Ind AS 38: Intangible Assets — Recognition, Amortisation & Impairment
- What Is an Intangible Asset? Core Criteria
- Recognition: Acquired vs Internally Generated
- The R&D Rule: Research Always Expensed, Development Maybe Capitalised
- Amortisation: Finite vs Indefinite Useful Life
- Impairment of Intangibles
- Case Study: TCS — Software Development Capitalisation
- Case Study: Sun Pharma — Drug Discovery R&D
- Case Study: Hindustan Unilever — Acquired Brands & Trademarks
- Comparison: Ind AS 38 vs Old IGAAP
- Key Disclosures Required Under Ind AS 38
Ind AS 38 governs accounting for intangible assets — identifiable non-monetary assets without physical substance. From capitalised software development costs to acquired brand names, drug licences to customer relationships recognised in a business combination, intangibles are central to the balance sheets of India's knowledge-economy companies. The standard draws a sharp line between what can be recognised as an asset and what must be expensed — and the consequences are significant for reported EBITDA, profit, and balance sheet strength.
| Structural block | What it covers |
|---|---|
| Objective and scope | Prescribes accounting for intangible assets — identifiable, non-monetary assets without physical substance (patents, software, licences, customer relationships) — not specifically dealt with in another standard. |
| Identifiability and recognition | An intangible asset must be identifiable (separable, or arising from contractual/legal rights), controlled by the entity, and expected to generate future economic benefits — recognised only when cost can be measured reliably and the recognition criteria are met. |
| Internally generated intangibles | Research costs are always expensed as incurred; development costs are capitalised only once the entity can demonstrate technical feasibility, intention and ability to complete and use/sell the asset, and reliable cost measurement — internally generated goodwill, brands, and similar items are never recognised as assets. |
| Measurement after recognition | Cost model (cost less accumulated amortisation and impairment) or, rarely used in India, revaluation model where an active market exists. |
| Useful life and amortisation | Assets with a finite useful life are amortised systematically over that life; assets with an indefinite useful life are not amortised but are tested for impairment at least annually (per Ind AS 36) and the "indefinite" assessment is reviewed each period. |
| Derecognition and disclosure | Derecognised on disposal or when no future economic benefits are expected; disclosures include a reconciliation of carrying amount by class, and separate disclosure of the aggregate research and development expenditure recognised as an expense. |
What Is an Intangible Asset? Core Criteria
Under Ind AS 38, an intangible asset is an identifiable non-monetary asset without physical substance. Three conditions must all be met:
- Identifiability: Separable from the entity (can be sold, transferred, licensed independently), OR arises from contractual/legal rights (even if inseparable)
- Control: Entity has power to obtain future economic benefits from the resource and can restrict others' access
- Future economic benefits: Expected inflow of revenues, cost savings, or other economic benefits attributable to the asset
Examples: patents, copyrights, customer lists, software licences, brand names (acquired), franchise rights, customer relationships, drug approvals (ANDA, NDA), mining rights.
Recognition: Acquired vs Internally Generated
Recognition depends critically on whether the intangible was acquired externally or generated internally.
| Source | Recognition | Initial Measurement |
|---|---|---|
| Separately acquired (e.g., patent purchased) | Recognised as asset if identifiable, controllable, future benefits probable | Cost = purchase price + directly attributable costs to prepare for intended use |
| Acquired in business combination (Ind AS 103 PPA) | Recognised separately from goodwill if fair value can be reliably measured | Fair value at acquisition date (even if not on acquiree's balance sheet) |
| Internally generated (brand, masthead, customer list) | Cannot be recognised — always expensed | N/A |
| Internally generated — development phase (qualifying) | Recognised if all 6 criteria met (see below) | Directly attributable costs from date criteria first met |
| Received as government grant | Can recognise at fair value or nominal amount | Per Ind AS 20 |
The R&D Rule: Research Always Expensed, Development Maybe Capitalised
This is the most practically important part of Ind AS 38 for pharma, tech, and industrial companies. The standard distinguishes research from development:
Original, planned investigation to obtain new scientific/technical knowledge and understanding
Always expensed — no exceptions. Cannot be capitalised regardless of outcome probability.
Examples: laboratory studies, testing of alternatives, searching for new knowledge
Application of research findings to plan/design new or substantially improved products/processes
Capitalised only if ALL 6 criteria are met
Examples: prototype testing, design of tools/jigs/dies, pilot plant design
The 6 Development Capitalisation Criteria (All Must Be Met)
- Technical feasibility of completing the intangible so it will be available for use or sale
- Intention to complete and use/sell it
- Ability to use or sell the asset
- Probable future economic benefits — demonstrated by existence of a market or internal usefulness
- Adequate technical, financial and other resources to complete development
- Ability to reliably measure expenditure attributable to the intangible during development
Amortisation: Finite vs Indefinite Useful Life
The amortisation treatment depends on the useful life classification:
| Category | Useful Life | Amortisation | Impairment Testing |
|---|---|---|---|
| Finite useful life | Determinable (years or units of production) | Amortised systematically over useful life; reviewed annually | Only when impairment indicators exist |
| Indefinite useful life | No foreseeable limit to period of economic benefits | NOT amortised | Annual impairment test required (even without indicators) |
Residual value of a finite-life intangible is assumed to be zero unless:
- A third party is committed to buy the asset at end of its useful life, OR
- There is an active market for the asset and residual value can be reliably estimated
Amortisation method: Must reflect the pattern of consumption of expected economic benefits. Straight-line is most common; units-of-production can be used if usage pattern is determinable.
