The intangible assets accounting standard tells how to record and report non-physical assets like patents, copyrights, and goodwill in business accounts. This standard gives rules to correctly identify, measure, and treat such assets. As per this standard, a company should record an intangible asset only if it brings future economic benefits and can be measured clearly. Companies in India and globally use this standard to report fair and uniform values for assets like software, brands, and customer lists. It helps create trust among investors. It also improves accuracy in accounting and ensures proper comparison between different companies’ reports. Businesses with extensive intellectual property portfolios depend on this standard to reflect their full worth in financial statements.
What is the Intangible Assets Accounting Standard?
Understanding the accounting standard for intangible assets helps record the value of assets you cannot see or touch, but still have a lot of value. These assets are essential for big companies, especially tech, media, and pharma companies.
Purpose of the Standard
The intangible assets accounting standard belongs to a set of financial rules that help record and report assets that have no physical shape. These rules are mainly found in IAS 38 intangible assets under IFRS and GAAP guidelines for intangible assets. This ensures fairness and similarity in financial reporting.
Need for Consistency in Accounting
Different companies often hold various types of intangible assets. The standard brings consistency to how they record and treat these. Without this, investors would struggle to compare one company with another. It also helps prevent fraud or misstatement of profits.
Global Adoption and Importance
Companies worldwide, including Indian firms, now work in global markets. Using international standards like intangible assets under IFRS ensures compliance across borders. Also, accounting rules under GAAP ensure that even startups follow a framework for non-physical assets accounting.
Recognition and Measurement of Intangible Assets
Before a business records an intangible asset in its books, it must prove its value. This standard part explains how to recognise an intangible asset and find its worth. Intangible assets are non-physical resources like patents, trademarks, and brand value that add long-term value to a business. Recognising and measuring these assets accurately is crucial for transparent financial reporting. This topic is governed by IAS 38, which outlines strict criteria for its recognition and valuation.
When to Recognise Intangible Assets?
Including an intangible asset in the books must meet two rules: bringing future benefits and having a measurable cost. If the business cannot show clear income or price, it should not recognise the asset. For example, a company developing a new app can only record it once the app reaches the working stage and is likely to earn money. Ideas or concepts in early stages do not meet recognition rules.
Valuing the Asset at First Entry
Once the asset is recognised, the company must use intangible asset valuation to find its actual cost. This includes the purchase price, legal fees, and expenses to prepare the asset. This is important to ensure the value shown is not too high or too low. Like custom software, assets built internally need cost tracking from day one. If costs are not tracked properly, the asset cannot be valued correctly and may be omitted from financial statements.
Valuing After First Recognition
After the asset is recorded, two options are available: the cost model and the revaluation model. Most businesses use the cost model since fair market value is hard to find for many intangible assets. Revaluation works only when there’s an active market for the asset, like licenses that are bought and sold often.
Amortisation and Impairment: Accounting Treatment
Once the asset is recorded, the business must reduce its value over time if it has a limited useful life. Also, if the asset loses value due to changes in the market or law, that loss must be shown in the books. This section explains both.
Understanding Amortisation of Intangible Assets
Amortisation spreads the cost of an intangible asset across its useful life. This helps match income and expenses in the right years. If a company buys software for ₹6,00,000 to use over 3 years, it should reduce ₹2,00,000 from its value each year. This is different from tangible asset depreciation but works in the same way. The method used is primarily the straight-line method. That means equal reduction every year.
Special Rules for Indefinite Life Assets
Some intangible assets, like goodwill, do not lose value over time. These assets are not amortised. They must be tested yearly to see if their value has decreased. If yes, the reduced value must be shown in the books. Not testing goodwill regularly can show higher profits than reality. This misleads investors and affects decision-making. So, impairment testing is a must for such assets.
Testing and Recording Impairment
Impairment means the asset is not worth what is shown in the balance sheet. If a business loses its patent rights due to a legal fight, it must reduce its value to ₹0. This loss is shown in the profit and loss account as an expense. Businesses should perform impairment tests every year or when a big event (like a legal case or loss of market) occurs. This keeps the books updated and accurate to actual values.
Common Examples of Intangible Assets in Business Accounting
Many businesses use or build intangible assets in their daily operations. These include both acquired and internally generated assets. Identifying and properly recording these assets helps in fair and complete financial reporting.
Most Common Intangible Assets in Use
Some key intangible assets examples include:
- Software is an intangible asset used to manage inventory or finance.
- Trademarks that protect logos and brand images
- Patents give legal rights over inventions.
- Copyrights for music, books, or digital content.
- Franchise agreements allow others to use a brand.
- Customer data lists that provide business leads.
- Licensing rights to sell a product in a region.
These must be recorded correctly with supporting legal papers, payment receipts, and value estimates.
Recording Journal Entries for Intangible Assets
A company must make a proper journal entry about intangible assets when it buys an intangible asset. For example, purchasing a ₹1,00,000 software package:
| Software A/c Dr ₹1,00,000 To Bank A/c ₹1,00,000 |
Amortisation entries follow each year, reducing the value of the software:
| Amortization A/c Dr ₹20,000 To Software A/c ₹20,000 |
Disclosure in Financial Statements
The financial statements for intangible assets must show total cost, amortised value, and remaining value. Each asset should also be described clearly. This is intangible assets disclosure and is required under both IFRS and GAAP. Auditors, investors, and regulators use these disclosures to understand how strong a company’s intellectual base is. Full and fair disclosure builds trust and protects the company’s image in the market.
