the date of payment or first use. Fix: Count from the date the asset is available for use, which is the date it is in the location and condition to operate as intended.

Exam tips

Write the three definition tests and two recognition criteria by name. Step marks follow these headings.
In case-based questions, decide each item separately and list the treatment (capitalise or expense) in a short table-like list.
Always give a reason tied to a failed test, not just the word expense.
Expect MCQs on items that cannot be recognised, such as internally generated goodwill, brands, and training costs.
Link this topic with initial measurement and internally generated intangibles, because exam questions often combine them.
Always name the mode of acquisition in the first line. Examiners award marks for classifying correctly.
In list-type questions, mark each item as capitalised or expensed with a short reason. This earns step marks.
Remember the special cases: fair value in a purchase-type amalgamation, existing carrying amounts for a merger under AS 14, the grant choice, and the AS 10 principles for exchanges.