Advanced Accounting · AS 26 Intangible Assets

Initial Measurement and Methods of Acquisition of Intangible Assets under AS 26

Updated 4 October 2026 · Fact-checked

Under AS 26, an intangible asset is first measured at cost. Cost depends on how you got it: separate purchase, amalgamation, government grant, exchange, or internal generation. Identify the mode, apply its cost rule, add directly attributable costs, and exclude general overheads and losses.

Understand Initial Measurement and Methods of Acquisition

An intangible asset is an identifiable non-monetary asset without physical substance, held for use in producing goods or services, for rent to others, or for administrative purposes. Examples are patents, licences, copyrights and software. Once it meets the recognition criteria (probable future economic benefits and cost that can be measured reliably), you record it at cost.

The cost rule changes with the mode of acquisition. You must first spot the mode, because the examiner tests the difference between modes.

For a separate acquisition, cost is the purchase price, including import duties and non-refundable purchase taxes, less trade discounts and rebates, plus any directly attributable cost of preparing the asset for its intended use. Examples of such costs are professional fees and employee costs arising directly from bringing the asset to working condition. Costs of introducing a new product, advertising, administration and general overheads, and initial operating losses are not part of cost.

If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is treated as interest over the credit period, not as part of cost.

Other modes need special handling. In an amalgamation in the nature of purchase, cost is the fair value at the date of amalgamation. If 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. In an amalgamation in the nature of merger (pooling of interests), AS 14 applies. The transferee records the transferor's assets at their existing carrying amounts (book values). The AS 26 initial measurement rule does not apply to them.

A government grant asset may be recorded at its fair value at the date of acquisition, or at acquisition cost (which may be nil) plus any expenditure directly attributable to preparing it for its intended use. The grant is accounted for as per AS 12.

In an exchange, AS 26 follows the principles of AS 10 for exchange of assets. Cost is usually determined by the fair value of the asset given up (adjusted for any cash transferred). You also consider the fair value of the asset received if that is more clearly evident. Do not state this as a rule that applies to every kind of exchange without checking the facts in the question.

Internally generated goodwill is never recognised.

Key rules to remember

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.

How to solve Initial Measurement and Methods of Acquisition questions

Use this sequence for any question on initial measurement of an intangible asset.

1Check that the item is an intangible asset and meets recognition criteria: identifiable, controlled, probable future benefits, reliable cost.
2Identify the mode of acquisition: separate purchase, amalgamation, government grant, exchange, or internal generation.
3For a separate purchase, start with the purchase price and add import duties, non-refundable taxes and directly attributable costs. Deduct trade discounts and rebates.
4Remove costs that are not allowed: general overheads, advertising, training, initial operating losses, and interest on deferred payment.
5For amalgamation, grant or exchange, apply that mode's rule: fair value for a purchase, existing carrying amount (book value) under AS 14 for a merger, the grant choice, or the AS 10 exchange principles.
6Compute the final cost, and state the treatment of excluded items (expense to the Statement of Profit and Loss).
7Write a one-line conclusion giving the amount recognised and the standard's basis.

Quickest way: Mode first, then include or exclude

When to use it: Use this for MCQs and for short written parts where you must pick a cost figure quickly.

Write the mode of acquisition at the top of your rough work.
For a purchase, list items in two columns: add to cost, and expense. Only directly attributable items go in the first column.
In MCQs, eliminate any option that includes advertising, overheads, training or interest on deferred payment.
If you see internally generated goodwill, the answer is nil recognition.
In written answers, show each component on its own line with a short reason, so you earn step marks even if one item is wrong.