Relevance to ACCA Syllabus
Financial reporting is a key pillar in the ACCA qualification. The topic of intangible assets accounting standard links directly to IAS 38, which appears in Financial Reporting (FR), Strategic Business Reporting (SBR), and even in Advanced Financial Management. ACCA candidates must know how intangible assets are identified, measured, amortised, and disclosed under international financial reporting standards.
Intangible Assets Accounting Standard ACCA Questions
Q1. Which of the following international standards deals with intangible assets?
A) IFRS 16
B) IAS 38
C) IFRS 13
D) IAS 10
Ans: B) IAS 38
Q2. Under IAS 38, internally generated goodwill should be:
A) Recognised as an asset
B) Amortised over 10 years
C) Not recognised as an asset
D) Disclosed only in notes
Ans: C) Not recognised as an asset
Q3. Which of the following is a necessary criterion for recognising an intangible asset?
A) The asset must be visible
B) Probable future economic benefits
C) The asset should be fully depreciated
D) Legal ownership is not required
Ans: B) Probable future economic benefits
Q4. What is the correct accounting treatment for software development costs under IAS 38?
A) Fully expensed
B) Capitalised if the development phase criteria are met
C) Shown as a liability
D) Written off as goodwill
Ans: B) Capitalised if development phase criteria are met
Q5. What happens if an intangible asset becomes impaired?
A) Its value increases in the books
B) It is revalued upward
C) The carrying amount is reduced to the recoverable amount
D) It must be disclosed as a contingent liability
Ans: C) The carrying amount is reduced to the recoverable amount
Relevance to US CMA Syllabus
US CMA exams focus on financial planning, performance, and analytics, where the treatment of intangible assets affects business performance and strategic cost management. Knowing how intangible assets impact ROI, asset turnover, and expense reporting is crucial for managerial accounting.
Intangible Assets Accounting Standard US CMA Questions
Q1. In financial planning, why is amortisation of intangible assets important?
A) Increases asset turnover
B) Decreases working capital
C) Reduces reported net income
D) Boosts current ratio
Ans: C) Reduces reported net income
Q2. Which of the following is an intangible asset under US GAAP?
A) Land
B) Equipment
C) Patent
D) Inventory
Ans: C) Patent
Q3. Goodwill arises in which of the following situations?
A) When liabilities are paid in advance
B) When inventory is sold
C) When a business is acquired for more than its net assets
D) When intangible assets are revalued
Ans: C) When a business is acquired for more than its net assets
Q4. What is the normal accounting treatment for the amortisation of software used internally?
A) Not amortised
B) Amortised over useful life
C) Expensed immediately
D) Added to liabilities
Ans: B) Amortised over useful life
Q5. How should costs incurred in the research phase of a new product be treated?
A) Capitalised
B) Deferred
C) Expensed immediately
D) Amortised
Ans: C) Expensed immediately
Relevance to US CPA Syllabus
In the US CPA, Financial Accounting and Reporting (FAR) covers the treatment of intangible assets by US GAAP. Candidates must understand how to measure, record, and disclose intangible assets, including goodwill, patents, trademarks, and their impairment or amortisation.
Intangible Assets Accounting Standard US CPA Questions
Q1. Under US GAAP, how is goodwill tested?
A) Amortised yearly
B) Tested for impairment annually
C) Expensed when acquired
D) Deferred until disposal
Ans: B) Tested for impairment annually
Q2. What is the typical useful life for amortising a legal copyright under GAAP?
A) 10 years
B) 20 years
C) Legal life or useful life, whichever is shorter
D) No amortisation allowed
Ans: C) Legal life or useful life, whichever is shorter
Q3. A company developed software for internal use. What is the correct treatment for development costs?
A) Expense immediately
B) Capitalize and amortize
C) Add to goodwill
D) Disclose only in notes
Ans: B) Capitalize and amortize
Q4. Which of the following is not considered an intangible asset under US GAAP?
A) Franchise agreement
B) Brand loyalty
C) Customer relationship
D) Trademark
Ans: B) Brand loyalty
Q5. What intangible assets must be disclosed in financial statements?
A) Exact location of use
B) Useful life, amortisation method, and gross carrying amount
C) Production capacity
D) Names of developers
Ans: B) Useful life, amortisation method, and gross carrying amount
Relevance to CFA Syllabus
CFA curriculum, especially in Financial Reporting and Analysis, requires a deep understanding of how intangible assets impact firm valuation, earnings quality, and cash flows. Analysts must evaluate how these assets are treated under IFRS and GAAP and how they affect financial ratios and forecasting models.
Intangible Assets Accounting Standard CFA Questions
Q1. What is the effect of capitalising development costs on return on assets (ROA)?
A) ROA decreases in the early years
B) ROA increases in the early years
C) ROA remains unaffected
D) ROA always goes up
Ans: A) ROA decreases in the early years
Q2. Which accounting standard covers the treatment of intangible assets under IFRS?
A) IFRS 13
B) IAS 38
C) IFRS 7
D) IAS 2
Ans: B) IAS 38
Q3. Under IFRS, when can an internally developed brand be recognised as an intangible asset?
A) After the research phase
B) Never
C) During the development phase, if the criteria are met
D) Only after five years of business
Ans: C) During the development phase, if the criteria are met
Q4. How does aggressive capitalisation of intangible assets affect earnings quality?
A) Improves earnings quality
B) Has no impact
C) Reduces earnings quality
D) Increases cash flows
Ans: C) Reduces earnings quality
Q5. Why is impairment testing of goodwill important for investors?
A) Shows an increase in asset base
B) Impacts cash flow
C) Provides insight into overpayment risks
D) Improves earnings per share
Ans: C) Provides insight into overpayment risks
