accounting of intangible assets -...
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CHAPTER-IV
ACCOUNTING OF INTANGIBLE ASSETS
Accounting of Intangible assets is a complex and important subject in today’s
information and knowledge based economy. For companies, these assets are becoming
basic drivers for achieving competitive success. They constitute a fundamental part of
balance sheet of a company. Accounting of Intangible assets is also vital for their
effective management as there is a famous saying ‘What gets measured gets managed’
(Ayuso, 2003a). With a view to report these assets in the financial statements, various
regulatory bodies have issued accounting standards on intangible assets.
Accordingly this chapter is based on an in-depth study of major accounting
standards dealing with intangible assets. It has been divided into two sections. Section-I
introduces different accounting standards presently used for reporting intangible assets
information across globe. Section-II examines, in detail, the similarities and differences
among these standards.
SECTION-I
4.1 INTRODUCTION OF ACCOUNTING STANDARDS ON INTANGIBLE
ASSETS
Over past decades for the purpose of accounting of intangible assets in the
financial statements, several accounting standards have been issued by professional
accounting bodies in different countries. As mentioned by Canibano et al (2000), the
literature has been discussing the topic of accounting and reporting of intangible assets
for a long time. Provisions of these standards used to vary across countries which would
limit the comparability of financial statements in international context (Brunovs and
Kirsh, 1991)
The globalisation of the world’s capital markets sparked a movement for global
standards on intangible assets. The best example of this was the introduction of
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International Accounting Standard-38 on intangible assets. Following that other countries
have also issued separate accounting standard on intangible assets like AS-26 in India,
SFAS-142 in US, FRS-10 in UK and ASBE-6 in China. These standards address issues
like how and when intangible assets that are acquired or internally generated should be
accounted in the financial statements. They also lay down provisions on how these
intangible assets should be accounted after they have been initially recognised in the
financial statements. A brief history/description of these standards under IFRS, UK, US,
Indian and Chinese GAAP is given below:
International Financial Reporting Standard (IFRS): Under IFRS, International
Accounting Standard-38 (IAS-38) on intangible assets was issued by the International
Accounting Standards Committee (IASC) in September, 1998. The objective of the
standard was to prescribe the accounting treatment for intangible assets that are not dealt
with specifically in another standard. The standard requires an entity to recognise an
intangible asset if, and only if, specified criteria are met. The Standard also specifies how
to measure the carrying amount of intangible assets and requires specified disclosures
about these assets. Accounting treatment for amortisation, impairment, retirements and
disposals have also been explained. Further IASC has also issued International
Accounting Standard 36-Impairment of Assets which discusses the impairment
provisions for goodwill and intangible assets with indefinite life
In April 2001 the International Accounting Standards Board (IASB) adopted all
International Accounting Standards and continued its development, calling the new
standards as IFRS. Subsequently, International Financial Reporting Standard (IFRS) 3 on
Business Combinations was issued in March 2004. IFRS-3 describes the accounting
treatment for intangible assets acquired as a part of business combination. The
introduction of IFRS-3 resulted in an increase in the number of intangible assets
recognised at the time of acquisition.
IASB has issued many IFRS, which are now being used for public reporting
purposes in almost 100 countries ranging from Australia to the United Kingdom.
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Regulators in India, China and US are likely to converge their local standards with IFRS
by 2011.
US GAAP: Under US GAAP, the accounting and valuation of intangible assets
for financial reporting purposes is governed by The Financial Accounting Standards
Board (FASB). FASB issued the Statement of Financial Accounting Standards No. 142
on goodwill and other intangible assets, in June 2001. The application of the standard was
made mandatory from December 15, 2001. The statement explains in detail the initial
recognition and measurement of intangible assets, treatment for internally generated
intangible assets, accounting for intangible assets, accounting for goodwill, financial
statement presentation of intangible assets and goodwill, and other disclosures.
In addition, FASB has also issued the Statement of Financial Accounting
Standards No. 141 on Business combinations which describes the accounting treatment of
intangible assets acquired as a part of business combination.
