Understanding AS-26 on Intangible Assets

Accounting Standard (AS) 26 deals with the accounting treatment for intangible assets. Intangible assets are identifiable non-monetary assets without physical substance. This standard provides guidelines on how to recognise, measure, amortise, and derecognise intangible assets.

Let's examine each statement provided in the question based on the principles outlined in AS-26:

Analysis of Each Statement based on AS-26

(A) Internally generated goodwill should not be recognised as an asset

According to AS-26, internally generated goodwill is explicitly prohibited from being recognised as an asset. This is because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost. Its cost cannot be distinguished from the cost of running the business as a whole. Therefore, this statement is consistent with AS-26.

(B) Self-generated goodwill is accounted for in the books and shown as an asset

This statement is the opposite of statement (A). "Self-generated goodwill" is another term for "internally generated goodwill." As discussed above, AS-26 prohibits the recognition of such goodwill in the financial statements. Therefore, this statement is incorrect.

(C) Intangible assets should be written off as early as possible but not exceeding its estimated life

AS-26 requires that an intangible asset with a finite useful life should be amortised systematically over its useful life. The objective is to reflect the consumption of the future economic benefits embodied in the asset. If the useful life cannot be estimated reliably, it is presumed not to exceed ten years. While the phrase "as early as possible" isn't standard terminology in AS-26, the core principle is to amortise over the estimated useful life. Amortising over the estimated life, especially if that life is short due to uncertainty, is consistent with the standard's requirement for systematic allocation and prudence. Therefore, this statement, read in the context of amortising over the best estimate of useful life and the presumption if life is uncertain, aligns reasonably with the standard's requirements for assets with finite lives.

(D) Purchased goodwill is not recognised as an asset

AS-26 states that goodwill acquired in a business combination (i.e., purchased goodwill) should be recognised as an asset. It represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognised. Therefore, this statement is incorrect.

(E) Can be written off even beyond 10 years depending upon the nature of the asset

AS-26 states that the amortisation period for an intangible asset with a finite useful life should not exceed ten years from the date when the asset is available for use, unless a longer useful life can be established and reliably estimated. If the useful life exceeds ten years, the standard requires disclosure of the reasons for the longer period and the factor(s) that were influential in determining the useful life. Thus, it is possible to amortise an intangible asset over a period longer than 10 years under specific conditions where the useful life is reliably estimable to be longer. Therefore, this statement is consistent with AS-26.

Summary of Correct Statements

Based on the analysis:

• Statement (A) is correct.
• Statement (B) is incorrect.
• Statement (C) aligns with the principle of amortisation over estimated useful life, especially concerning the potential for shorter lives if uncertain.
• Statement (D) is incorrect.
• Statement (E) is correct under specific conditions outlined in the standard.

The statements consistent with AS-26 are (A), (C), and (E).

Linking to the Options

Let's see which option includes statements (A), (C), and (E):

• Option 1: (A) and (B) only - Incorrect (B is wrong).
• Option 2: (C) and (B) only - Incorrect (B is wrong).
• Option 3: (A), (D), and (E) only - Incorrect (D is wrong).
• Option 4: (A), (C), and (E) only - Includes (A), (C), and (E).

Therefore, the correct option is the one listing (A), (C), and (E) as correct statements.

AS-26 Revision Table: Key Concepts

Additional Information on AS-26 and Intangible Assets

AS-26 applies to all intangible assets except those specifically dealt with by other accounting standards. Examples of intangible assets covered by AS-26 include computer software, licences, trademarks, patents, copyrights, and research and development costs (under specific conditions).

Key aspects to remember about AS-26 include:

• Identifiability: An intangible asset is identifiable if it is separable (can be sold, transferred, licensed, etc.) or arises from contractual or other legal rights.
• Control: An enterprise controls an asset if it has the power to obtain the future economic benefits flowing from the underlying resource and can restrict the access of others to those benefits.
• Future Economic Benefits: These may include revenue from the sale of goods or services, cost savings, or other benefits resulting from the use of the asset.
• Amortisation: This is the systematic allocation of the depreciable amount of an intangible asset over its useful life. The method of amortisation should reflect the pattern in which the asset's future economic benefits are expected to be consumed. If this pattern cannot be determined reliably, the straight-line method is used.
• Impairment: Intangible assets are subject to impairment testing. Assets with finite lives are tested if there is an indication of impairment. Assets with indefinite lives (and goodwill) are tested annually for impairment.

Understanding AS-26 is crucial for correctly accounting for intangible assets, which are becoming increasingly important for businesses in the modern economy.