Ind AS 38, Intangible Assets, deals with the recognition, measurement, amortisation and disclosure of intangible assets. An intangible asset is an identifiable non monetary asset without physical substance. Examples include patents, copyrights, licences, trademarks, software and certain development costs. An asset is recognised when it is identifiable, the entity controls it, future economic benefits are expected to flow to the entity and its cost can be measured reliably. Intangible assets are initially measured at cost and subsequently accounted for using the applicable cost or revaluation model. Ind AS 38 also provides requirements for useful life, amortisation, impairment and derecognition of intangible assets.
Objectives of an Intangible Assets (IND AS 38):
1. Proper Recognition of Intangible Assets
One objective of Ind AS 38 is to establish clear criteria for recognising intangible assets in financial statements. An intangible asset should be recognised only when it is identifiable, the entity controls the asset, future economic benefits are expected to flow to the entity and its cost can be measured reliably. These conditions prevent companies from recognising uncertain or unsupported assets. Proper recognition ensures that assets such as patents, copyrights, licences and software are recorded appropriately. This improves the reliability of financial statements and helps users understand the resources controlled by the entity.
2. Reliable Measurement
Ind AS 38 aims to ensure that intangible assets are measured using appropriate and reliable methods. Initially, an intangible asset is generally measured at cost. Subsequently, the entity may apply the cost model or, where permitted and supported by an active market, the revaluation model. Proper measurement helps ensure that the carrying amount represents the asset appropriately. Reliable measurement is important because incorrect valuation can significantly affect total assets, profit, equity and financial ratios. Therefore, Ind AS 38 provides a systematic framework for determining the appropriate measurement of intangible assets throughout their useful life.
3. Determination of Useful Life
Another objective of Ind AS 38 is to establish appropriate requirements for determining the useful life of intangible assets. An entity must assess whether an intangible asset has a finite or indefinite useful life. Factors such as expected usage, technological changes, legal restrictions and market conditions are considered. Assets with finite useful lives are amortised over their useful lives, while assets with indefinite useful lives are not amortised but are tested for impairment as required. Proper determination of useful life ensures that the cost of an intangible asset is allocated appropriately and that financial statements reflect its expected economic benefits.
4. Appropriate Amortisation
Ind AS 38 aims to ensure that the cost of intangible assets with finite useful lives is systematically allocated over the period in which economic benefits are expected to be received. This process is known as amortisation. The amortisation method should reflect the pattern in which the asset’s economic benefits are consumed, where that pattern can be determined reliably. If the pattern cannot be reliably determined, a straight line method is generally used. Proper amortisation prevents overstatement of assets and ensures that expenses are recognised in the appropriate periods, resulting in more accurate measurement of profit or loss.
5. Recognition of Research and Development Costs
Ind AS 38 provides specific guidance for accounting for research and development expenditure. Research expenditure is generally recognised as an expense when incurred because future economic benefits cannot normally be demonstrated at that stage. Development expenditure may be recognised as an intangible asset when specified recognition criteria are satisfied, including technical feasibility, intention and ability to complete and use or sell the asset, availability of resources and probable future economic benefits. The objective is to distinguish expenditure that creates a probable identifiable future economic benefit from expenditure that should be charged to profit or loss.
6. Impairment of Intangible Assets
Ind AS 38 aims to prevent intangible assets from being carried at amounts higher than their recoverable amounts. Intangible assets are subject to impairment requirements under Ind AS 36. Assets with indefinite useful lives and certain intangible assets not yet available for use require impairment testing as specified. When the carrying amount exceeds the recoverable amount, an impairment loss is recognised. This ensures that financial statements do not overstate the value of intangible assets. Regular assessment of impairment indicators and appropriate impairment testing therefore helps present a more realistic financial position and protects users from misleading asset valuations.
7. Proper Disclosure
Ind AS 38 aims to ensure that users receive adequate information about an entity’s intangible assets. Financial statements should provide relevant disclosures regarding the nature and carrying amounts of intangible assets, useful lives, amortisation methods, accumulated amortisation and impairment losses, where applicable. Information about additions, disposals and other movements may also be required. Such disclosures help investors, creditors and other stakeholders understand the composition and financial significance of intangible assets. Transparent disclosure improves comparability between companies and enables users to assess how intangible resources contribute to the entity’s financial position and future economic benefits.
8. Proper Derecognition
Ind AS 38 provides principles for derecognising intangible assets when they are disposed of or when no future economic benefits are expected from their use or disposal. The objective is to ensure that assets that no longer provide economic benefits are removed from the financial statements. Any resulting gain or loss is recognised appropriately in profit or loss, subject to applicable requirements. Proper derecognition prevents obsolete, disposed or otherwise unusable intangible assets from remaining in the books. It therefore helps maintain accurate asset values and ensures that the financial statements reflect the entity’s current economic resources.
