KS Academy CA Final - FR

Ind AS 38 – Intangible Assets

1. Pluto Ltd. intends to open a new retail store in a new location in the next few weeks. Pluto
Ltd has spent a substantial sum on a series of television advertisements to promote this
new store. The Company has paid an amount of Rs. 800,000 for advertisements before 31st
March, 20X1. Rs. 700,000 of this sum relates to advertisements shown before 31st March,
20X1 and Rs. 100,000 to advertisements shown in April, 20X1. Since 31st March, 20X1, the
Company has paid for further advertisements costing Rs. 400,000.
Pluto Ltd is of view that such costs can be carried forward as intangible assets. Since
market research indicates that this new store is likely to be highly successful. Please
explain and justify the treatment of the above costs in the financial statements for the year
ended 31st March, 20X1

Solution

Under Ind AS 38 – Intangible Assets – intangible assets can only be recognised if they are
identifiable and have a cost which can be reliably measured.

These criteria are very difficult to satisfy for internally developed intangibles.

For these reasons, Ind AS 38 specifically prohibits recognising advertising expenditure as an

intangible asset. The issue of how successful the store is likely to be does not affect this
prohibition. Therefore, such costs should be recognised as expenses.

However, the costs would be recognised on accrual basis. Therefore, of the advertisements
paid for before 31st March, 20X1, Rs. 7, 00,000 would be recognised as an expense and Rs.
1,00,000 as a pre-payment in the year ended 31st March, 20X1. The Rs. 4,00,000 cost of
advertisements paid for since 31st March, 20X1 would be charged as expenses in the year
ended 31st March, 20X2

2. Jupiter Ltd acquires new energy efficient technology that will significantly reduce its
energy costs for manufacturing.

Costs incurred Cost to be capitalised

Particular include as per Ind AS 38

Cost of new solar technology 10,00,000 10,00,000

Trade discount provided (1,00,000) (1,00,000)
Training course for staff in new
50,000 -
Technology

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Initial testing of new technology 35,000 35,000

Losses incurred while other parts
of plant shut down during testing 25,000 -
and training
Total 10,10,000 9,35,000

3. Venus India Private Ltd acquired a software for its internal use costing Rs. 10,00,000. The
amount payable for the software was Rs. 600,000 immediately and Rs. 400,000 in one year
time. The other expenditure incurred were:-
Purchase Tax : Rs. 1,00,000
Entry Tax : 10% ( recoverable later from tax department)
Legal fees: Rs. 87,000
Consultancy fees for implementation: Rs. 1,20,000
Cost of capital of the company is 10%.
Calculate the cost of the software on initial recognition using the principles of Ind AS
38 Intangible Assets.

Answer:

Particulars Amount in (Rs.)

Cash paid 6,00,000
Deferred consideration (Rs.400,000/1.1) 3,63,636
Purchase Tax 1,00,000
Entry tax (not to be considered as it is a refundable tax) -
Legal fees 87,000
Consultancy fees for implementation 1,20,000
Total cost to be capitalised 12,70,636

4. On 31st March, 20X1, Earth India Ltd. paid Rs. 50,00,000 for a 100% interest in Sun India
Ltd. At that date Sun Ltd.’s net assets had a fair value of Rs. 30,00,000. In addition, Sun Ltd.
also held the following rights:
a. Trade Mark named “GRAND” – valued at Rs. 180,000 using a discounted cash flow
technique.
b. Sole distribution rights to an electronic product; future cash flows from which are
estimated to be Rs. 150,000 per annum for the next 6 years.

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10% is considered an appropriate discount rate.

The 6 year, 10% annuity factor is 4.36.
Calculate goodwill and other Intangible assets arising on acquisition.
Answer:

Particulars Amount Amount

Purchase Consideration(A) 50,00,000
Net Asset acquired 30,00,000
Trade Mark 1,80,000
Distribution Rights (1,50,000x 4.36) 6,54,000
Total (B) (38,34,000)
Goodwill on Acquisition 11,66,000

5. Sun Ltd acquired a software from Earth Ltd. in exchange for a telecommunication license.
The telecommunication license is carried at Rs. 5,00,000 in the books of Sun Ltd. The
Software is carried at Rs. 10,000 in the books of the Earth Ltd which is not the fair value.
Advise journal entries in the following situations in the books of Sun Ltd and Earth
Ltd:
a. Fair value of software is Rs. 5,20,000 and fair value of telecommunication license is Rs.
5,00,000.
b. Fair Value of Software is not measurable. However similar Telecommunication license
is transacted by another company at Rs. 4,90,000.
c. Neither Fair Value of Software nor Telecommunication license could be reliably
measured.

