AS 26 of ICAI sets clear rules for recognising and measuring intangible assets under Indian GAAP. It guides companies on software, licences, trademarks, and development costs. This post explains applicability, recognition tests, disclosures, examples, and practical points.
Understanding AS 26 of ICAI
AS 26 of ICAI provides the accounting framework for intangible assets. It applies to enterprises following Indian GAAP, not Ind AS. Companies under the Ind AS roadmap must instead use Ind AS 38.
AS 26 became mandatory from 1 April 2003 for Level I entities and was later extended to other classes. It ensures consistent treatment of software, IP rights, and development costs across Indian enterprises.
Scope and Applicability
AS 26 applies when an enterprise:
- Follows Accounting Standards (AS) issued by ICAI.
- Is not required or permitted to follow Ind AS.
- Holds identifiable non-monetary assets without physical substance.
Covered assets
- Computer software
- Licences, patents, copyrights
- Trademarks and brand-related rights
- Franchise rights
- Technical know-how
Excluded assets
- Financial assets
- Mineral rights
- Deferred tax assets (AS 22)
- Leases under AS 19
- Assets covered by other specific standards
Internally generated goodwill
AS 26 explicitly prohibits recognising internally generated goodwill because its cost cannot be measured reliably.
Recognition Criteria Under AS 26 of ICAI
An intangible asset is recognised only if the enterprise can show:
Identifiability
The asset is separable or arises from legal or contractual rights.
Control
The enterprise controls future economic benefits flowing from the asset.
Future Economic Benefits
These may include improved processes, cost savings, or revenue.
Reliable Measurement
The cost must be measured reliably.
If any condition is not met, the cost must be expensed.
Internally Generated Intangibles
Internally generated intangibles fall into research and development phases.
Research Phase
Costs in the research phase must be expensed. Research includes:
- Feasibility studies
- Investigation and exploration
- Searching for new knowledge
Development Phase
Development costs may be capitalised if the enterprise proves:
- Technical feasibility
- Intention to complete and use/sell
- Ability to use or sell
- Availability of resources
- Probable future benefits
- Reliable measurement of expenditure
Typical development items include software builds, product design, and improved processes.
Measurement Rules: Initial and Subsequent
Initial Measurement
Measured at cost, including:
- Purchase price
- Import duties
- Taxes
- Direct costs for preparing the asset
Subsequent Measurement
AS 26 allows only the cost model, not the revaluation model.
Useful Life and Amortisation
AS 26 assumes a maximum useful life of 10 years, unless a longer period is justified.
Amortisation should reflect the pattern of economic benefits. Straight-line is common, but not mandatory.
Examples: Applying AS 26 of ICAI
ERP Software Example
A company buys ERP software for ₹40 lakh. Installation and testing cost ₹5 lakh.
Total cost = ₹45 lakh.
Capitalise: Purchase, installation, and testing costs.
Amortise over the useful life (say five years).
Customisation Costs
Customisation costs qualify only when they enhance functionality and meet recognition criteria.
Training & Maintenance
Training and routine maintenance costs must be expensed, as they do not provide future economic benefits.
Disclosure Requirements Under AS 26
AS 26 requires detailed disclosures to support transparency.
Mandatory items
- Useful life of each class of intangible
- Amortisation method
- Gross and net carrying amounts
- Amortisation expense
- Nature of intangible assets
- Reconciliation of carrying amount at start and end of period
- R&D expenditure charged to profit and loss
- Basis for determining useful life
For completeness, refer to the ICAI official disclosure checklist on the ICAI website.
Impairment of Intangible Assets
Intangible assets must be tested for impairment when indicators arise. AS 28 governs impairment.
Recoverable Amount
Recoverable amount is the higher of:
- Net selling price, and
- Value in use (present value of expected future cash flows)
If the carrying amount exceeds the recoverable amount, recognise an impairment loss in the profit and loss account.
Common triggers:
- Obsolescence
- Market changes
- Legal restrictions
- Underperformance
Tax Treatment (General Note)
Under the Income Tax Act, Section 32 provides depreciation on specified intangibles like licences, trademarks, and know-how. Accounting treatment under AS 26 may differ from tax rules. For exact cases, consult an authorised tax professional.
Practical Tips for Accountants
- Document all recognition criteria for development costs.
- Track internal project costs with clear evidence.
- Ensure the amortisation method matches economic benefits.
- Review useful life each year.
- Maintain impairment documentation.
- Align disclosures with the Companies Act, 2013 (Schedule III).
- Expense training and maintenance costs consistently.
Conclusion
AS 26 of ICAI gives a structured approach for recognising and measuring intangible assets under Indian GAAP. Clear rules help firms treat software, licences, and development costs consistently. Proper records, disclosures, and reviews support compliance and better reporting.
Key Actions
- Apply recognition tests for each intangible.
- Use proper cost tracking and documentation.
- Review useful life and impairment each year.
FAQs
What does AS 26 of ICAI apply to?
It applies to intangible assets under Indian GAAP for companies not using Ind AS.
Can development costs be capitalised?
Yes, but only if they meet strict technical and economic criteria.
Is internally generated goodwill allowed under AS 26?
No. AS 26 prohibits recognising internally generated goodwill.
What is the maximum useful life under AS 26?
Usually 10 years, unless a longer period is justified.
Are training costs capitalised?
No. Training and maintenance costs are expensed as they do not create future benefits.