Scope of an Intangible assets (IND AS 38):
1. Intangible Assets Covered
Ind AS 38 applies to accounting for intangible assets that are not specifically covered by another Ind AS. An intangible asset is an identifiable non monetary asset without physical substance. The standard covers assets such as patents, copyrights, licences, franchises, software and certain development costs. It provides requirements for recognition, measurement, amortisation, impairment and derecognition. The standard applies when an entity controls the resource and expects future economic benefits from it. However, if another Ind AS specifically deals with a particular intangible asset or transaction, that specific standard takes precedence over Ind AS 38.
2. Computer Software
Computer software can fall within the scope of Ind AS 38 when it meets the definition and recognition criteria for an intangible asset. Software acquired separately is generally recognised at cost when the recognition requirements are satisfied. Internally developed software requires careful distinction between the research and development phases. Expenditure during the research phase is generally recognised as an expense, while development expenditure may be capitalised when all specified criteria are met. The accounting treatment depends on the nature of the software, its development process and the entity’s ability to demonstrate future economic benefits and reliable measurement of expenditure.
3. Research and Development Expenditure
Ind AS 38 specifically addresses research and development activities. Expenditure incurred during the research phase is generally recognised as an expense because the entity cannot normally demonstrate that an intangible asset will generate probable future economic benefits. Development expenditure may be recognised as an intangible asset only when all prescribed criteria are satisfied. These include technical feasibility, intention and ability to complete and use or sell the asset, availability of resources, probable future economic benefits and reliable measurement of expenditure. This scope ensures that only development expenditure meeting the recognition requirements is capitalised as an intangible asset.
4. Goodwill from Business Combinations
Goodwill acquired in a business combination is dealt with under Ind AS 103, Business Combinations, rather than being recognised under the general recognition requirements of Ind AS 38. Goodwill represents future economic benefits arising from assets that cannot be individually identified and separately recognised. After initial recognition, goodwill is subject to impairment requirements under Ind AS 36. Therefore, while goodwill is an intangible economic resource, its accounting treatment is specifically governed by Ind AS 103 and related impairment requirements. Ind AS 38 does not apply to goodwill arising from a business combination.
5. Financial Assets
Financial assets are generally outside the scope of Ind AS 38 because they are governed primarily by Ind AS 32, Ind AS 107 and Ind AS 109. Financial assets include cash, equity instruments of another entity, contractual rights to receive cash and certain other financial instruments. Although some financial assets may not have physical substance, they are not treated as intangible assets under Ind AS 38. The specific financial instrument standards provide requirements for recognition, classification, measurement, impairment and disclosure. Therefore, entities must first determine whether an asset is a financial asset before applying the requirements of Ind AS 38.
6. Leases
Rights arising under lease arrangements are generally accounted for under Ind AS 116, Leases, rather than Ind AS 38. A lessee generally recognises a right of use asset representing its right to use an underlying asset during the lease term. Although a right of use asset does not have physical substance itself, it is specifically governed by Ind AS 116. Consequently, entities should not automatically classify lease related rights as intangible assets under Ind AS 38. The specific requirements of Ind AS 116 determine their recognition, measurement, depreciation and other accounting treatment.
7. Assets Held for Sale
Intangible assets classified as held for sale are subject to the requirements of Ind AS 105, Non current Assets Held for Sale and Discontinued Operations. When the relevant classification criteria are satisfied, the asset is measured and presented according to Ind AS 105. The asset is generally measured at the lower of its carrying amount and fair value less costs to sell, subject to the standard’s requirements. Depreciation or amortisation is discontinued when the asset meets the relevant held for sale criteria. Thus, Ind AS 105 takes precedence over the normal measurement requirements of Ind AS 38.
8. Intangible Assets Under Other Standards
Certain intangible assets may be covered by other specific Ind AS. For example, intangible assets arising from insurance contracts, business combinations or leases may be subject to the requirements of the relevant standards. Where another standard provides specific accounting requirements for an asset or transaction, those requirements are applied instead of Ind AS 38. This approach avoids duplication and ensures consistent accounting treatment. Therefore, before applying Ind AS 38, an entity should determine whether another Ind AS specifically governs the particular transaction or asset. Ind AS 38 applies primarily where no more specific standard provides the required accounting treatment.
