In: Accounting
Assume you are the financial controller of a new established
company. The CEO has asked your choice of accounting policy
regarding the measurement of intangible assets at the time of
recognition and after the acquisition.
Required:
State your choice of accounting policy regarding the measurement of
intangible assets at the time of recognition and after the initial
acquisition. Explain the reason (s) of your choice (s). You should
provide comments regarding the choice of accounting method.
Inorder to get a clear understanding of intangible assets, it is important to understand what is an 'asset' in accordance with Accounting. To be considered as an asset it should be -
1) Controlled by an enterprise as a result of past events.
2) Future Economic benefits are expected to flow to the enterprise from it.
Assets are generally classified as Tangible and Intangible. Tangible assets are those assets which have a physical substance and can be held, touched and felt. Eg. Building, Plant and Machinery etc. Intangible assets are those ,which does not have physical substance and hence cannot be seen or touched. Eg. Goodwill, patent etc.
Intangible assets are classified into three categories and the measurement of Intangible asset at the time of recognition depends on the category it falls.
The three categories of intangible assets are as follows :
1) Unidentifiable Intangible Asset
2) Acquired Identifiable Intangible Asset
3) Internally generated identifiable intangible asset
AS -26 on Intangible Assets lays down the criteria for intangible assets recognition. The recognition/record of intangible assets in Books depends upon the fulfillment of criteria for recognition by the intangible assets. The recognition criteria are
1) Intangible Assets should have the characteristics of an asset.
2) The Intangible asset should be reliably measured. Inorder to recognise an intangible asset it is essential that the cost of Intangible asset shall be measured reliably. If cost cannot be measured, it wouldn't qualify for recognition.
3) The probable future economic benefits from the intangible assets should be measured. The management shall make estimate of future benefits on reasonable and supportive assumption, while assessing the probability of future economic benefits from Intangible Assets.
Now after the recognition of the asset the next important aspect to be looked into is the Initial measurement of Intangible Assets. As per AS-26 on Intangible assets the intangible assets Should be initially shown at cost. The cost of Intangible asset depends on the way the intangible assets are acquired.
If an intangible asset is acquired separately it's cost can be measured separately.
If an intangible Assets are acquired in exchange of assets, the cost of the Intangible Assets shall be the fair market value of the asset given up.
If an intangible asset is acquired by way of issue of shares or other securities of the reporting enterprise, then the asset shall be recorded at fair value of Intangibles acquired or fair value of shares or securities issued, whichever is more evident.
Incase of an amalgamation in nature of purchase there would be 2 categories of intangible assets that can be acquired. They are 1) Goodwill & 2)Intangible assets Other than Goodwill
Intangible Assets acquired other than goodwill shall be recognised only if it meets the criteria of the Asset. Incase of amalgamation in nature of purchase, the cost of intangible asset other than goodwill cannot be measured reliably then the same shall be included in the value of goodwill arising at the time of amalgamation.
Goodwill generated in the process of doing business is known as internally generated Goodwill. As per AS -26, the self generated Goodwill is not recognised in the books or financial statements as the cost cannot be measured reliably.