Ind AS 38 – Intangible Assets Interview Q&A
A. Foundations & Recognition
Q1: What is the objective of Ind AS 38, and how does it define an intangible asset?
What the interviewer tests: The interviewer is evaluating your knowledge of accounting standards and your ability to articulate the definition and implications of intangible assets.
- Objective of Ind AS 38
- Definition of intangible asset
- Recognition criteria
The objective of Ind AS 38 is to prescribe the accounting treatment for intangible assets. It defines an intangible asset as an identifiable non-monetary asset without physical substance, which is controlled by an entity and expected to provide future economic benefits. Recognition requires that it be probable that the expected future benefits will flow to the entity and that the cost can be measured reliably.
Q2: How do you distinguish an intangible asset from goodwill or a mere expense?
What the interviewer tests: The interviewer is looking for your understanding of accounting principles and asset classification.
- Intangible assets definition
- Goodwill characteristics
- Expense recognition
An intangible asset is a non-physical asset that provides future economic benefits, such as patents or trademarks. Goodwill arises during business acquisitions when the purchase price exceeds the fair value of identifiable net assets, reflecting brand value or customer loyalty. In contrast, expenses are costs incurred to generate revenue and do not provide future benefits, thus they are not classified as assets.
Q3: What are the recognition criteria for internally generated intangible assets?
What the interviewer tests: The interviewer is testing your knowledge of accounting standards and the criteria for asset recognition.
- Identification of intangible assets
- Criteria for recognition
- Compliance with accounting standards
Internally generated intangible assets are recognized when they meet specific criteria: they must be identifiable, controlled by the entity, and expected to generate future economic benefits. Additionally, the costs associated with the development phase must be reliably measured, in accordance with applicable accounting standards like IAS 38.
Q4: Why are most research costs expensed, but development costs sometimes capitalized?
What the interviewer tests: The interviewer wants to gauge your understanding of accounting principles related to research and development.
- Accounting standards for research
- Capitalization criteria for development
- Impact on financial statements
Research costs are generally expensed as they are uncertain and do not guarantee future economic benefits. In contrast, development costs can be capitalized if they meet specific criteria, such as technical feasibility and intention to complete, as they are likely to provide future economic benefits, impacting the balance sheet positively.
Q5: What characteristics classify an internally generated intangible asset as development rather than research?
What the interviewer tests: The interviewer is evaluating your knowledge of the distinction between research and development phases in intangible asset recognition.
- Criteria for development phase
- Distinction from research phase
- Accounting implications
An internally generated intangible asset is classified as development if it meets specific criteria, including the intention to complete the asset for use or sale, the ability to use or sell it, and the existence of a market for it. In contrast, research is aimed at gaining new scientific or technical knowledge and does not meet these criteria, which affects how costs are capitalized.
B. Measurement & Costing
Q6: What costs can be included in the initial measurement of an intangible asset?
What the interviewer tests: The interviewer is evaluating your understanding of intangible asset recognition and measurement principles.
- Directly attributable costs
- Development phase costs
- Exclusion of general administrative costs
In the initial measurement of an intangible asset, costs that can be included are those directly attributable to preparing the asset for its intended use, such as purchase price, legal fees, and direct labor costs during the development phase. General administrative costs and other overheads are typically excluded.
Q7: How should subsequent expenditure on an intangible asset be treated?
What the interviewer tests: The interviewer is checking your understanding of the accounting treatment of intangible assets.
- Capitalization criteria
- Expense recognition
- Impact on financial statements
Subsequent expenditure on an intangible asset should be capitalized if it enhances the asset's value or extends its useful life. If the expenditure merely maintains the asset's current condition, it should be expensed. This treatment affects the balance sheet and income statement accordingly.
Q8: What are the two permissible measurement models after initial recognition—cost and revaluation?
What the interviewer tests: The interviewer is assessing your understanding of measurement models in accounting and their implications.
- Cost model
- Revaluation model
- Financial reporting implications
The two permissible measurement models after initial recognition are the cost model, where assets are carried at their cost less accumulated depreciation, and the revaluation model, which allows assets to be carried at their fair value at the date of revaluation less subsequent depreciation.
Q9: How does the revaluation model apply to intangible assets, and under what conditions is it permitted?
What the interviewer tests: The interviewer is evaluating your understanding of the revaluation model specifically for intangible assets and the conditions that govern its application.
