CA Final Financial Reporting Notes by PW for January 2027 Exam

Intangible assets do not have a physical form, but their recognition and measurement involve specific accounting requirements. Under Ind AS 38, you need to understand when an expenditure qualifies for recognition as an asset, which costs must be expensed, and how an intangible asset is measured after initial recognition. These distinctions are important when solving Financial Reporting questions.

Physics Wallah’s notes explain the treatment of purchased, exchanged,   government-grant-related and business-combination-acquired intangible assets, along with internally generated assets. They also cover the cost and revaluation models, the conditions for capitalising development expenditure, and the rules for determining useful life and amortisation. Revise each recognition condition and accounting treatment carefully to strengthen your understanding of Ind AS 38 for the CA Final examination.

CA Final Financial Reporting Notes 

Ind AS 38: Intangible Assets, Measurement and Amortisation

An intangible asset is initially measured at cost, whichever way it is acquired. The way the cost is arrived at depends on the mode of acquisition.

• Purchased: Cost is built up from the purchase price and directly attributable expenses (see below).

• Acquired by exchange: Treated in the same way as under Ind AS 16.

• Acquired by way of government grant: Accounted for as per Ind AS 20.

• Acquired in a business combination: Measured at fair value on the date of acquisition.

• Internally generated: Capitalised only when the conditions for the development phase are met.

Cost of a Purchased Intangible Asset

The cost of a purchased intangible asset, such as a licence agreement, a software franchise agreement or software, includes the following.

• Purchase price: Taken net of trade discount and rebate.

• Import duty and taxes: Taxes such as GST are included only if they are non-refundable.

• Directly attributable expenses: These include professional or consultant fees, costs of testing, legal fees and employment costs.

The following items are not included in the cost of an intangible asset: advertising and promotional costs, costs of introducing or launching a new product, staff training costs, administrative and other general overheads, and operating losses.

If payment is deferred, the treatment is the same as under Ind AS 16.

Intangible Assets Acquired in a Business Combination

The cost of an intangible asset acquired in a business combination is its fair value at the date of acquisition.

• Such an asset is recognised separately from goodwill, whether or not the acquiree (the seller) had recognised it before the business combination.

• If the intangible asset cannot be separated from goodwill, it is recognised together with goodwill.

• If the asset is separable but only together with another related item, it is recognised together with that item.

For example, a magazine publishing title and its related subscriber database are two separate intangible assets. The fair value of the publishing title cannot be measured reliably because it cannot be sold without the database. Both are therefore recognised as a single asset at their combined fair value.

Internally Generated Intangible Assets

The expenditure is divided into two phases.

• Research phase: This is the planned investigation to gain new knowledge. Expenditure incurred in this phase is charged to the Statement of Profit and Loss.

• Development phase: This is the application of research findings to develop an intangible asset. Expenditure is capitalised and recognised as an intangible asset if the conditions below are met.

An intangible asset arising from the development phase is recognised if, and only if, the entity can demonstrate all of the following.

• Technical feasibility of completing the asset

• Intention to complete it

• Ability to use or sell it

• Ability to measure reliably the expenditure during its development

• How the asset will generate probable future economic benefits

• Availability of adequate technical, financial or other resources to complete it

The directly attributable expenditure capitalised in the development phase is as follows.

• Inclusions: Costs of materials and services consumed, employee costs, fees to register a legal right, and amortisation of patents and licences used to generate the intangible asset.

• Exclusions: Staff training costs, selling, administrative and general overheads, abnormal losses and initial operating losses.

Points to note:

1. If we cannot distinguish between the research phase and the development phase, we treat the expenditure as research phase expenditure.

2. A research project acquired in a business combination is recognised as an intangible asset at fair value. Any later expenditure the company incurs itself is treated phase-wise: research phase expenditure goes to the Statement of Profit and Loss, while development phase expenditure is capitalised if the conditions are met.

3. Internally generated goodwill, brands, mastheads, publishing titles and customer lists are not recognised, because their cost cannot be measured reliably and the entity cannot demonstrate that an identifiable intangible asset exists.

Expenditure Always Recognised as an Expense

The following expenditure never results in an intangible asset and is always recognised as an expense.

• Expenditure on research, except when acquired as part of a business combination

• Start-up costs

• Expenditure on training activities

• Expenditure on advertising and promotional activities

• Expenditure on relocating or reorganising part or all of an entity

Most subsequent expenditure on an intangible asset does not add to the future economic benefits expected from it. It is therefore charged to the Statement of Profit and Loss.

Subsequent Measurement

An entity can choose either of two models as its accounting policy, and the choice applies to the entire class of assets.

• Cost model: Cost less accumulated amortisation less accumulated impairment losses (Ind AS 36).

• Revaluation model: Fair value on the date of revaluation less subsequent accumulated amortisation less subsequent accumulated impairment losses (Ind AS 36).

Fair value under the revaluation model must be determined by reference to an active market, which is a market where the asset can be bought and sold. If there is no active market, the revaluation model cannot be used.

As an exception, if no active market exists for one intangible asset in a class, that asset is carried at cost. The remaining assets in the class can still be carried under the revaluation model.

The following aspects of the revaluation model are the same as under Ind AS 16.