Answer:

Rs. in ‘000
Situati
Sun Ltd. Earth Ltd.
on
Software Dr. 500 Telecommunication license Dr. 520
1 To Telecommunication license 500 To To Software 10
Profit on Exchange Nil To Profit on Exchange 510
Software Dr.490
Loss on Exchange Dr.10 Telecommunication license Dr. 490
2 To Telecommunication license 500 To Software 10
Note: To Profit on Exchange 480
The company may first recognise

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Impairment loss and then record an

entry. The effect is the same as
impairment loss will also be charged
to Income Statement
Software Dr. 500 Telecommunication license Dr. 10
3
To Telecommunication license 500 To Software 10

6. Venus Ltd. is preparing its accounts for the year ended 31st March, 20X2 and is unsure how
to treat the following items.
a. Company has completed a big marketing and advertising campaign costing Rs. 2,40,000.
The finance director had authorised this campaign on the basis that it would create Rs.
5,00,000 of additional profits over the next three years.
b. A new product was developed during the year. The expenditure aggregated Rs. 1,50,000
of which Rs. 1,00,000 was incurred prior to 30th September, 20X1, the date on which it
became clear that the product was technically viable. The new product will be launched
in the next four months and its recoverable amount is estimated at Rs. 70,000.
c. Staff participated in a training programme which cost the company Rs. 300,000. The
training organisation had made a presentation to the directors of Baxter outlining that
incremental profits to the business over the next twelve months would be Rs. 500,000.

What amounts should appear as assets in Venus Ltd. Balance sheet as at 31st March, 20X2

Solution

The treatment in Venus Ltd’s balance sheet as at 31st March, 20X2 will be as follows:

a. Marketing and advertising campaign: no asset will be recognised because it is not possible
to identify future economic benefits that are attributable only to this campaign. All of the
expenditure should be expensed in the statement of profit and loss account.
b. New product: development expenditure appearing in the statement of financial position
will be valued at Rs. 50,000. The expenditure prior to the date on which the product
becomes technically feasible is recognised in the statement of profit and loss account as an
expense.
c. Training programme: no intangible asset will be recognised, because staff are not under
the control of Venus Ltd. and when staff leave the benefits of the training, whatever they
may be, also leave.

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7. Expenditure on a new production process in 20X1-20X2:

1st April to 31st December Rs. 2,700

1st January to 31st March Rs. 900

Total Rs. 3,600

The production process met the intangible asset recognition criteria for development on 1st
January, 20X2. The amount estimated to be recoverable from the process is Rs. 1,000.

Expenditure incurred for development of the process in FY 20X2-20X3 is Rs. 6,000. Asset
was brought into use on 31st March, 20X3 and is expected to be useful for 6 years.

What is the carrying amount of the intangible asset at 31st March, 20X2 and 31st March,
20X3. Also determine the charge to profit or loss for 20X1-20X2?

At 31st March, 20X4, the amount estimated to be recoverable from the process is Rs. 5,000.

What is the carrying amount of the intangible asset at 31st March, 20X4 and the charge to
profit or loss for 20X3-20X4 on account of impairment loss?

Solution

1) Expenditure to be transferred to profit or loss in 20X1-20X2

Total Expenditure Rs. 3,600
Less: Expenditure during development phase Rs. (900)
Expenditure to be transferred to profit or loss Rs. 2,700
2) Carrying amount of intangible asset on 31st March, 20X2
Expenditure during Development Phase will be capitalised Rs. 900
(Recoverable amount is higher being Rs. 1,000, hence no impairment)
3) Carrying amount of intangible asset on 31st March, 20X3
Carrying amount of intangible asset on 31st March, 20X2 Rs. 900
Add: Further expenditure during development phase Rs. 6,000
Total capital expenditure on development phase Rs. 6,900

4) Expenditure to be charged to profit or loss in 20X3-20X4

Opening balance of Intangible Asset Rs. 6,900
Add: Amortisation for the year (6,900 / 6) Rs. (1,150)
Carrying amount of intangible asset Rs. 5,750

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Less: Recoverable Amount Rs. (5,000)