- Revaluation model
- Intangible assets
- Permissible conditions
The revaluation model for intangible assets allows them to be carried at fair value, provided that fair value can be determined by reference to an active market. This model is permitted when the asset has a reliable measure of fair value and is regularly revalued to reflect current market conditions, ensuring that the financial statements present a true and fair view of the company's assets.
Q10: What disclosures are required when the revaluation model is applied to intangible assets?
What the interviewer tests: The interviewer is testing your knowledge of accounting standards and disclosure requirements for intangible assets.
- Fair value measurement
- Revaluation surplus
- Amortization and impairment details
When applying the revaluation model to intangible assets, disclosures must include the fair value measurement basis, whether the revaluation resulted in a surplus or deficit, and details about the amortization methods and any impairment losses recognized. This ensures transparency and compliance with accounting standards.
C. Amortization & Useful Life
Q11: What is the difference between indefinite-life and finite-life intangible assets?
What the interviewer tests: The interviewer wants to evaluate your knowledge of accounting principles related to intangible assets.
- Definition of indefinite-life assets
- Definition of finite-life assets
- Amortization differences
Indefinite-life intangible assets are those that are not expected to be consumed or expire and thus are not subject to amortization, such as trademarks or goodwill. Conversely, finite-life intangible assets, like patents or copyrights, have a limited useful life and are amortized over that period. This distinction is crucial for accurate financial reporting and impairment testing.
Q12: How do you determine the useful life of an intangible asset, and which factors influence its estimation?
What the interviewer tests: The interviewer is assessing your understanding of intangible assets and the factors affecting their amortization.
- Legal or contractual provisions
- Technical obsolescence
- Market demand
The useful life of an intangible asset is determined by considering factors such as legal or contractual provisions that may limit its duration, the asset's expected usage, and potential technological advancements that could render it obsolete. Additionally, market demand and the competitive landscape can influence its longevity.
Q13: What amortization methods are acceptable under Ind AS 38, and how must they reflect usage patterns?
What the interviewer tests: The interviewer is assessing your knowledge of amortization methods and their alignment with asset usage.
- Straight-line method
- Declining balance method
- Usage-based method
Under Ind AS 38, acceptable amortization methods include the straight-line method, declining balance method, and usage-based method. The chosen method must reflect the pattern in which the asset's future economic benefits are expected to be consumed.
Q14: How should useful life or amortization method changes be accounted for?
What the interviewer tests: The interviewer is testing your understanding of accounting principles related to asset management and reporting.
- Prospective application
- Disclosure requirements
- Impact on financial statements
Changes in useful life or amortization methods should be accounted for on a prospective basis, meaning they affect future periods without restating prior financial statements. It's also essential to disclose the change and its rationale in the financial statements, as it impacts asset valuation and depreciation expense.
Q15: How are intangible assets with indefinite useful life tested for impairment, and why aren't they amortized?
What the interviewer tests: The interviewer is checking your knowledge of impairment testing and accounting for intangible assets.
- Annual impairment testing
- No systematic amortization
- Indefinite useful life rationale
Intangible assets with indefinite useful lives are tested for impairment annually, or more frequently if there are indicators of impairment. They are not amortized because their useful life cannot be determined to be limited, reflecting their potential to generate economic benefits indefinitely.
D. Derecognition & Disclosures
Q16: When should an intangible asset be derecognized from the books?
What the interviewer tests: The interviewer is testing your knowledge of accounting principles related to intangible assets and their treatment in financial statements.
- Criteria for derecognition
- Accounting standards
- Impact on financial statements
An intangible asset should be derecognized from the books when it is disposed of or when it no longer meets the criteria for recognition, such as when it has been impaired or its useful life has expired. This is in accordance with relevant accounting standards, ensuring that the financial statements accurately reflect the company's assets.
Q17: How are gains or losses treated on the disposal or retirement of an intangible asset?
What the interviewer tests: The interviewer is assessing your understanding of accounting standards related to intangible assets.
- Recognition of gain/loss
- Disposal method
- Accounting standards
Gains or losses on the disposal or retirement of an intangible asset are recognized in the profit and loss statement. The gain or loss is calculated as the difference between the proceeds from the disposal and the carrying amount of the asset at the time of disposal, in accordance with relevant accounting standards.
Q18: What key disclosures are required for intangible assets in financial statements?