• Treatment of revaluation gain or loss

• Frequency of revaluation

• Treatment of accumulated amortisation on the date of revaluation

• Transfer of revaluation surplus to retained earnings

Amortisation

Amortisation is the systematic allocation of the amortisable amount of an intangible asset over its useful life.

Amortisable amount = Cost - Residual value

• Commencement: Amortisation starts when the asset is available for use, that is, when it is ready to use.

• Cessation: Amortisation stops on the earlier of the date the asset is classified as held for sale (Ind AS 105) and the date it is derecognised (scrapped or sold).

• Idle asset: Amortisation does not cease when the intangible asset is idle.

Residual value

In most cases, we assume the residual value to be zero. It is taken as a positive amount only in two situations.

• A third party has committed to purchase the asset at the end of its useful life.

• There is an active market for the asset, and it is probable that the market will exist at the end of its useful life.

If the residual value is higher than the carrying amount, amortisation is zero.

Useful life

• Indefinite useful life: The asset is not amortised but is tested for impairment annually as per Ind AS 36.

• Finite useful life: The asset is amortised over that life.

• Purchased goodwill: It is not amortised, but is tested for impairment annually as per Ind AS 36.

Methods of amortisation

• Straight-line method: (Cost - Residual value) / Useful life

• Diminishing balance (WDV) method: Opening carrying amount x Depreciation rate (%)

• Units of production method: Amortisable amount x (Current year production / Total estimated production)

• Method based on revenue: In most cases, this method is inappropriate. It can be applied in rare cases only, where revenue is the limiting factor. An example is a right to operate a toll road up to a specific amount of revenue.

Useful Life of Assets Arising from Contractual or Legal Rights

• The useful life cannot exceed the period of the contract, but it may be shorter depending on the period over which the entity expects to use the asset.

• If the contract is renewable, the useful life includes the renewal period only if all of the following conditions are met:

• There is supportive evidence, mainly based on experience, that the contract will be renewed.

• Any conditions necessary to obtain the renewal will be satisfied.

• The cost of renewal is not significant compared with the future economic benefits expected from the renewal.

Change in Amortisation Method, Useful Life and Residual Value

The amortisation method, useful life and residual value are reviewed at each year end. Any change is treated as a change in accounting estimate and is given prospective effect, that is, in the remaining future period.

Impairment

Impairment of an intangible asset is accounted for as per Ind AS 36. For an intangible asset with an indefinite useful life, an impairment review is required at least annually.

Derecognition

An intangible asset is derecognised when it is disposed of or when no future economic benefits are expected from it.

Gain or loss on derecognition = Net proceeds - Carrying amount

The gain or loss is transferred to the Statement of Profit and Loss and shown under Other Income, not as Revenue.

CA Final Financial Reporting Notes PDF for January 2027 Exam

Download the CA Final Financial Reporting Notes PDF by PW to revise Ind AS 38 – Intangible Assets. It covers initial and subsequent measurement, internally generated intangible assets, development expenditure, and amortisation rules and methods. 

Why use CA Final Financial Reporting Notes by PW?

The notes explain the accounting treatment of intangible assets at different stages, from initial recognition to subsequent measurement and amortisation. You can use them to:

• Understand the Initial Measurement of Intangible Assets: Revise the components included in the cost of a purchased intangible asset, such as purchase price, non-refundable taxes and directly attributable expenses. The notes also explain the treatment of assets acquired through exchange, government grants and business combinations.

• Learn the Recognition Criteria for Internally Generated Assets: Understand the conditions an entity must demonstrate to recognise an intangible asset arising from the development phase, including technical feasibility, intention to complete, ability to use or sell, availability of resources and measurement of expenditure.

• Differentiate Research and Development Expenditure: Revise why research expenditure is generally charged to the Profit and Loss Account, while development expenditure can be capitalised when all the prescribed recognition conditions are met. The notes also cover the treatment of acquired research projects in business combinations.

• Identify Expenditure That Cannot Be Capitalised: Understand why expenses such as advertising and promotional costs, staff training, administrative overheads, initial operating losses and start-up costs are recognised as expenses rather than included in the cost of an intangible asset.

• Compare the Cost and Revaluation Models: Study how intangible assets are measured after initial recognition under both models. The notes also explain the requirement for an active market, the application of an accounting policy to an entire class of assets and the exception for assets without an active market.

• Revise the Treatment of Revaluation: Understand the accounting considerations relating to revaluation gains and losses, frequency of revaluation, accumulated amortisation on the revaluation date and transfer of revaluation surplus to retained earnings.

• Understand the Rules for Amortisation: Revise the calculation of the amortisable amount, the commencement and cessation of amortisation, and the treatment of residual value. The notes also explain why assets with indefinite useful lives are not amortised but are tested for impairment annually.

• Compare Different Amortisation Methods: Study the straight-line method, diminishing balance or written-down value method, and units of production method. The notes also discuss the limited circumstances in which a revenue-based method may be appropriate.

• Revise Useful Life and Subsequent Expenditure: Understand how contractual or legal rights affect the useful life of an intangible asset, including the conditions for considering contract renewal. You can also revise why most subsequent expenditure is recognised as an expense.

Revise Ind AS 38 with PW's CA Final Financial Reporting Notes and focus on the recognition and measurement requirements for intangible assets. Review the research and development criteria, capitalisation rules and amortisation methods to strengthen your understanding of the accounting treatments covered in the chapter.

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