Amount charged to profit or loss (Impairment Loss) Rs. 750
5) Carrying Amount of Intangible Asset on 31st March, 20X4
Value of Intangible Asset will be recoverable amount i.e. Rs. 5,000

8.
a. Saturn Ltd. acquired an intangible asset on 31st March, 20X1 for Rs. 1,00,000. The asset
was revalued at Rs. 1,20,000 on 31st March, 20X2 and Rs. 85,000 on 31st March, 20X3.
b. Jupiter Ltd. acquired an intangible asset on 31st March, 20X1 for Rs. 1,00,000. The asset
was revalued at Rs. 85,000 on 31st March, 20X2 and at Rs. 1,05,000 on 31st March, 20X3.

Assuming that the year-end for both companies is 31st March, and that they both use the
revaluation model, show how each of these transactions should be dealt with in the
financial statements. Explain the treatment for revaluation of intangible asset. Ignore
computation of amortization on them for ease of understanding.

Solution:

Saturn Ltd.

Rs.20,000 revaluation increase on 31st March, 20X2 should be credited to the revaluation
reserve and recognised in other comprehensive income. Rs. 20,000 of the revaluation decrease
on 31st March, 20X3 should be debited to revaluation reserve and remaining Rs. 15,000 should
be recognised as an expense.

Jupiter Ltd.

Rs. 15,000 revaluation decrease on 31st March, 20X2 should be recognised as an expense in the
Statement of Profit and loss. Rs. 15,000 out of the Rs. 20,000 increase on 31st March, 20X3
should be recognised as income. The remaining Rs. 5,000 should be credited to revaluation
reserve and recognised in other comprehensive income.\

Note: The above amount will be different if amortization of intangible asset is taken into
consideration

9. X Limited engaged in the business of manufacturing fertilisers entered into a technical

collaboration agreement with a foreign company Y Limited. As a result, Y Limited would
provide the technical know-how enabling X Limited to manufacture fertiliser in a more

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efficient way. X Limited paid Rs. 10,00,00,000 for the use of know-how for a period of 5
years. X Limited estimates the production of fertiliser as follows:

Year (In metric tons)

1 50,000

2 70,000

3 1,00,000

4 1,20,000

5 1,10,000

At the end of the 1st year, it achieved its targeted production. At the end of 2nd year, 65,000
metric tons of fertiliser was being manufactured, and X Limited considered to revise the
estimates for the next 3 years. The revised figures are 85,000, 1,05,000 and 1,15,000 metric
tons for year 3, 4 & 5 respectively.

How will X Limited amortise the technical know-how fees as per Ind AS 38?

Solution

Based on the above data, it may be suitable for X Ltd. to use unit of production method for
amortisation of technical know-how.

The total estimated unit to be produced 4,50,000 MT. The technical know-how will be
amortised on the basis of the ratio of yearly production to total production.

The first year charge should be a proportion of 50,000/4,50,000 on Rs. 10,00,00,000 =

Rs.1,11,11,111.

At the end of 2nd year, as per revised estimate the total number of units to be produced in
future are 3,70,000 MT (ie 65,000 + 85,000 + 1,05,000 + 1,15,000).

The amortisation for second year will be 65,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) i.e
1,56,15,615.

Amortisation for remaining years (unless the estimates are again revised):

Year 3 = 85,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) ie. Rs. 2,04,20,420

Year 4 = 1,05,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) ie. Rs. 2,52,25,225

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Year 5 = 1,15,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) ie. Rs. 2,76,27,629

10. X Ltd. purchased a patent right on 1st April, 20X1, for Rs. 3,00,000; which has a legal life of
15 years. However, due to the competitive nature of the product, the management estimates
a useful life of only 5 years. Straight-line amortisation is determined by the management to
be the best method. As at 1st April, 20X2, management is uncertain that the process can
actually be made economically feasible, and decides to write down the patent to an
estimated market value of Rs. 1,50,000 and decides to amortise over 2 years. As at 1st April,
20X3, having perfected the related production process, the asset is now appraised at a value
of Rs. 3,00,000. Furthermore, the estimated useful life is now believed to be 4 more years.
Determine the value of intangible asset at the end of each financial year?

Answer:

Value as on 31st March, 20X2

Original cost Rs. 3,00,000

Less: amortisation (Rs. 60,000)
Net Value Rs. 2,40,000

Value as on 31st March, 20X3

On 1st April, 20X2, the impairment is recorded by writing down the asset to the estimated
value of Rs. 1,50,000, which necessitates a Rs. 90,000 charge to profit & loss (carrying
value, Rs. 2,40,000 less fair value Rs. 1,50,000).
Amortisation provided for the financial year 20X2-20X3 is Rs. 75,000 (Rs. 1,50,000/2)
Net value is = Rs. 1,50,000 – Rs. 75,000 = Rs. 75,000.

Value as on 31st March, 20X4

As of 1st April, 20X3, the carrying value of the patent is Rs. 75,000.
Revalued amount of patent is Rs. 3,00,000.
Out of total revaluation gain of Rs. 2,25,000, Rs. 90,000 will be charged to profit & loss and
balance amount of Rs. 1,35,000 (Rs. 2,25,000 – Rs. 90,000) will be credited to revaluation
reserve.
Amortisation provided for the financial year 20X3-20X4 is Rs. 75,000 (Rs. 3,00,000/4)
Net value is = Rs. 3,00,000 – Rs. 75,000 = Rs. 2,25,000.
Similarly, Value as on March 31, 20X5 = Rs. 2,25,000 – Rs.75,000 = Rs. 1,50,000
Value as on March 31, 20X6 = Rs. 1,50,000 – Rs.75,000 = Rs. 75,000

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Value as on March 31,20X5 = Rs. 75,000 – Rs.75,000 = Rs. Nil

11. X Pharmaceutical Ltd. seeks your opinion in respect of following accounting transactions:
a. Acquired a 4 year license to manufacture a specialised drug at a cost of Rs. 1,00,00,000 at
the start of the year. Production commenced immediately.
b. Also purchased another company at the start of year. As part of that acquisition, X
Pharmacy Ltd. acquired a brand with a fair value of Rs. 3,00,00,000 based on sales
revenue. The life of the brand is estimated at 15 years
c. Spent Rs. 1,00,00,000 on an advertising campaign during the first six months.
Subsequent sales have shown a significant improvement and it is expected this will
continue for 3 years.
d. It has commenced developing a new drug ‘Drug-A’. The project cost would be Rs.
10,00,00,000. Clinical trial proved successful and such drug is expected to generate
revenue over the next 5 years.
Cost incurred (accumulated) till 31st March, 20X1 is Rs. 5,00,00,000.
Balance cost incurred during the financial year 20X1-20X2 is Rs. 5,00,00,000.
e. It has also commenced developing another drug ‘Drug B’. It has incurred Rs. 50,00,000
towards research expenses till 31st March, 20X2. The technological feasibility has not
yet been established.

How the above transactions will be accounted for in the books of account of X
Pharmaceutical Ltd?

Solution

X Pharmaceutical Ltd. is advised as under:

a. It should recognise the drug license as an intangible asset, because it is a separate

external purchase, separately identifiable asset and considered successful in respect of
feasibility and probable future cash inflows.
The drug license should be recorded at Rs. 1,00,00,000.
b. It should recognise the brand as an intangible asset because it is purchased as part of
acquisition and it is separately identifiable. The brand should be amortised over a period
of 15 years
The brand will be recorded at Rs. 3,00,00,000.
c. The advertisement expenses of Rs. 1,00,00,000 should be expensed off.

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d. The development cost incurred during the financial year 20X1-20X2 should be
capitalised.
Cost of intangible asset (Drug A) as on 31st March, 20X2
Opening cost Rs. 5,00,00,000
Development cost Rs. 5,00,00,000
Total cost Rs. 10,00,00,000
e. Research expenses of Rs. 50,00,000 incurred for developing ‘Drug B’ should be expensed
off since technological feasibility has not yet established.

12. X Ltd. is engaged in the business of publishing Journals. They acquired 100% stake in Y
Ltd., a company in the same industry. X Ltd. paid purchase consideration of Rs. 10,00,00,000
and fair value of net assets acquired is Rs. 8,50,00,000. The purchase consideration includes
payment for the following as well:
a. Rs. 30,00,000 for obtaining the skilled staff of Y Ltd.
b. Rs. 50,00,000 by way of payment towards ‘Non-compete Fee’ so as to restrict Y Ltd. to
compete in the same line of business for next 5 years.
However, the above items (a) and (b) are not forming part of the net assets acquired of
Rs. 8,50,00,000.
How should the above transactions be accounted for by X Ltd?

