CA Intermediate · Advanced Accounting

AS 26 Intangible Assets for CA Intermediate

AS 26 prescribes how to account for intangible assets: non-monetary assets without physical substance, held for use in production, supply, rental or administration. To solve questions, test the definition and recognition criteria, measure at cost, split research from development, then amortise over useful life, normally not more than ten years unless rebutted.

What this chapter covers

AS 26 covers identifiable, non-monetary assets without physical substance, such as patents, copyrights, licences, software, brands bought from others and know-how. The standard answers three questions: when to recognise an item as an asset, how to measure it, and how to charge its cost to profit over time.

The chapter has a clear flow. First you decide if the item meets the definition (identifiability, control, future economic benefits) and the recognition criteria. Then you measure cost based on how it was acquired: separate purchase, as part of an amalgamation, by government grant, or by exchange of assets. For an amalgamation, the treatment follows AS 14: in an amalgamation in the nature of purchase, an acquired intangible that meets the recognition criteria is recognised at fair value. If fair value cannot be reliably measured, it is not recognised separately and forms part of goodwill. In a pooling of interests, the assets are recorded at existing carrying amounts. Internally generated items need special care. Research cost is always an expense. Development cost is capitalised only when all the stated conditions are proved.

This chapter links to other parts of Advanced Accounting. Amortisation is similar to depreciation, impairment connects to AS 28, amalgamation and goodwill connect to the company accounts chapters, and disclosures connect to Schedule III. Questions are usually numerical or short-case based, so you need to be ready for both MCQs and written answers. Question patterns are indicative only and can change from exam to exam.

AS 26 is a compact chapter. Typical areas include research versus development, cost computation, amortisation schedules, and recognise-or-expense decisions. Once you learn the conditions and the treatment rules, many questions become mechanical. Definitions and rules can also be tested as MCQs, where you need no working. The question patterns are only indicative, so do not rely on any one pattern. The same ideas help you in other chapters that deal with assets, goodwill and impairment.

AS 26 Intangible Assets: topics in the order to study them

1Intangible Assets: Definition and Recognition CriteriaEverything else depends on knowing what qualifies as an intangible asset and when it can be recognised.
2Initial Measurement and Methods of AcquisitionOnce an item is recognisable, you need to know how to compute its cost under each acquisition route.
3Internally Generated Intangibles: Research and DevelopmentThis is the most tested part and builds on the cost and recognition rules you have just learnt.
4Subsequent Expenditure and Recognition of ExpensesIt completes the capitalise-or-expense decision after the asset is already on the books.
5Amortisation of Intangible AssetsYou can only amortise correctly once you know the carrying cost and what was capitalised.
6Impairment, Retirement, Disposal and DisclosuresThese are end-of-life and reporting steps, best learnt last as they use the amortised carrying amount.

How to prepare AS 26 Intangible Assets

Aim to learn the rules once, then drill small numerical cases until you can apply them without looking at notes.

Read the definition and write the three tests (identifiability, control, future economic benefits) plus the two recognition criteria in your own words.
Make a one-page table of acquisition methods and the cost rule for each: separate purchase, amalgamation (AS 14: purchase vs pooling), government grant, exchange.
Memorise the conditions for capitalising development cost and practise sorting activities into research or development.
Solve questions on subsequent expenditure, deciding case by case whether to capitalise or expense, and note the reason for each.
Practise amortisation: depreciable amount is cost less residual value, spread over useful life. Residual value is presumed zero unless (a) a third party has committed to buy the asset at the end of its useful 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. Also practise change of estimate, and the ten-year presumption and its rebuttal.
Work through impairment, retirement and disposal questions, computing gain or loss on disposal from the carrying amount.
Finish with a mixed set of MCQs and two or three full written answers, writing the rule, then the working, then the conclusion.

Common mistakes in AS 26 Intangible Assets

Capitalising research cost because the project looks promising.
Fix: Treat all research cost as an expense. Capitalise only from the date every development condition is met.
Capitalising development cost incurred before the conditions were met.
Fix: Capitalise only the expenditure from the date the recognition criteria are first met. Earlier cost stays as an expense.
Including general overheads, training or initial operating losses in the cost of the asset.
Fix: Include only directly attributable costs needed to create and prepare the asset for its intended use. Exclude selling, administrative and training costs.
Starting amortisation from the wrong date or using the wrong period.
Fix: Begin amortisation when the asset is available for use and spread the depreciable amount (cost less residual value) over its useful life.
Recognising internally generated brands or goodwill as assets.
Fix: Remember that internally generated goodwill and similar items are not recognised. Only acquired goodwill in an amalgamation or business purchase is recorded.
Ignoring the carrying amount when computing gain or loss on disposal.
Fix: Deduct accumulated amortisation to get the carrying amount first, then compare it with net proceeds.

Last-day revision: AS 26 Intangible Assets

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.

AS 26 Intangible Assets practice questions

AS 26 Intangible Assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

AS 26 Intangible Assets: frequently asked questions

Is AS 26 important for CA Intermediate?

It is a short chapter that can be tested through both MCQs and written numerical answers. Question patterns are only indicative, so prepare all parts of the chapter. Focused practice on the rules and small numerical cases is worthwhile.

How do I tell research from development?

Research is original, planned investigation to gain new knowledge, so it is always expensed. Development applies research findings to a plan or design for production. It is capitalised only when all the stated conditions are proved.

What is the maximum useful life of an intangible asset?

AS 26 presumes the useful life will not exceed ten years from the date the asset is available for use. A longer period is allowed only if you can rebut that presumption, and the reasons must be disclosed. If the life exceeds ten years, you must also estimate the recoverable amount annually under AS 28.

Can internally generated goodwill be recorded?

No. Internally generated goodwill is not recognised as an asset because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost.