Ind AS 38 – Intangible Assets: Practical Guide for CFOs

What is Ind AS 38?

Ind AS 38 sets out the accounting treatment for intangible assets such as software, intellectual property, brand reputation, and customer relationships, under Indian Accounting Standards.

It explains how these assets should be recognized, measured, amortized, and disclosed in financial statements.

Unlike property, plant, and equipment, intangible assets lack physical substance but often represent critical drivers of enterprise value. Proper accounting for these assets ensures transparency in financial reporting and helps stakeholders understand the economic resources controlled by a company.

For CFOs, finance leaders, and controllers responsible for financial reporting in India, Ind AS 38 plays an important role in areas such as capitalization of development costs, amortization policies, impairment assessment, and compliance with accounting regulations.

Objective of Ind AS 38

The objective of Ind AS 38 is to prescribe the treatment for intangible assets accounting that are not specifically addressed in another accounting standard.

The standard establishes the principles for recognizing an intangible asset, measuring its carrying amount, and determining the amortization and impairment requirements associated with such assets.

By providing clear guidance, Ind AS 38 helps ensure that financial statements present reliable information about an entity’s investment in intangible resources and the consumption of those resources over time.

Scope of Ind AS 38 Standard

Ind AS 38 applies to the intangible assets accounting except when another standard specifically deals with them.

Common examples of intangible assets include:

• Computer software
• Patents and copyrights
• Trademarks and brand names
• Customer lists and relationships
• Licenses and franchise rights

However, certain items fall outside the scope of the standard, including financial assets, goodwill arising in business combinations, mineral rights and exploration assets, and intangible assets related to insurance contracts.

Internally generated goodwill is specifically prohibited from being recognized as an asset under the standard.

Key Principles and Requirements

What are the recognition criteria under IAS 38?

An intangible asset is recognized only if:

1. It is probable that future economic benefits will flow to the entity, and
2. The cost of the asset can be measured reliably.

How are intangible assets initially measured?

An intangible asset is initially measured at cost. This includes purchase price, import duties, non-refundable taxes, and any directly attributable costs required to prepare the asset for its intended use.

Internally Generated Intangible Assets

The standard distinguishes between the research phase and development phase of internally generated assets. Research costs are expensed when incurred because future economic benefits cannot be reliably demonstrated.

Development costs may be capitalized if specific criteria are met, such as technical feasibility, intention to complete the asset, and ability to generate future economic benefits.

Subsequent Measurement of Intangible Assets

After initial recognition, companies may apply either:

• Cost model – asset carried at cost less accumulated amortization and impairment losses
• Revaluation model – asset carried at fair value if an active market exists (rare for most intangible assets)

Amortization of Intangible Assets

Intangible assets with finite useful lives must be amortized over their expected useful life. Assets with indefinite useful lives are not amortized but must be tested annually for impairment.

Practical Business Implications for CFOs

Ind AS 38 has significant implications for companies operating in technology, pharmaceuticals, media, and other knowledge-driven industries.

Organizations must carefully evaluate whether expenditures related to software development, product design, or intellectual property should be capitalized or expensed.

Finance teams must maintain detailed records of intangible assets, including their useful lives, amortization methods, and impairment indicators.

In addition, companies must ensure alignment between R&D teams, finance teams, and management to properly assess the development phase and support capitalization decisions.

Common Challenges in Implementation of Ind AS 38

Companies frequently face challenges in applying Ind AS 38 in practice.

One major difficulty involves distinguishing between research and development phases of projects. Determining when development begins requires judgment and appropriate documentation.

Another challenge is estimating useful lives for intangible assets, particularly when technological changes may shorten asset lifecycles.

Companies also struggle with valuation of acquired intangible assets during mergers and acquisitions, which may require external valuation specialists.

In addition, identifying impairment indicators for intangible assets with indefinite lives can be complex and requires periodic review.

Example of Software Capitalization

Consider a technology company that spends INR 30,00,000 on developing a new software product.

During the initial research stage, the company incurs INR 10,00,000. These costs are expensed immediately.

Once the project enters the development phase and meets capitalization criteria, the company incurs an additional INR 20,00,000.

This development cost is capitalized as an intangible asset and amortized over the software’s estimated useful life, for example five years.

This treatment ensures that costs associated with generating future economic benefits are matched with the periods in which those benefits are realized.

Disclosure Requirements Under Ind AS 38

Ind AS 38 requires companies to provide disclosures that enable users of financial statements to understand the nature and value of intangible assets.

Key disclosures include:

• Useful lives or amortization rates used
• Amortization methods applied
• Gross carrying amount and accumulated amortization
• Reconciliation of opening and closing balances
• Impairment losses recognized during the period
• Details of intangible assets with indefinite useful lives

These disclosures provide transparency regarding how intangible assets contribute to a company’s financial performance.

How Nexdigm Can Help

Nexdigm’s CFO Services team assists companies in navigating the complexities of intangible assets accounting under Indian Accounting Standards.

Our professionals support organizations with capitalization policy design, identification and valuation of intangible assets, development cost assessments, amortization policy review, and preparation of financial statement disclosures.

We also assist companies during audits, financial reporting transitions, and regulatory reviews to ensure robust Ind AS compliance.