Intangible Assets in Financial Reporting: Recognition, Measurement and Challenges in India

Intangible assets are non-physical resources such as patents, trademarks, goodwill, and brand reputation that hold significant economic value for a company. Unlike tangible assets such as machinery or buildings, intangible assets cannot be physically touched but often drive long-term profitability and competitive advantage.

In India, the recognition, measurement, and disclosure of intangible assets are primarily governed by Ind AS 38 for companies following Indian Accounting Standards and by AS 26 (issued by ICAI) for companies reporting under IGAAP. While both standards share the same foundational framework, certain treatments differ between the two regimes.

The core characteristics of intangible assets are:

• Non-physical nature: The asset has no physical substance but generates identifiable economic value.
• Control: The company has the power to obtain future economic benefits from the asset and restrict others from accessing those benefits.
• Future economic benefits: The asset is expected to generate revenue, cost savings, or other measurable economic inflows for the company.

Recognition Criteria

For an intangible asset to be recognized in the financial statements, two conditions must both be satisfied:

• Future economic benefits attributable to the asset are expected to flow to the company; and
• The cost of the asset can be measured reliably.

Where an intangible asset is generated internally, its expenditure must be classified into either a research phase or a development phase. Only development-phase costs that meet specific capitalization criteria may be recognized as an asset; research-phase costs are always expensed.

Initial Measurement of Intangible Assets

When an intangible asset is first recognized, it is measured at cost, provided the recognition criteria are met.

Acquired Intangible Assets

Intangible assets acquired externally are measured at cost, which includes:

• Purchase price, including import duties and non-refundable taxes.
• Directly attributable costs such as legal fees, registration costs, and consulting fees.

Example: A patent acquired externally is recorded at its purchase price plus legal registration fees.

Internally Generated Intangible Assets

• Research costs are expensed immediately and cannot be capitalized under any circumstances.
• Development costs may be capitalized only if all of the following conditions are met: technical feasibility of completion, intention to complete the asset, ability to use or sell it, probability of future economic benefits, and availability of adequate resources and reliable cost measurement.

Example: In a software development project, costs incurred during the research phase are expensed. Costs incurred during the development phase are capitalized only if all criteria above are satisfied.

Subsequent Measurement of Intangible Assets

Measurement Models

After initial recognition, companies must apply one of two measurement models consistently to each class of intangible asset:

1. Cost Model
   • The asset is carried at cost minus accumulated amortization and any impairment losses.
   • This is the most widely used model in practice.
   • Example: A trademark amortized over its useful life, adjusted downward if its value declines.
2. Revaluation Model
   • Permitted only where the fair value of the asset can be determined by reference to an active market — which is uncommon for most intangible assets.
   • The asset is carried at its revalued amount minus subsequent amortization and impairment losses.
   • Example: Broadcasting licenses traded in an active market.

Classification in Financial Statements

Intangible assets must be classified in the financial statements by category. Common classes under Ind AS 38 include brands, trademarks, software, copyrights, patents, formulae, models, designs, prototypes, licenses, and franchises.

Disclosure Requirements

Companies must disclose the following in their financial statements:

• Whether each class of intangible asset is internally generated or externally acquired.
• Useful lives, amortization rates, and the methods applied.
• Reconciliation of carrying amounts at the start and end of the reporting period.
• Research and development expenditure recognized as an expense during the period.
• Details of individually material intangible assets.

Amortisation

Intangible assets with a finite useful life must be amortized systematically over that life, using a method that reflects the pattern in which the asset’s economic benefits are consumed. Intangible assets with an indefinite useful life, including purchased goodwill, cannot be amortized and must be tested for impairment annually.

Impairment

Impairment testing ensures that the carrying amount of an intangible asset does not exceed its recoverable amount. Where the carrying amount exceeds the recoverable amount, an impairment loss must be recognized and disclosed. This is particularly judgment-intensive for goodwill and other indefinite-life assets.

De-recognition

An intangible asset must be derecognized from the financial statements when it no longer generates future economic benefits or when it is disposed of. Any gain or loss on de-recognition is taken to the income statement.

Treatment Under the Income-tax Act, 1961

The tax treatment of intangible assets differs from their accounting treatment. Under Section 32 of the Income Tax Act, 1961, a specific list of intangible assets is treated as depreciable under the block of assets concept: know-how, patents, copyrights, trademarks, licenses, franchises, and any other business or commercial rights of a similar nature. The applicable depreciation rate for this block is 25% on a written-down value basis. Intangibles that fall outside this defined list do not qualify for depreciation under the Act.

It is also important to note that internally generated goodwill is not recognized in the financial statements under either Ind AS 38 or AS 26. Only purchased goodwill arising from a business combination is recognized as an intangible asset. Under Ind AS, purchased goodwill is not amortized but must be tested annually for impairment under Ind AS 103 and Ind AS 36. Under IGAAP (AS 14), purchased goodwill is amortized over its useful life, generally not exceeding ten years.

Challenges with Intangible Assets

• Valuation difficulties:
  • Unlike physical assets, intangibles lack a clear market price.
  • Valuing goodwill, brand reputation, or intellectual property typically requires complex models and subjective assumptions.
  • Subjectivity in valuation can lead to disputes with regulators, investors, or tax authorities.
• Recognition issues:
  • Internally generated assets such as brand value or customer loyalty are generally not recognized in financial statements.
  • Only purchased or legally acquired intangibles can be capitalized, which can understate the true economic value of many businesses.
• Amortization and impairment:
  • Finite-life intangibles must be amortized, while indefinite-life assets require annual impairment testing.
  • Impairment assessments are judgement-intensive and can significantly affect reported profits.
• Disclosure and transparency:
  • Standards require detailed disclosures, but providing clear and consistent information remains a common challenge in practice.
  • Investors often find it difficult to assess the real impact of intangibles on future earnings.

Guidelines for Indian Companies

Companies operating in India, whether under Ind AS 38 or AS 26, should maintain robust internal controls and documentation to support the identification, measurement, amortization, and impairment testing of intangible assets. This includes retaining evidence for development-phase capitalization decisions, impairment assessment workings, and useful life determinations.

Proper compliance with the applicable standard not only ensures a true and fair view in financial statements but also reduces exposure to audit qualifications and regulatory scrutiny. Given the overlap between accounting treatment and tax eligibility under Section 32, alignment between finance and tax teams at the point of asset recognition is particularly important.