Answer:

X Ltd. should recognise an intangible asset in respect of the consideration paid towards ‘Non-
Compete Fee’.

However, amount paid for obtaining skilled staff amounting to Rs. 30,00,000 does not meet
the definition of intangible asset since X Ltd. has not established any right over the resource
and the same should be expensed. The entity has insufficient control over the expected future
economic benefits arising from the team of skilled staff.

Therefore, Rs. 50,00,000 will be separately recognised as an intangible asset, whereas amount
paid for obtaining skilled staff does not meet the recognition criteria for being identified as a
separate intangible asset. However, since it is acquired as part of a business combination, it
forms part of the goodwill recognised at the acquisition date.

The value of goodwill would be Rs. 1,00,00,000 (Rs. 1,50,00,000 – Rs. 50,00,000).

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13. X Ltd. purchased a franchise from a restaurant chain at a cost of Rs. 1,00,00,000 and the
franchise has 10 years life. In addition, the franchise agreement mentions that the
franchisee would also pay the franchisor royalty as a percentage of sales made. Can the
franchise rights be treated as an intangible asset under Ind AS 38?

Answer:

The franchise rights meets the identification criterion of an intangible asset since it arises from
the contractual rights. It is acquired separately and it’s cost can be measured reliably. In
addition, X Ltd. will have future economic benefits and control over them from the franchise
rights.

X Ltd. should recognise the franchise right as intangible asset and amortise it over 10 years.
Royalty as a percentage of sales paid to the franchisor would be a charge to the profit and loss
in the books of the X Ltd.

14. An entity regularly places advertisements in newspapers advertising its products and
includes a reply slip that informs individuals replying to the advertisement that the entity
may pass on the individual’s details to other sellers of similar products, unless the
individual ticks a box in the advertisement.
Over a period of time the entity has assembled a list of customers’ names and addresses.
The list is provided to other entities for a fee. The entity would like to recognise an asset in
respect of the expected future economic benefits to be derived from the list. Can the
customer list be treated as an intangible asset under Ind AS 38?

Answer:

In this situation, the entity has no legal rights to the customer relationship, but exchange
transactions have taken place that evidence separability of the asset and the control that the
entity is able to exercise over the asset. Therefore, the list is an intangible asset. However, the
entity may not recognise the asset because the cost of generating the customer list internally
cannot be distinguished from the cost of developing the business as a whole. It does not meet
the conditions specified to recognize an internally generated intangible asset.

15. A software company X Ltd. is developing new software for the telecom industry. It employs
100 employee engineers trained in that particular discipline who are engaged in the
development of the software. X Ltd. feels that it has an excellent HR policy and does not

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expect any of its employees to leave in the near future. It wants to recognise these set of
engineers as a human resources asset in the form of an intangible asset. What would be
your advice to X Ltd?

Answer:

Although, without doubt the skill sets of the employees make them extremely valuable to the
company, however it does not have control over them. Merely having good HR policies
would not make them eligible to be recognised as an intangible asset.

16. X Ltd. has acquired a telecom license from Government to operate mobile telephony in two
states of India. Can the cost of acquisition be capitalised as an intangible asset under Ind
AS 38?
Answer:
Cost of acquisition of the telecom license can be capitalised as an intangible asset under the
head Licenses, as it will lead to future economic benefits for X Ltd
17. X Ltd. purchased a standardised finance software at a list price of Rs. 30,00,000 and paid Rs.
50,000 towards purchase tax which is non-refundable. In addition to this, the entity was
granted a trade discount of 5% on the initial list price. X Ltd. incurred cost of Rs. 7,00,000
towards customisation of the software for its intended use. X Ltd. also purchased a 5-year
maintenance contract with the vendor company of Rs. 2,00,000. At what cost the intangible
asset will be recognised?
Answer:
In accordance with Ind AS 38, the cost of a separately acquired intangible asset is its purchases
price and non-refundable purchase taxes, after deducting trade discounts and rebates and any
directly attributable cost of preparing the asset for its intended use.
Therefore, the initial cost of the asset should be:
Amount (Rs.)

List price 30,00,000

Less: Trade discount (5%) (1,50,000)

28,50,000
Non-refundable purchase tax 50,000
Customisation cost 7,00,000
Total cost 36,00,000

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The maintenance contract of Rs. 2,00,000 is an expense and therefore should be taken as a
prepaid expense and charged to profit and loss over a period of 5 years.