Common mistakes in Initial Measurement and Methods of Acquisition

Adding training, advertising or administration costs to the cost of a purchased intangible.
Students treat every cost linked to the asset as part of cost.
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.
Students copy the PPE cost routine from memory and miss a component.
Fix: Follow the full formula: price plus duties and non-refundable taxes, less discounts, plus attributable costs.
Capitalising deferred-payment interest as part of cost.
Students use the total amount payable as the cost.
Fix: Take the cash price equivalent as cost. Treat the excess as interest over the credit period.
Recognising internally generated goodwill.
Students confuse it with goodwill arising on amalgamation or acquisition.
Fix: Internally generated goodwill is never recognised. Only purchased goodwill (for example in an amalgamation in the nature of purchase) is shown.
Using book value for an asset acquired in an amalgamation in the nature of purchase.
Students mix up the purchase and pooling methods.
Fix: Purchase method uses fair value (with the cap where there is no active market). Merger uses the transferor's existing carrying amounts (book values) under AS 14, and AS 26 initial measurement does not apply.
Ignoring the fair value of the asset given up in an exchange.
Students use the book value of the old asset.
Fix: Follow the AS 10 principles: use the fair value of the asset given up, adjusted for cash, and also consider the fair value of the asset received if that is more clearly evident.

Worked examples

Example 1

Aarav Ltd purchased a patent for ₹12,00,000 from a foreign owner. Import duty paid was ₹1,00,000. A trade discount of ₹50,000 was allowed. Legal fees to register the patent were ₹40,000. Advertising to promote the product made under the patent cost ₹2,00,000. Training of staff to use the patent cost ₹30,000. Compute the cost of the patent.

Show the solution

Mode: separate acquisition.
Purchase price ₹12,00,000 plus import duty ₹1,00,000 = ₹13,00,000.
Deduct trade discount ₹50,000 = ₹12,50,000.
Add legal fees of registration ₹40,000, which are directly attributable = ₹12,90,000.
Exclude advertising ₹2,00,000 and training ₹30,000. Charge them to the Statement of Profit and Loss.

Answer: Cost of the patent = ₹12,90,000. Advertising and training totalling ₹2,30,000 are expensed.

Example 2

Meera Ltd bought a licence on deferred terms. The cash price is ₹8,00,000. It will pay ₹3,00,000 now and ₹3,00,000 at the end of each of the next two years, a total of ₹9,00,000. Directly attributable costs of ₹20,000 were paid in cash. Credit terms extend beyond normal credit period. Compute the cost of the licence and the interest.

Show the solution

Mode: separate acquisition with deferred payment.
Cash price equivalent = ₹8,00,000.
Add directly attributable costs ₹20,000 = ₹8,20,000.
Total payments ₹9,00,000 less cash price ₹8,00,000 = ₹1,00,000 interest.
Treat the ₹1,00,000 as a finance cost over the credit period, not as cost of the licence.

Answer: Cost of the licence = ₹8,20,000. The interest of ₹1,00,000 is a finance cost expensed over the credit period (unless capitalised under AS 16).

Exam tips

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.
MCQs often hide a distractor such as advertising or training. Strike these out first.
State clearly that internally generated goodwill is not recognised whenever goodwill appears in a question.

Practice questions from AS 26 Intangible Assets

Initial Measurement and Methods of Acquisition in other exams

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

Initial Measurement and Methods of Acquisition: frequently asked questions

What is the cost of an intangible asset under AS 26?

For a separate purchase, it is the purchase price plus import duties and non-refundable taxes, less trade discounts and rebates, plus directly attributable costs. For other modes, the cost follows the specific rule for that mode, such as fair value in an amalgamation in the nature of purchase.

How is an intangible asset acquired by government grant measured?

You may record it at its fair value at the date of acquisition. Or you may record it at acquisition cost, which may be nil, plus any expenditure directly attributable to preparing it for its intended use. The grant itself is accounted for as per AS 12. Your answer should state the choice you apply.

How do you measure an intangible asset acquired in exchange?

AS 26 applies the principles of AS 10 for exchange of assets. Cost is usually the fair value of the asset given up, adjusted for any cash transferred. You also consider the fair value of the asset received if that is more clearly evident. Read the facts in the question and state which fair value you rely on.

Can internally generated goodwill be recognised?

No. AS 26 does not allow recognition of internally generated goodwill as an asset. Expenditure on it is expensed as incurred.