Recognition of an Intangible assets (IND AS 38):
1. Identifiability
An intangible asset must be identifiable to be recognised separately from goodwill. An asset is identifiable when it is either separable or arises from contractual or other legal rights. A separable asset can be separated from the entity and sold, transferred, licensed, rented or exchanged. An asset may also be identifiable even if it cannot be separated, when it arises from contractual or legal rights. This requirement helps distinguish individual intangible assets from general goodwill or internally generated reputation. Examples include patents, copyrights, licences and franchises that can be separately identified.
2. Control Over the Asset
An entity recognises an intangible asset only when it controls the resource. Control means that the entity has the power to obtain future economic benefits arising from the underlying resource and restrict others’ access to those benefits. Legal rights can support the existence of control, although legal enforceability is not always essential. For example, an entity holding a patent can control the economic benefits arising from the patent and restrict others from using it. Therefore, control is an important recognition criterion because it establishes the entity’s ability to obtain economic benefits from the intangible resource.
3. Future Economic Benefits
An intangible asset is recognised when it is probable that future economic benefits attributable to the asset will flow to the entity. These benefits may arise through increased revenue, reduced costs, improved efficiency or other economic advantages. The entity assesses the probability using reasonable and supportable assumptions based on conditions existing at the recognition date. For example, a patent may provide future benefits by allowing an entity to manufacture and sell a product without competition from unauthorised users. This criterion ensures that intangible assets are recognised only when they are expected to contribute economically to the entity.
4. Reliable Measurement of Cost
The cost of an intangible asset must be measured reliably for recognition. A separately acquired intangible asset generally has a cost that can be measured reliably, particularly when it is purchased for cash or another identifiable consideration. For internally generated intangible assets, reliable measurement can be more difficult because expenditure may be incurred across different stages of development. Ind AS 38 therefore provides specific requirements for research and development expenditure. Reliable measurement ensures that the amount recognised as an asset is supported by appropriate records and does not involve excessive uncertainty or arbitrary estimation.
5. Separate Acquisition
An intangible asset acquired separately is generally recognised when the recognition criteria are satisfied. The cost normally includes its purchase price and directly attributable costs necessary to prepare the asset for its intended use. Examples include legal fees, registration costs and professional fees directly attributable to acquiring the asset. The probability recognition criterion is considered satisfied for separately acquired intangible assets because the purchase price reflects the entity’s expectation of obtaining future economic benefits. Therefore, patents, licences, copyrights and software acquired separately are generally recognised at cost when they meet the definition of an intangible asset.
6. Internally Generated Intangible Assets
Internally generated intangible assets are subject to stricter recognition requirements because it may be difficult to distinguish the cost of creating an asset from the cost of maintaining or improving the business. Ind AS 38 requires an entity to classify the creation process into a research phase and development phase. Expenditure incurred during research is generally recognised as an expense. Development expenditure is recognised as an intangible asset only when all specified criteria are demonstrated. This approach prevents entities from capitalising expenditure that does not yet demonstrate sufficient evidence of probable future economic benefits.
7. Research Expenditure
Expenditure incurred during the research phase of an internally generated project is recognised as an expense when incurred. At the research stage, an entity cannot normally demonstrate that an intangible asset exists which will generate probable future economic benefits. Activities may include obtaining new knowledge, searching for alternatives and evaluating possible applications. Since the outcome is uncertain, such expenditure does not satisfy the recognition requirements for an intangible asset. Therefore, research costs are charged to profit or loss rather than capitalised. This treatment ensures that uncertain future benefits are not recognised prematurely as assets.
8. Development Expenditure
Development expenditure may be recognised as an intangible asset when an entity can demonstrate all prescribed criteria under Ind AS 38. These include technical feasibility, intention and ability to complete the asset, ability to use or sell it, probable future economic benefits, availability of adequate resources and reliable measurement of expenditure. Capitalisation begins only from the date these conditions are satisfied. Expenditure incurred before that date is not subsequently reinstated as part of the asset’s cost. This requirement ensures that only development projects with sufficient evidence of future economic benefits are recognised as intangible assets.
9. Internally Generated Goodwill and Brands
Ind AS 38 prohibits recognition of certain internally generated intangible items, including internally generated goodwill, brands, mastheads, publishing titles and customer lists. Such items are difficult to distinguish from the cost of developing the business as a whole. Their costs also cannot generally be measured separately and reliably. Therefore, expenditure incurred in creating these items is normally recognised as an expense when incurred. This prevents entities from recognising subjective values for internally generated reputation or customer relationships. However, separately acquired intangible assets that meet the recognition criteria can be recognised in accordance with the applicable requirements.