18. X Limited in a business combination, purchased the net assets of Y Limited for Rs. 4,00,000
on 31st March, 20X1.
The assets and liabilities position of Y Limited just before the acquisition is as follows:
Assets Cost (in Rs.)
Property, Plant & Equipment 1,00,000
Intangible asset 1 1 20,000
Intangible asset 2 2 50,000
Cash & Bank 1,30,000
Liabilities
Trade payable 50,000

The fair market value of the PPE, intangible asset 1 and intangible asset 2 is available and
they are Rs. 1,50,000, Rs. 30,000 and Rs. 70,000 respectively.

How would X Limited account for the net assets acquired from Y Limited?

Answer:

X Limited will account for the assets acquired from Y Limited in following manner:

Assets Amount (Rs.)

Property, Plant & Equipment 1,50,000
Goodwill 70,000
Intangible asset 1 30,000
Intangible asset 2 70,000
Cash & Bank 1,30,000
Liabilities
Trade payable 50,000

Note 1- Goodwill is the difference between fair value of net assets acquired and purchase
consideration paid when is calculated as follow:

Goodwill = Rs. 4,00,000 – Rs. (1,50,000 + 70,000 + 30,000 + 1,30,000 – 50,000) = Rs. 70,000.

19. X Ltd. acquired Y Ltd. on 30th April, 20X1. The purchase consideration is Rs. 50,00,000. The
fair value of the tangible assets is Rs. 45,00,000. The company estimates the fair value of

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“in-process research projects” at Rs. 10,00,000. No other Intangible asset is acquired by X

Ltd. in the transaction. Further, cost incurred by X Ltd. in relation to that research project is
as follows:
a. Rs. 5,00,000 – as research expenses
b. Rs. 2,00,000 – to establish technological feasibility
c. Rs. 7,00,000 – for further development cost after technological feasibility is established.
At what amount the intangible asset should be measured under Ind AS 38?
Answer:
X Ltd. should initially recognise the acquired “in house research project’’ at its fair value
i.e., Rs. 10,00,000. Research cost of Rs. 5,00,000 and cost of Rs. 2,00,000 for establishing
technical feasibility should be charged to profit & loss. Costs incurred from the point of
technological feasibility/asset recognition criteria until the time when development costs
are incurred are capitalised.
so the intangible asset should be recognised at Rs. 17,00,000 (Rs. 10,00,000 + Rs. 7,00,000)
20. X Ltd. acquired a patent right of manufacturing drug from Y Ltd. In exchange X Ltd. gives
its intellectual property right to Y Ltd. Current market value of the patent and intellectual
property rights are Rs. 20,00,000 and Rs. 18,00,000 respectively. At what value patent right
should be initially recognised in the books of X Ltd. in following two situations?
a. X Ltd. did not pay any cash to Y Ltd.
b. X Ltd. pays Rs. 2,00,000 to Y Ltd.
Answer:
If an entity is able to determine reliably the fair value of either the asset received or the
asset given up, then the fair value of the asset given up is used to measure cost unless the
fair value of the asset received is more clearly evident.

The transaction at the fair value of the asset received adjusted for any cash received or
paid. Therefore, in case (a) patent is measured at Rs. 18,00,000, in case (b) it is measured at
Rs. 20,00,000 (18,00,000 + 2,00,000).

21. X Garments Ltd. spent Rs. 1,00,00,000 towards promotions for a fashion show by way of
various on-road shows, contests etc After that event, it realised that the brand name of
the entity got popular and resultantly, subsequent sales have shown a significant
improvement. It is further expected that this hike will have an effect over the next 2-3 years.
How the entity should account for the above cost incurred on promoting such show?

Answer:

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Expenditure of Rs. 1,00,00,000 though increased future economic benefits, but it does not
result in creation of an intangible asset.

Such promotional cost should be expensed off.

22. An entity is developing a new production process. During 20X1-20X2, expenditure incurred
was Rs. 1,000, of which Rs. 900 was incurred before 1st March, 20X2 and Rs. 100 was
incurred between 1st March, 20X2 and 31st March, 20X2. The entity is able to demonstrate
that at 1st March, 20X2, the production process met the criteria for recognition as an
intangible asset. The recoverable amount of the know-how embodied in the process
(including future cash outflows to complete the process before it is available for use) is
estimated to be Rs. 500. Explain the accounting treatment of expenditure incurred in 20X1-
20X2 and 20X2-20X3 as per relevant Ind AS.
During 20X2-20X3, expenditure incurred is Rs. 2,000. At the end of 20X3, the recoverable
amount of the know-how embodied in the process (including future cash outflows to
complete the process before it is available for use) is estimated to be Rs. 1,900.
Answer:
At the end of the financial year 20X2, the production process is recognised as an intangible
asset at a cost of Rs. 100 (expenditure incurred since the date when the recognition criteria
were met, i.e., 1st March, 20X2). Rs. 900 expenditure incurred before 1st March, 20X2 is
recognised as an expense because the recognition criteria were not met until 1st March, 20X2.
This expenditure does not form part of the cost of the production process recognised in the
balance sheet.
At the end of 20X3, the cost of the production process is Rs. 2,100 (Rs. 100 expenditure
recognised at the end of 20X2 plus Rs. 2,000 expenditure recognised in 20X3). The entity
recognises an impairment loss of Rs. 200 to adjust the carrying amount of the process before
impairment loss (Rs. 2,100) to its recoverable amount (Rs. 1,900). This impairment loss will be
reversed in a subsequent period if the requirements for the reversal of an impairment loss in
Ind AS 36 are met.

23. X Ltd. is engaged is developing computer software. The expenditures incurred by X Ltd. in
pursuance of its development of software is given below:
a. Paid Rs. 2,00,000 towards salaries of the program designers.
b. Incurred Rs. 5,00,000 towards other cost of completion of program design.
c. Incurred Rs. 2,00,000 towards cost of coding and establishing technical feasibility.
d. Paid Rs. 7,00,000 for other direct cost after establishment of technical feasibility

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e. Incurred Rs. 2,00,000 towards other testing costs.

f. A focus group of other software developers was invited to a conference for the
introduction of this new software. Cost of the conference aggregated to Rs. 70,000.

On 15th March, 20X1, the development phase was complete and a cash flow budget was
prepared.

Net profit for the year was estimated to be equal Rs. 40,00,000. How X Ltd. should account
for the above mentioned cost?

Answer:

Costs incurred in creating computer software, should be charged to research & development
expenses when incurred until technical feasibility/asset recognition criteria have been
established for the product. Here, technical feasibility is established after completion of
detailed program design.

In this case, Rs. 9,00,000 (salary cost of Rs. 2,00,000, program design cost of Rs. 5,00,000 and
coding and technical feasibility cost of Rs. 2,00,000) would be recorded as expense in Profit
and Loss since it belongs to research phase.

Cost incurred from the point of technical feasibility are capitalised as software costs. But the
conference cost of Rs. 70,000 would be expensed off.

In this situation, direct cost after establishment of technical feasibility of Rs. 7,00,000 and
testing cost of Rs. 2,00,000 will be capitalised.

The cost of software capitalised is = Rs. (7,00,000 + 2,00,000) = Rs. 9,00,000.

24. X Ltd. has started developing a new production process in financial year 20X1-20X2. Total
expenditure incurred till 30th September, 20X1, was Rs. 1,00,00,000. The expenditure on the
development of the production process meets the recognition criteria on 1st July, 20X1. The
records of X Ltd. show that, out of total Rs. 1,00,00,000, Rs. 70,00,000 were incurred during
July to September, 20X1. X Ltd. publishes its financial results quarterly. How X Ltd. should
account for the development expenditure?
Answer:
X Ltd. should recognise the intangible asset at Rs. 70,00,000 and Rs. 30,00,000 which was
already recognised as an expense in first quarter should not be capitalised.
25. X Ltd. decides to revalue its intangible assets on 1st April, 20X1. On the date of revaluation,
the intangible assets stand at a cost of Rs. 1,00,00,000 and accumulated amortisation is Rs.

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40,00,000. The intangible assets are revalued at Rs. 1,50,00,000. How should X Ltd. account
for the revalued intangible assets in its books of account?

Answer:
The intangible assets are revalued to Rs. 1,50,00,000 on an amortised replacement cost basis,
which is a 150% increase from its original cost. Thereby applying the existing ratio of
accumulated depreciation to the cost the revalued gross amount would be Rs. 2,50,00,000
gross and Rs. 1,00,00,000 on amortisation.

Ind AS 38 (1) 17