As per provisions of AS-26, how would you deal to the following situations: (1) ₹ 23,00,000 paid by a manufacturing company to the legal advisor for…
CA Intermediate · Advanced Accounting · MTP · January 2025
As per provisions of AS-26, how would you deal to the following situations: (1) ₹ 23,00,000 paid by a manufacturing company to the legal advisor for defending the patent of a product is treated as a capital expenditure. (2) During the year 2023-24, a company spent - 7,00,000 for publicity and research expenses on one of its new consumer products which was marketed in the same accounting year but proved to be a failure. (3) A company spent - 25,00,000 in the past three years to develop a product, these expenses were charged to profit and loss account since they did not meet AS-26 criteria for capitalization. In the current year approval of the concerned authority has been received. The company wishes to capitalize - 25,00,000 by disclosing it as a prior period item. (4) A company with a turnover of 200 crores and an annual advertising budget of 50,00,000 had taken up for the marketing of a new product by a company. It was estimated that the company would have a turnover of 20 crore from the new product. The company had debited to its Profit & Loss Account the total expenditure of 50,00,000 incurred on extensive special initial advertisement campaign for the new product.
Suggested Answer and Working Notes:
(a) As per AS 26 “Intangible Assets”, subsequent expenditure on an intangible asset after its purchase or its completion should be recognized as an expense when it is incurred unless (a) it is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance; and (b) expenditure can be measured and attributed to the asset reliably. If these conditions are met, the subsequent expenditure should be added to the cost of the intangible asset. (i) In the given case, the legal expenses to defend the patent of a product amounting - 23,00,000 should not be capitalized and be charged to Profit and Loss Statement. (ii) The company is required to expense the entire amount of 7,00,000 in the Profit and Loss account for the year ended 31st March, 2024 because no benefit will arise in the future. (iii) As per AS 26, expenditure on an intangible item that was initially recognized as an expense by a reporting enterprise in previous annual financial statements should not be recognized as part of the cost of an intangible asset at a later date. Thus, the company cannot capitalize the amount of 25,00,000 and it should be recognized as expense (iv) Expenditure of 50,00,000 on advertising and promotional activities should always be charged to Profit and Loss Statement. Hence, the company has done the correct treatment by debiting the sum of 50 lakhs to Profit and Loss Account.
Topics: AS 26
Related Questions in this Topic
- S Limited is engaged in the manufacture of Lithium-ion batteries for electric cars. It has developed a new technology wh...
- Zenith Consultancy Ltd. is a mid-sized professional services firm engaged in providing consulting services in the areas ...
- On April 1, 2022, Hello Limited approached a software company for implementation of SAP ERP at its organisation. The cos...
- Following is the example of research activities as per AS 26 which is recognised as expense when it is incurred:
- Softline Limited gives you the following balance sheet as at 31st March, 2025: Particulars Notes Amount ₹ Eq...