Page 3 - 4. COMPILER QB - INDAS 38

paid for further advertisements costing Rs. 4,00,000. The accountant charged all these costs as expenses in
the year to 31 March 2018. However, CFO of A Ltd. does not want to charge Rs. 12,00,000 against 2017-2018
profits. He believes that these costs can be carried forward as intangible assets because the company’s market

research indicates that this new store is likely to be highly successful.
Examine and justify the treatment of these costs of Rs. 12,00,000 in the financial statements for the year
st
ended 31 March, 2018 as per Ind AS.
SOLUTION

● Ind AS 38 specifically prohibits recognising advertising expenditure as an intangible asset. Irrespective of
success probability in future, such expenses have to be recognized in profit or loss. Therefore, the
treatment given by the accountant is correct since such costs should be recognised as expenses.

● However, the costs should be recognised on an accrual basis.
Therefore, of the advertisements paid for before 31st March, 2018, Rs. 7,00,000 would be recognised as
an expense and Rs. 1,00,000 as a prepayment in the year ended 31st March 2018.
Rs. 4,00,000 cost of advertisements paid for since 31st March, 2018 would be charged as expenses in
the year ended 31st March, 2019.

Q3 (RTP Nov. 18)
One of the senior engineers at XYZ has been working on a process to improve manufacturing efficiency and,
consequently, reduce manufacturing costs. This is a major project and has the full support of XYZʼs board of
directors. The senior engineer believes that the cost reductions will exceed the project costs within twenty-four

months of their implementation. Regulatory testing and health and safety approval was obtained on 1 June
20X5. This removed uncertainties concerning the project, which was finally completed on 20 April 20X6. Costs
of Rs 18,00,000, incurred during the year till 31st March 20X6, have been recognized as an intangible asset.
An offer of Rs 7,80,000 for the newly developed technology has been received by potential buyers but it has
been rejected by XYZ. The Senior engineer believes that the project will be a major success and has the

potential to save the company Rs 12,00,000 in perpetuity. Director of research at XYZ, Neha, who is a qualified
electronic engineer, is seriously concerned about the long-term prospects of the new process and she is of the
opinion that competitors would have developed new technology at some time which would require replacing the
new process within four years. She estimates that the present value of future cost savings will be Rs 9,60,000
over this period. After that, she thinks that there is no certainty about its future. What would be the

appropriate accounting treatment of the aforesaid issue?
SOLUTION

Ind AS 38 ‘Intangible Assets’ requires an intangible asset to be recognised if, and only if, certain criteria are
met. Regulatory approval on 1 June 20X5 was the last criterion to be met, the other criteria have been met as
follows:
● Intention to complete the asset is apparent as it is a major project with full support from board
● Finance is available as resources are focused on project
● Costs can be reliably measured

● Benefits are expected to exceed costs – (in 2 years)
Amount of Rs 15,00,000 (Rs 18,00,000 x 10/12) should be capitalised in the Balance sheet of year ending
20X5-20X6 representing expenditure since 1 June 20X5.

4. 2