What the interviewer tests: The interviewer wants to evaluate your knowledge of the disclosure requirements for intangible assets under relevant accounting standards.
- Nature of intangible assets
- Amortization methods
- Impairment testing
Key disclosures for intangible assets include the nature of the assets, the amortization methods used, and the useful lives or amortization periods. Additionally, any impairment losses recognized must be disclosed, along with the reasons for impairment, to ensure stakeholders are aware of the valuations and risks associated with these assets.
Q19: How are capitalized internally generated intangible assets presented and explained in note disclosures?
What the interviewer tests: The interviewer is assessing your understanding of accounting standards and reporting practices for intangible assets.
- Recognition criteria
- Measurement basis
- Disclosure requirements
Capitalized internally generated intangible assets are presented as non-current assets in the balance sheet. In the note disclosures, companies explain the recognition criteria, such as the project's feasibility and expected future economic benefits, alongside the measurement basis, typically at cost less accumulated amortization and impairment losses.
Q20: Why is qualitative disclosure around indicators of change in useful life or impairment critical for intangible assets?
What the interviewer tests: The interviewer wants to evaluate your understanding of intangible asset management and the importance of transparency in financial reporting.
- Importance of qualitative disclosures
- Impact on financial statements
- Stakeholder communication
Qualitative disclosures regarding indicators of change in useful life or impairment of intangible assets are critical because they provide context for the numbers reported. They help stakeholders understand the assumptions and judgments made by management, which can significantly impact asset valuation and overall financial health. Such transparency is essential for informed decision-making and maintaining investor confidence.
E. Practical & Ethical Scenarios
Q21: A company launches a new software platform—how do you evaluate capitalizing development costs vs expensing them?
What the interviewer tests: The interviewer is evaluating your understanding of accounting principles related to software development costs and the implications of capitalization versus expensing.
- Criteria for capitalization
- Impact on financial statements
- Regulatory compliance
To evaluate capitalizing development costs, I would consider whether the costs meet the criteria set by accounting standards, such as ASC 350 or IAS 38. If the software is expected to provide future economic benefits and development is complete, costs can be capitalized. Otherwise, they should be expensed, impacting profit and loss in the current period.
Q22: How would you handle expenditure on brand-building or marketing in light of Ind AS 38 criteria?
What the interviewer tests: The interviewer is assessing your understanding of intangible asset recognition and treatment under Ind AS.
- Understanding of Ind AS 38
- Criteria for asset recognition
- Impact on financial statements
To handle expenditure on brand-building under Ind AS 38, I would first assess whether the costs meet the criteria for recognition as an intangible asset, focusing on factors like identifiability, control, and future economic benefits. If the expenditure does not meet these criteria, I would classify it as an expense in the profit and loss statement.
Q23: When acquiring a patent in a business combination, how do you determine and recognize its fair value separately?
What the interviewer tests: The interviewer is probing your knowledge of fair value measurement in business combinations and the treatment of intangible assets.
- Fair value determination methods
- Recognition process
- Impact on financial statements
To determine and recognize the fair value of a patent acquired in a business combination, one can use the income approach, which estimates future cash flows attributable to the patent, discounted to present value. The fair value is recognized separately from goodwill on the balance sheet as an intangible asset, impacting both the asset valuation and amortization expense.
Q24: How would you ensure consistent and transparent treatment when a group of subsidiaries use different amortization methods for similar intangibles?
What the interviewer tests: The interviewer is assessing your understanding of accounting principles and your ability to manage consistency across subsidiaries.
- Standardization of policies
- Communication with subsidiaries
- Regular audits and reviews
To ensure consistent and transparent treatment, I would implement a standardized accounting policy across all subsidiaries, clearly outlining the acceptable amortization methods. Regular communication and training sessions would be held to ensure all subsidiaries understand these policies. Additionally, I would conduct regular audits to review compliance and address any discrepancies proactively.
Q25: What governance processes would you implement to avoid management bias in classifying and measuring internally generated intangible assets?
What the interviewer tests: The interviewer wants to evaluate your knowledge of governance frameworks and your ability to mitigate bias in financial reporting.
- Establishing clear policies
- Regular audits
- Involvement of independent committees
I would implement clear policies that define criteria for classifying intangible assets, conduct regular audits to ensure compliance, and involve independent committees to review management's assessments to minimize bias.