10. Recognition at Cost
Once an intangible asset satisfies the recognition requirements, it is initially measured at cost. For a separately acquired asset, cost includes the purchase price and directly attributable costs necessary to prepare it for its intended use. For an internally generated asset, the cost generally includes expenditure incurred from the date the recognition criteria are first satisfied. Expenditure recognised as an expense before the recognition criteria are met cannot normally be reinstated as part of the asset’s cost later. This ensures that only qualifying expenditure is capitalised and that the carrying amount is determined systematically and reliably.
Measurement of an Intangible assets (IND AS 38):
1. Initial Measurement
An intangible asset is initially measured at cost when it satisfies the recognition criteria under Ind AS 38. Cost includes the purchase price and directly attributable expenses necessary to prepare the asset for its intended use. Such costs may include professional fees, registration costs and testing expenses. Costs incurred after the asset is ready for use are generally recognised as expenses unless they meet specific recognition requirements. For internally generated intangible assets, only qualifying expenditure incurred after the development recognition criteria are satisfied is included in cost. Thus, initial measurement provides a reliable starting value for the asset.
2. Cost Model
Under the cost model, an intangible asset is carried at its cost less accumulated amortisation and accumulated impairment losses. After initial recognition, the asset continues to be measured using this approach unless another permitted accounting policy is selected. The carrying amount is therefore reduced systematically through amortisation when the asset has a finite useful life. Impairment losses are also recognised when required under Ind AS 36. The cost model is commonly used because it provides a straightforward and consistent basis for subsequent measurement. It ensures that the carrying amount reflects the unamortised portion of the original recognised cost.
3. Revaluation Model
Under the revaluation model, an intangible asset is carried at its fair value at the date of revaluation, less subsequent accumulated amortisation and impairment losses. This model can be used only when the fair value can be measured by reference to an active market. Active markets for intangible assets are uncommon, so application of the revaluation model is limited. Revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ materially from fair value. Any increase or decrease from revaluation is accounted for according to the requirements of Ind AS 38 and recognised appropriately in equity or profit or loss.
4. Measurement of Separately Acquired Assets
A separately acquired intangible asset is generally measured initially at cost. The cost normally includes the purchase price, import duties and non refundable purchase taxes, after deducting trade discounts and rebates. Directly attributable costs necessary to prepare the asset for its intended use may also be included. Examples include professional fees and costs of testing whether the asset functions properly. Costs related to introducing a new product, training employees or relocating activities are generally not included in the cost. This approach ensures that the initial carrying amount represents the expenditure directly associated with acquiring and preparing the intangible asset for use.
5. Measurement of Internally Generated Assets
Internally generated intangible assets are measured based on the qualifying expenditure incurred after the recognition criteria for development have been satisfied. Research expenditure and development expenditure incurred before all recognition criteria are met are generally recognised as expenses and cannot subsequently be reinstated as part of the asset’s cost. The cost includes directly attributable expenditure necessary to create, produce and prepare the asset for its intended use. Examples may include employee costs, materials and services used in development. Proper identification and documentation of qualifying expenditure are therefore essential for determining the correct carrying amount of internally generated intangible assets.
6. Subsequent Measurement
After initial recognition, an intangible asset is subsequently measured using either the cost model or revaluation model, where permitted. Under the cost model, cost is reduced by accumulated amortisation and impairment losses. Under the revaluation model, the asset is carried at revalued amount less subsequent amortisation and impairment. The selected accounting policy should be applied consistently to the relevant class of intangible assets. The entity must also assess the useful life of the asset and determine whether it is finite or indefinite. Subsequent measurement therefore reflects consumption of economic benefits and any decline or increase in the asset’s recognised value.
7. Measurement of Finite Life Assets
An intangible asset with a finite useful life is measured after recognition by considering accumulated amortisation and impairment losses. The depreciable or amortisable amount is allocated systematically over its useful life. The amortisation period and method should reflect the expected pattern of consumption of future economic benefits. If that pattern cannot be reliably determined, the straight line method is generally used. Residual value is normally assumed to be zero unless specific conditions are satisfied. The useful life and amortisation method are reviewed at least at each financial year end. Changes are accounted for as changes in accounting estimates under applicable requirements.
8. Measurement of Indefinite Life Assets
An intangible asset with an indefinite useful life is not amortised while its useful life remains indefinite. However, it must be tested for impairment as required by Ind AS 36, including annual impairment testing. The entity must also reassess whether the asset continues to have an indefinite useful life at each reporting period. If circumstances change and the useful life becomes finite, the asset is amortised prospectively over its revised useful life. Indefinite does not mean infinite; it means that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
9. Measurement After Revaluation
When an intangible asset is revalued, the entire class of assets to which it belongs generally needs to be considered for revaluation, subject to the requirements of Ind AS 38. The revalued amount is the fair value at the revaluation date. Subsequent amortisation is based on the revalued amount and remaining useful life. A revaluation increase is generally recognised in Other Comprehensive Income and accumulated in equity as a revaluation surplus, subject to applicable exceptions. A revaluation decrease is generally recognised in profit or loss, except to the extent of any existing revaluation surplus for that asset.
10. Measurement on Derecognition
When an intangible asset is disposed of or when no future economic benefits are expected from its use or disposal, it is derecognised. The gain or loss arising on derecognition is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset. The resulting gain or loss is generally recognised in profit or loss. An intangible asset should not remain recognised when it no longer meets the relevant conditions for continued recognition. Proper measurement on derecognition ensures that the financial statements accurately reflect the economic effect of disposing of or abandoning the asset.
Disclosures of an Intangible assets (IND AS 38):
1. General Disclosures for Each Class
For each class of intangible assets, distinguish internally generated from others. Disclose useful lives (indefinite or finite) and amortisation methods for finite-lived assets. State gross carrying amount and accumulated amortisation at beginning and end of period. Provide a reconciliation of carrying amount at start and end, showing additions, disposals, amortisation, impairment losses, revaluations, and foreign exchange differences. Disclose the line item in profit or loss where amortisation is included. Also disclose any restrictions on title and contractual commitments to acquire intangibles.
2. Disclosures for Indefinite Useful Life Assets
For intangible assets with indefinite useful lives, disclose the carrying amount and provide a clear justification for that assessment. Explain the factors that led to the conclusion of an indefinite life, such as expected cash flows, product lifecycle, market stability, or legal renewal rights. Since these assets are not amortised, this disclosure is critical for users to assess future benefits. Also state that the asset is tested for impairment annually, either individually or at the cash-generating unit level, and disclose the basis for impairment testing.
3. Revalued Intangible Assets – Additional Disclosures
If intangible assets are carried at revalued amounts, disclose the effective date of revaluation, the gross carrying amount, accumulated amortisation at revaluation date, and the revaluation surplus with movement. State the valuation method used (e.g., market value or depreciated replacement cost) and whether an independent valuer was involved. Disclose the fair value hierarchy level used. Also disclose the carrying amount that would have been recognised had the revaluation not occurred, to help users understand the impact of the revaluation policy.
4. Research and Development Expenditure Disclosed
Disclose the total amount of research and development expenditure recognised as an expense during the period. This includes both research costs and development costs that did not meet the capitalisation criteria under Ind AS 38. This disclosure is mandatory even if the entity has capitalised some development costs. Separate disclosure of research vs development expense is encouraged but not mandatory. This helps users assess the entity’s innovation spending and the proportion of such expenditure that does not result in a recognisable intangible asset on the balance sheet.
5. Significant Individual Assets and Other Disclosures
Identify and describe any intangible asset that is individually material to the entity’s financial position, including its nature, carrying amount, and remaining amortisation period. Disclose any intangible assets that are subject to legal or contractual restrictions, and any assets pledged as security for liabilities. Also disclose the accounting policy for amortisation, impairment, and useful life assessment. If a subsidiary has significant intangibles, describe those as well. Finally, disclose any fully amortised intangibles still in use and any retirement or disposal plans for material assets.
Example of an Intangible assets (IND AS 38):
A company purchases a patent for ₹5,00,000. It also pays ₹20,000 as legal and registration fees and ₹10,000 for testing the patent before it is ready for use. The patent has an estimated useful life of 5 years and no residual value.
Under Ind AS 38, directly attributable costs necessary to prepare the intangible asset for its intended use are included in its cost.
| Particulars |
Amount |
| Purchase price of patent |
₹5,00,000 |
| Legal and registration fees |
₹20,000 |
| Testing costs |
₹10,000 |
| Total Cost of Patent |
₹5,30,000 |
| Useful life |
5 years |
| Residual value |
Nil |
| Annual Amortisation |
₹1,06,000 |
Journal Entries
| Particulars |
Debit |
Credit |
| Patent A/c Dr. |
₹5,30,000 |
|
| To Bank A/c |
|
₹5,30,000 |
| Amortisation Expense A/c Dr. |
₹1,06,000 |
|
| To Accumulated Amortisation A/c |
|
₹1,06,000 |
Conclusion: The patent is initially recognised at ₹5,30,000 and amortised systematically over its 5 year useful life. After one year, its carrying amount will be ₹4,24,000.
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