Ind AS 38: Initial Measurement and Separate Acquisition vs Internal Generation

Understand Initial Measurement and Separate vs Internal Generation

Key rules to remember

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.

How to solve Initial Measurement and Separate vs Internal Generation questions

1. 1Identify the route: separate purchase, business combination, government grant, exchange, or internal generation.
2. 2Check recognition first: is the item identifiable, controlled, and does it give probable future benefits with reliable cost? Items like internally generated brands and goodwill fail at once.
3. 3For a purchase, start with the price, deduct trade discounts, then add duties, non-refundable taxes and directly attributable costs. Leave out training, advertising, overheads and operating losses.
4. 4For deferred payment, take the cash price equivalent and treat the extra as interest expense, unless it is capitalised under Ind AS 23.
5. 5For business combination, grant or exchange, apply the fair value or carrying amount rule with its exact condition.
6. 6For internal projects, split the spend into research and development, then find the date all six criteria are met.
7. 7Capitalise only spend from that date to the date the asset is ready for use. Expense everything before it and all non-qualifying costs.
8. 8State the final cost and the amount charged to profit or loss, and give a one-line reason for each treatment.

Quickest way: Switch-date shortcut for development projects

Common mistakes in Initial Measurement and Separate vs Internal Generation

• Capitalising development spend from the start of the project once the project 'looks promising'.

  Students treat feasibility as a general feeling rather than a demonstrated criterion.

  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.

  The words 'directly attributable' are read loosely.

  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.

• Recognising internally generated brands, customer lists or goodwill.

  Students recall that they have value and ignore that cost cannot be distinguished from running the business.

  Fix: Ind AS 38 prohibits recognition of these. Expense the spend.

• Recording goodwill and an assembled intangible together in a business combination.

  Students forget that an acquired identifiable intangible is recognised separately at fair value.

  Fix: Recognise each identifiable intangible at fair value, even if the acquiree had not recognised it. Goodwill is the residual.

• Using fair value in every exchange of assets.

  The commercial substance condition is overlooked.

  Fix: Use the carrying amount of the asset given up where the exchange lacks commercial substance or neither fair value can be measured reliably.

• Capitalising interest on deferred payment in the intangible's cost.

  Students add all payments made.

  Fix: Cost is the cash price equivalent. The excess is interest expense over the credit period, unless it is capitalised under Ind AS 23.

Worked examples