Indian GAAP: Accounting Standard-26 on intangible assets was issued in 2002
by the Council of Institute of Chartered Accountants of India, under Indian Generally
accepted Accounting Practices. Its application was made mandatory for all types of
enterprises, with accounting periods commencing on or after 1-4-2004. This standard
covered the similar provisions of initial recognition, measurement, subsequent
expenditure, amortisation, impairment losses, retirements and disposals, and disclosure
like IFRS and US GAAP. Further Accounting Standard-28 on Impairment of Assets
discusses the provisions for impairment of intangible assets.
Chinese GAAP: Under Chinese GAAP, Accounting Standard for Business
Enterprises No.6 on intangible assets was issued by the Ministry of Finance of the
People’s Republic of China on 15 February, 2006. The standard was made mandatory for
all listed Chinese companies from 1 January, 2007. The standard was made on the lines
of IFRS standard. It explains the definition, initial recognition, measurement, subsequent
measurement, disposal and discarding and disclosure of intangible assets. It also includes
treatment of internal research and development projects. In conjunction to above, ASBE-
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8 explains the provisions of impairment of intangible assets and ASBE-20 describes the
treatment of intangible assets acquired as a part of business combination.
UK GAAP: Under UK GAAP, Financial Reporting Standard-10 (FRS-10),
issued by the Accounting Standards Board in December1997, sets out the principles of
accounting for goodwill and intangible assets. The objective of the standard was to ensure
that purchased goodwill and intangible assets are charged in the profit and loss account in
the periods in which they are depleted and also that sufficient information is disclosed in
the financial statements to enable users to determine the impact of goodwill and
intangible assets on the financial position and performance of the reporting entity. FRS-
10 applies to all financial statements that are intended to give a true and fair view of a
reporting entity’s financial position and profit or loss for a period. Reporting entities
applying the Financial Reporting Standard for Smaller entities (FRSSE) are exempt from
the provisions of FRS-10.
SECTION-II
4.2 COMPARISON OF ACCOUNTING STANDARDS ON INTANGIBLE
ASSETS
Accounting Standards issued under IFRS, US GAAP, UK GAAP, Indian GAAP
and Chinese GAAP have been compared in this section in order to understand the
accounting treatment employed for intangible assets. IFRS has been used as a yardstick
for this comparison, as most of the countries are harmonising their national accounting
practices with IFRS. Having IFRS as a basis, is also important as European countries
have adopted IFRS since 1 January, 2005.
Financial Accounting Standard Board of US decided to converge its accounting
standard with IFRS after Norwalk Agreement passed in 2002. This is a very important
step towards global harmonisation of accounting standards which could be achieved by
2011. However until the above convergence (US GAAP with IFRS) is achieved, US
GAAP will continue to have equal significance, and accordingly have been taken as a
category for comparison.
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Also China’s contribution to world economy cannot be undermined. This
necessitates the need to understand Chinese accounting standard on intangible assets vis a
vis IFRS
Table 4.1 discusses similarities and divergences in US GAAP, UK GAAP, Indian
GAAP and Chinese GAAP in comparison to the benchmark IFRS. The comparison has
been organised primarily according to different sections relating to definition, initial
recognition, measurement of acquired intangible assets, measurement of internally
generated intangible assets, subsequent measurements, amortisation, impairment,
retirement and disposals of intangible assets, treatment of research and development
expenditure, software developed for internal use and sale. The comparison reflects
standards issued as of march 31, 2007.
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Table 4.1
Comparison of IFRS, US GAAP, UK GAAP, Indian GAAP and Chinese GAAP on accounting treatment of intangible assets
(A). Definition :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) An intangible asset is an identifiable non-monetary asset without physical substance. (IAS 38)
Under U.S. GAAP an intangible assets is an asset (not including a financial asset) that lacks physical substance.
Intangible assets are “non-financial fixed assets that do not have physical substance but are identifiable and are controlled by the entity through custody or legal rights”.
AS 26 defines an intangible assets as an identifiable non-monetary asset without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
Intangible assets as per ASBE no.6 refer to the identifiable non-monetary assets possessed or controlled by enterprises which have no physical shape.
2) To meet the definition of an intangible assets, an item must lack physical substance and must be: identifiable; non-monetary; and controlled by the entity and expected to provide
future economic benefits to the entity (i.e., it must meet the definition of an asset).
An intangible assets is identifiable if it: is separable, i.e., capable of being separated or
divided and sold, transferred, licensed, rented or exchanged either individually or together with a related contract, asset or liability, regardless of whether there is an intent to do so; or
arises from contractual or other legal rights,
regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
Similar to IFRS
Similar to IFRS
Similar to IFRS
Similar to IFRS
Contd…
53
(B). Initial Recognition :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) An intangible assets is recognised when: it is probable that future economic
benefits that are attributable to the asset will flow to the entity; and
the cost of the asset can be
measured reliably. The cost of an intangible assets acquired in a separate transition is the fair value of any consideration given.
Under U.S. GAAP an acquired identifiable intangible assets is recognised when: • it is probable that future
economic benefits that are attributable to the asset will flow to the entity, like IFRS; however, unlike IFRS, this is part of the definition of an asset rather than a recognition criterion; and
• fair value can be
measured with sufficient reliability
Like IFRS, direct-response advertising software developed for internal use and software developed for sale to third parities are recognised initially at cost. Other intangible assets generally are recognised at fair value, which usually equals the fair value of the consideration given.
Similar to IFRS
Similar to IFRS
Similar to IFRS
Contd…
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(C). Measurement – Acquired Intangibles :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) The cost of a separately acquired
intangible asset at the date of acquisitions
is usually self-evident, being the fair value
of the consideration paid.
Similar to IFRS
Similar to IFRS
Similar to IFRS
Similar to IFRS
(D). Measurement – Internally Generated Intangibles :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) The cost comprises all expenditures that
can be directly attributed or allocated to
creating producing and preparing the
asset from the date when the recognition
criteria are met.
Costs of internally developing,
maintaining or restoring
intangible assets that are not
specifically identifiable, that
have indeterminable lives, or
that are inherent in a continuing
business and related to an entity
as a whole, are recognised as
an expense when incurred.
Internally generated
intangibles, excluding
development costs, may be
capitalised only if they have
a readily ascertainable
market value.
Similar to IFRS
Similar to IFRS
Contd…
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(E). Subsequent Measurement – Acquired And Internally Generated Intangibles :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) Intangible assets subject to amortisation
are carried at historical costs less
accumulated amortisation/ impairment, or
at fair value less subsequent
amortisation/ impairment. Intangible
assets not subject to amortisation are
carried at historical costs unless impaired.
A subsequent revaluation of intangible
asset to their fair value is based on prices
in an active market. Revaluations are
performed regularly and for the entire
class of intangible assets at the same
time if an entity adopts this treatment
(extremely rare in practice).
Initial recognition is similar to IFRS.
Revaluation is not allowed.
Intangible assets subject to
amortisation are carried at
amortised costs less impairment.
Intangible assets not subject to
amortisation are carried at historical
costs less impairment.
Similar to IFRS Initial recognition is similar
to IFRS. Revaluation is not
allowed. All intangible
assets are carried at
amortised costs less
impairment.
Initial recognition is
similar to IFRS.
Revaluation is not
allowed.
Contd…
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(F). Amortisation :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) Acquired goodwill is not amortised, but instead is subject to impairment testing at least annually
Like IFRS, acquired goodwill is not amortised, but instead is subject to impairment testing at least annually; the method of impairment testing differs in certain respects from IFRS.
Acquired goodwill is amortised within 20 years unless indefinite useful life is permitted in which case annual impairment testing is required.
Goodwill arising on amalgamation in the nature of purchase is amortised over five years. Goodwill arising on acquisition is not amortised but is tested for impairment.
Similar to IFRS
2) The useful life of intangible assets other than goodwill is either finite or indefinite. Intangibles with indefinite useful lives are not amortised, but instead are subject to impairment testing at least annually. An intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
Like IFRS, the useful life of intangible assets other than goodwill is either finite or indefinite. Like IFRS, intangibles with indefinite useful lives are not amortised, but instead are subject to impairment testing at least annually; the method of impairment testing differs in certain respects from IFRS. Like IFRS, an intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
Unlike IFRS and US GAAP, the useful life of an intangible assets cannot exceed 20 years from the date the asset is available for use
Unlike IFRS and US GAAP, the useful life of an intangible asset cannot exceed 10 years from the date the asset is available for use.
Similar to IFRS
3) An intangible asset with a finite life is amortised on a systematic basis over its useful life.
Similar to IFRS Similar to IFRS Similar to IFRS Similar to IFRS
Contd…
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S. No. IFRS US GAAP UK GAAP
Indian GAAP
Chinese GAAP
4) A change in useful life is accounted for prospectively as a change in accounting estimate. The amortisable amount of an intangible asset with a finite useful life is determined after deducting its residual value. The residual value of an intangible assets is the amount that could be obtained at the reporting date for an intangible assets currently in the condition that the subject intangible assets is expected to be in on its expected disposal date, less the estimated costs of disposal.
Similar to IFRS Similar to IFRS
Similar to IFRS
Similar to IFRS
5) The residual value of an intangible assets with a finite useful life is assumed to be zero unless a third party has committed to buy the asset at the end of its useful life, or there is an active market from which a residual value can be obtained and it is probable that such a market will exist at the end of the asset's useful life.
Unlike IFRS, the residual value of an intangible asset with a finite useful life can be demonstrated to be an amount other than zero when there are transactions observed with sufficient frequency, even if it does not constitute an active market.
Similar to IFRS
Similar to IFRS
Similar to IFRS
6) When control of an intangible assets is based on legal rights that have been granted for a finite period, the useful life cannot exceed that period unless: • the legal rights are renewable; • there is evidence to support that they will be renewed; and • the cost of renewal of such rights is not significant
The useful life of an intangible assets is based on an analysis of all pertinent factors, including: • whether the legal rights are renewable; • the expected use of the asset by the entity; • the expected useful life of another asset or group of assets to which the intangible assets may relate; • legal, regulatory, or contractual requirements that may limit the life; • any legal, regulatory, or contractual requirements that enable renewal or extension of the asset's legal or contractual life without substantial cost or material modifications; • the effects of obsolescence, demand, competition or other economic factors; and • the level of maintenance expenditure required to obtain the expected future cash flows from the asset. These factors, while consistent with the requirements of IFRS, are more detailed and therefore differences may arise in practice.
Similar to IFRS
Similar to IFRS
Similar to IFRS
Contd..
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S. No. IFRS US GAAP UK GAAP
Indian GAAP
Chinese GAAP
7) The method of amortisation, which should be reviewed at each reporting date, reflects the pattern of consumption of the economic benefits. If the pattern in which the asset's economic benefits are consumed cannot be determined, then the straight-line method is used. There rarely will be persuasive evidence to support an amortisation method that results in a lower amount of accumulated amortisation than would have been recognised had the straight-line method been used.
Unlike IFRS, there is no requirement to review the method of amortisation at each reporting date; rather, it is reviewed whenever events or changes in circumstances indicate that the current estimate is no longer appropriate. Like IFRS, the method of amortisation should reflect the pattern of consumption of the economic benefits. Like IFRS, if that pattern cannot be determined reliably, then the straight-line method is used. Unlike IFRS, U.S. GAAP does not have a presumption that amortisation should at least equal to the amount that would be recognised using the straight-line method.
Similar to IFRS
Similar to IFRS
Similar to IFRS
8) The amortisation of intangible assets with finite lives begins when the intangible assets is available for use (i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management), which may be prior to the asset being brought into use.
Similar to IFRS
Similar to IFRS
Similar to IFRS
Similar to IFRS
9) Amortisation ceases at the earlier of the date that the asset is classified as held for sale or is derecognised.
Similar to IFRS
Similar to IFRS
Similar to IFRS
Similar to IFRS
Contd…
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(G). Impairment – Acquired And Internally Generated Intangibles : S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) IAS 38 does not require any impairment testing unless there are indications of impairment. Impairment reviews are required whenever changes in events or circumstances indicate that an intangible asset‟s carrying amount may not be recoverable. Annual reviews are required for intangible assets with indefinite useful lives and for assets not yet ready for use. Reversals of impairment losses are allowed under specific circumstances.
Similar to IFRS, except reversal of impairment losses are not allowed, and in-definitive lived intangible assets are tested for impairment separately from the reporting unit.
Similar to IFRS, except that annual impairment is required for assets with amortised life exceeding 20 years or indefinite life
Similar to IFRS, except that AS 26 requires test of impairment to be applied even if there are no indications of that asset is impaired for following assets: Intangible assets not
yet available for use; Intangible assets
amortised over more than 10 years.
Similar to IFRS except reversal of impairment losses are prohibited.
(H). Retirement And Disposals :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) When an intangible assets is disposed of or when no further economic benefits are expected from its use, the gain or loss is the difference between any net proceeds received and the carrying amount of the asset. Any attributable revaluation surplus may be transferred to retained earnings or may remain in the revaluation reserve, but is not recognised in profit or loss.
Like IFRS, when an intangible assets is disposed of or when no further economic benefits are expected from its use, the gain or loss is the difference between any net proceeds received and the carrying amount of the asset. Unlike IFRS, the revaluation model is not permitted and therefore no revaluation surplus arises.
Silent on this
Similar to US GAAP
Similar to US GAAP
2) Under IAS 38 if an intangible asset is „held for sale‟ then amortisation should stop.
Like IFRS, amortisation should stop if intangible assets is „held for sale‟
There is no such stipulation under AS26
There is no such stipulation under AS26.
There is no such stipulation under ASBE 6.
Contd…
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(I). Research And Development:
S. No.
IFRS US GAAP UK GAAP Indian GAAP
Chinese GAAP
1) Research is original and planned investigation undertaken with the prospect of gaining new knowledge and understanding. Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, products, processes etc. Development does not include the maintenance or enhancement of ongoing operations.
Research is planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about a significant improvement to an existing product, service, process or technique. Development is the translation of research findings or other knowledge into a plan or design for a new product, service, process or technique whether intended for sale or use.
Research is experimental or theoretical work undertaken primarily to acquire new scientific or technical knowledge for its own sake. Development is use of scientific or technical knowledge to produce new or substantially improved materials, devices, products or services prior to commercial production or commercial applications or to improving substantially those already produced or installed.
Similar to
IFRS
The term "research" refers to the creative and planned investigation to acquire and understand new scientific or technological knowledge. The term "development" refers to the application of research achievements and other knowledge to a certain plan or design, prior to the commercial production or use, so as to produce any new material, device or product, or substantially improved material, device and product.
2) Research costs generally are expensed as incurred.
Like IFRS, research costs generally are expensed as incurred.
Similar to IFRS
Similar to
IFRS
Similar to IFRS
3) If an internally generated intangible assets arises from the development phase of a project, then directly attributable expenditure is capitalised from the date that the entity is able to demonstrate: • the technical feasibility of completing the intangible assets so that it will be available for use or sale; • its intention to complete the intangible assets and use or sell it;
Unlike IFRS, with the exception of certain internally developed computer software and direct-response advertising, all other development costs are expensed as incurred.
Similar to IFRS except that capitalisation of development expenditure is voluntary.
Similar to IFRS
Similar to IFRS
Cont…
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S. No.
IFRS US GAAP UK GAAP Indian GAAP
Chinese GAAP
• its ability to use or sell the intangible assets; • how the intangible assets will generate probable future economic benefits; the entity must demonstrate the existence of a market for the output of the intangible assets or the intangible assets itself or, if it is to be used internally, the usefulness of the intangible assets; • the availability of adequate technical, financial and other resources to complete the development of, and to use or sell, the intangible assets; and • its ability to measure reliably the expenditure attributable to the intangible assets during its development. Development Costs initially recognised as an expense cannot be capitalised in a subsequent period.
4) If an entity acquires in-process research and development separately or in a business combination, then it is recognised as an intangible asset if it meets the definition of an intangible assets and its fair value can be measured reliably.
Like IFRS, in-process research and development acquired in a business combination is recognised initially at fair value in the consolidated financial statements of the acquirer. However, unlike IFRS, the in-process research and development is recognised as an expense immediately after the acquisition unless the asset has alternative future use, either in other research and development projects or otherwise.
FRS-10 is silent on this AS 26 is silent on this.
ASBE no. 6 is silent on this.
5) Expenditure on internally generated intangible assets such as brands, mastheads, publishing titles, customer lists and similar items cannot be capitalised.
Similar to IFRS
Similar to IFRS
Similar to IFRS
Similar to IFRS
Contd…
62
(J). Software Developed For Sale :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) There are no special requirements for
software developed for sale. Costs of
software developed for sale are
accounted for following the general
principles for internally generated
intangible assets
Unlike IFRS, there are special requirements for software
developed to be sold. Costs incurred internally in creating a
computer software product to be sold, leased or otherwise
marketed as a separate product or as part of a product or
process are research and development costs that are
expensed as incurred until technological feasibility has been
established for the product. Technological feasibility is
established upon completion of a detailed programme and
product design, or in the absence of the former, completion of
a working model whose consistency with the product design
has been confirmed through testing. Thereafter all software
development costs incurred up to the point of general release
of the product to customers are capitalised and reported
subsequently at the lower of amortised cost and net realisable
value. Although the technological feasibility capitalisation
threshold is similar to the general recognition principles for
internally generated intangible assets under IFRS, because the
precise language under U.S. GAAP differs from IFRS, it is
possible that differences may arise in practice.
Similar to IFRS
Similar to IFRS
Similar to IFRS
Contd…
63
(K). Internal Use Software :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) There are no special requirements for
the development of internal-use
software. The costs of internal-use
software are accounted for under the
general principles for internally
generated intangible assets or, in the
case of purchased software, following
the general requirements for
intangible assets.
Unlike IFRS, there are special requirements for the development
of internal-use software. Costs incurred for internal-use software
that is acquired, internally developed or modified solely to meet
the entity's internal needs are capitalised depending on the stage
of development. The stages of software development are the
preliminary project stage, application development stage and post-
implementation / operation stage. Costs incurred during the
preliminary project stage and the post-implementation / operation
stage are expensed as incurred.
Costs incurred in the application development stage that are
capitalised include only:
• external direct costs of materials and services consumed in
developing or obtaining internal-use software;
• payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal-use software
project; and
• interest incurred during development.
General administrative and overhead costs are expensed as
incurred.
The application development stage, which is necessary to
commence capitalising costs under U.S. GAAP, often will occur
sooner than the date that the criteria for capitalising development
costs under IFRS are met. Therefore both the timing of
commencing capitalisation and the amounts capitalised are likely
to be different from IFRS.
Similar to IFRS
Similar to IFRS
Similar to IFRS
Contd…
64
(L). Website Development Costs :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1)
Costs associated with Web sites
developed for advertising or
promotional purposes are expensed
as incurred. For other Web sites,
expenditure incurred during the
application and infrastructure
development stage, the graphical
design stage and the content
development stage are capitalised if
the criteria for capitalising
development costs are met. The costs
of developing content for advertising
or promotional purposes are
expensed as incurred.
Unlike IFRS, Web site development
costs are subject to the same
general capitalisation criteria as
internal-use software. Therefore
costs incurred during the application
development stage are capitalised.
U.S. GAAP provides detailed
guidance on the activities deemed to
be within the application
development stage for Web site
development. Unlike IFRS, U.S.
GAAP does not provide guidance on
the accounting for the costs of
developing content for Web sites,
and therefore differences from IFRS
may arise in practice
FRS 10 is Silent on this
Costs incurred during the
planning stage are expensed.
Costs for activities during the
websites application and
infrastructure development
stages are capitalised, and costs
incurred during the operation
stage are expensed as incurred.
ASBE no. 6 is silent on
this.
Contd…
65
(M). Goodwill :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) Goodwill is recognised only in a business
combination and is capitalised. It is
measured as a residual.
Similar to IFRS
Similar to IFRS
Similar to IFRS
Similar to IFRS
(N). Items That Are Expensed As Incurred :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) Expenditure associated with the
following costs are expensed as
incurred regardless of whether the
general criteria for recognition appear to
be met:
• internally generated goodwill;
• start-up costs unless, they qualify for
recognition as part of the cost of
property, plant and equipment ;
• training activities;
• advertising and promotional activities;
and
• expenditure on relocating or
reorganising part, or all, of an entity
Like IFRS, expenditure
associated with the following
costs are expensed as incurred
regardless of whether the general
criteria for recognition appear to
be met:
• internally generated goodwill;
• start-up costs, unless they
qualify for recognition as part of
the cost of property, plant and
equipment; and
• training activities.
Unlike IFRS, direct-response
advertising expenditure is
capitalised if certain criteria are
met
Silent on this
Similar to IFRS
Similar to IFRS
Contd…
66
(O). Direct Response Advertising :
S. No. IFRS US GAAP UK GAAP Indian GAAP Chinese GAAP
1) There are no special requirements for
direct-response advertising, and
expenditure is expensed as incurred.
Unlike IFRS, the cost of direct-
response advertising is
capitalised if both of the following
criteria are met:
• the primary purpose is to elicit
sales from customers who can be
shown to have responded
specifically to that advertising;
and
• there is persuasive evidence,
including historical patterns, that
the advertising will result in
probable future economic
benefits.
The amortisation of the deferred
costs should be pro rata to the
related revenue recognition.
Similar to IFRS
Similar to IFRS
Similar to IFRS
67
4.3 CONCLUSION
The following conclusions can be drawn from the above:
1. International Accounting Standard-38 (IAS-38) on intangible assets was
issued by the International Accounting Standards Committee (IASC) in
September, 1998. Other countries have also issued separate accounting
standard on intangible assets like AS-26 in India, SFAS-142 in US, FRS-10 in
UK and ASBE-6 in China.
2. International financial reporting Standard (IAS-38) has been used as a
yardstick for the comparison of accounting standards as most of the countries
are harmonising their national accounting practices with IFRS. All European
countries have adopted IFRS since 1 January, 2005.
3. IAS 38 (IASB), FAS 142 (US GAAP), FRS 10 (UK GAAP), AS 26 (Indian
GAAP) and ASBE 6 (Chinese GAAP), all cover many of the same topics, and
reach the same conclusions on many issues.
4. As per IFRS, US GAAP and Chinese GAAP intangible assets can be of
definite or indefinite life. On the other end Indian GAAP and UK GAAP
differs and has a rebuttable presumption of maximum useful life being 10 and
20 years respectively.
5. Under US GAAP except some software and website development cost all
research and development costs are expensed, unlike IFRS, UK GAAP, Indian
GAAP and Chinese GAAP. On the other hand, IAS 38, FRS 10, AS 26 and
ASEB 6 allow for capitalization of all development costs when specific
criteria are met, contrary to US GAAP.
6. Only IFRS and UK GAAP allow the revaluation of intangible assets out of the
pool of other accounting standards compared.
7. The only significant difference between IAS 38 and FRS-10 relates to
capitalization of development costs. Where the capitalization of development
costs is compulsory under IAS 38 if certain criteria are met, it is optional
under FRS 10. Further, in terms of the treatment of goodwill after initial
measurement, IFRS-3 on Business combinations requires that goodwill should
be subject to annual impairment reviews, but should not be amortized. While
under FRS 10 there is a rebuttable presumption that the useful life of goodwill
does not exceed 20 years, with amortization over the useful life.