Page 4 - 4. COMPILER QB - INDAS 38

The expenditure incurred prior to 1 June 20X5 which is Rs 3,00,000 (2/12 x Rs 18,00,000) should be
recognised as an expense, retrospective recognition of expense as an asset is not allowed.
Ind AS 36 ‘Impairment of assets’ requires an intangible asset not yet available for use to be tested for

impairment annually.
Cash flow of Rs 12,00,000 in perpetuity would clearly have a present value in excess of Rs 12,00,000 and hence
there would be no impairment. However, the research director is technically qualified, so impairment tests
should be based on her estimate of a four-year remaining life and so present value of the future cost savings
of Rs 9,60,000 should be considered in that case.

Rs 9,60,000 is greater than the offer received (fair value less costs to sell) of Rs 7,80,000 and so Rs 9,60,000
should be used as the recoverable amount.
So, the carrying amount should be consequently reduced to Rs 9,60,000.
Calculation of Impairment loss:
Particulars Amount Rs
Carrying amount (Restated) 15,00,000
Less: Recoverable amount 9,60,000
Impairment loss 5,40,000

Impairment loss of Rs 5,40,000 is to be recognised in the profit and loss for the year 20X5-20X6.
Necessary adjusting entry to correct books of account will be:
Particulars Rs
Operating expenses- Development expenditure (P/L) Dr. 3,00,000
To Cash / Bank 3,00,000

Impairment Loss (P/L) Dr. 5,40,000
To Intangible assets – Development expenditure 5,40,000

Q4 (Nov. 20)
ABC Pvt. Ltd., recruited a player. As per the terms of the contract, the player is prohibited from playing for
any other entity for the coming 5 years and has to be in employment with the company and cannot leave the

entity without mutual agreement. The price the entity paid to acquire this right is derived from the skills and
fame of the said player. The entity uses and develops the player through participation in matches. State
whether the cost incurred to obtain the right regarding the player can be recognised as an intangible asset as
per Ind AS 38?

SOLUTION
As per Ind AS 38, for an item to be recognised as an intangible asset, it must meet the definition of an
intangible asset, i.e., identifiability, control over a resource and existence of future economic benefits and also
recognition criteria.

With regard to establishment of control, Ind AS 38 states that an entity controls an asset if the entity has
the power to obtain the future economic benefits flowing from the underlying resource and to restrict the
access of others to those benefits. The capacity of an entity to control the future economic benefits from an
intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence

of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a
necessary condition for control because an entity may be able to control the future economic benefits in some
other way.
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