One of the senior engineers at XYZ has been working on a process to improve manufacturing efficiency and, consequently, reduce manufacturing costs.…

CA Final · Financial Reporting · MTP · May 2025
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 XYZ's 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 1st June 20X5. This removed uncertainties concerning the project, which was finally completed on 20th April 20X6. Costs of 18,00,000, incurred during the year till 31st March 20X6, have been recognized as an intangible asset. An offer of 7,80,000 for the new developed technology has been received by potential buyer but it has been rejected by XYZ. Utkarsh believes that the project will be a major success and has the potential to save the company - 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 to replace the new process within four years. She estimates that the present value of future cost savings will be - 9,60,000 over this period. After that, she thinks that there is no certainty about its future. Advise the appropriate accounting treatment for the aforesaid issue for the year ended 31st March, 20X6.

Suggested Answer and Working Notes:

Ind AS 38 'Intangible Assets' requires an intangible asset to be recognized if, and only if, certain criteria are met. Regulatory approval on 1st 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 boardFinance is available as resources are focused on projectCosts can be reliably measuredBenefits are expected to exceed costs – (in 2 years) Since the project was completed on 20th April, 20X6, on 31st March, 20X6, the amount of 15,00,000 (₹ 18,00,000 x 10/12) should be capitalised in the balance sheet of year ending 20X5-20X6 representing expenditure since 1st June 20X5. The expenditure incurred prior to 1st June 20X5 which is 3,00,000 (2/12 x 18,00,000) should be recognized 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 12,00,000 in perpetuity would clearly have a present value in excess of 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 9,60,000 should be considered in that case. 9,60,000 is greater than the offer received (fair value less costs to sell) of 7,80,000 and so - 9,60,000 should be used as the recoverable amount. So, the carrying amount should be consequently reduced to 9,60,000. Calculation of Impairment loss of intangible asset under development: Particulars ₹ Carrying amount 15,00,000 Less: Recoverable amount 9,60,000 Impairment loss 5,40,000 Impairment loss of 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 ₹ Operating expenses- Development expenditure Dr. 3,00,000 Operating expenses-Impairment loss Dr. 5,40,000 To Intangible asset under development 8,40,000

Topics: Ind AS 36

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