- Capitalised software (development costs): 3–5 years
- Customer relationships (from PPA): 5–15 years
- Patents: remaining legal life or economic life, whichever is shorter
- Drug approvals/ANDAs: economic life (typically 10–20 years)
- Brand names (finite): per contractual/market assessment
- Brand names (indefinite): no amortisation; annual impairment test
Impairment of Intangibles
Impairment of intangibles is governed by Ind AS 36 (Impairment of Assets). Key points:
- Intangibles with indefinite useful life (and goodwill): mandatory annual impairment test regardless of whether indicators exist
- All other intangibles: impairment test only when there is an indicator of impairment
- Impairment loss = Carrying Amount minus Recoverable Amount (higher of value in use and fair value less costs to sell)
- Reversal of impairment allowed for intangibles (except goodwill) if circumstances change and impairment no longer exists
See our Ind AS 36 guide for the full impairment methodology.
Case Study: TCS — Software Development Capitalisation
💻 TCS: Internal-Use Software Development Costs
TCS, India's largest IT company, develops significant proprietary software platforms — including its BaNCS banking platform, Ignio AI, and various industry-specific solutions. How does Ind AS 38 apply?
TCS's FY25 annual report shows ₹1,200+ crore in intangible assets (software and IP), amortised at approximately ₹400–500 crore per year. Internal-use software that doesn't meet Ind AS 38 development criteria is expensed in the same period — creating a conservative earnings impact in development years.
Case Study: Sun Pharma — Drug Discovery R&D
💊 Sun Pharmaceutical: ANDA Portfolio & R&D Treatment
Sun Pharma's competitive advantage lies in its ANDA (Abbreviated New Drug Application) pipeline and specialty drug portfolio. Ind AS 38 applies differently to different types of pharma intangibles:
| Intangible Type | Ind AS 38 Treatment | Balance Sheet Impact |
|---|---|---|
| Acquired ANDAs / product rights | Capitalised at acquisition cost; finite useful life | Yes — significant asset on balance sheet |
| In-house ANDA filing costs | Research phase = expensed; development capitalised only post-approval likelihood established | Limited — most expensed |
| Specialty pharma brands (acquired) | Capitalised; typically indefinite life if strong brand equity | Yes — subject to annual impairment test |
| Internal drug discovery (early stage) | Always expensed — research phase | No — P&L impact only |
Sun Pharma's FY25 balance sheet carries ₹8,000–10,000 crore in intangible assets, predominantly from acquired branded generics businesses (Ranbaxy merger, Halol acquisitions). Their R&D spend of ₹3,500+ crore in FY25 is largely expensed — creating a drag on reported EBITDA but building future pipeline value not visible on the balance sheet.
Case Study: Hindustan Unilever — Acquired Brands & Trademarks
🌄 HUL: Brand Accounting Under Ind AS 38
HUL owns iconic brands like Surf Excel, Lux, Dove, Lifebuoy, Horlicks (acquired from GSK Consumer). How are these brands treated?
Key principle: Internally developed brands (built organically by HUL over decades — Surf, Lux, Lifebuoy) cannot be capitalised under Ind AS 38. They are not on HUL's balance sheet at all — regardless of their economic value running into thousands of crores.
Acquired brands (Horlicks, Boost, Viva — acquired via the GSK Consumer Healthcare acquisition in 2020) are capitalised at their fair value on the acquisition date.
| Brand Category | Balance Sheet? | Ind AS 38 Treatment |
|---|---|---|
| Horlicks, Boost (acquired) | Yes — at acquisition FV (~₹8,000+ crore) | Indefinite useful life; no amortisation; annual impairment test |
| Surf Excel, Lux, Dove (organic) | No | Cannot be recognised — internally generated brand |
This creates the famous "brand gap" — HUL's market cap of ~₹5-6 lakh crore vs book value of ~₹9,000 crore. The difference largely represents organic brand value + franchise not captured in IGAAP/Ind AS financial statements.
Comparison: Ind AS 38 vs Old IGAAP
- Goodwill from acquisitions could be amortised or written off against reserves
- R&D capitalisation criteria were less rigorous — more flexible
- Useful life of intangibles presumed not to exceed 10 years (rebuttable)
- Indefinite useful life concept less explicitly defined
- Revaluation of intangibles generally not permitted
- Goodwill NOT amortised (Ind AS 103) — annual impairment test only
- Strict research vs development distinction; research always expensed
- No presumptive useful life cap — assessment based on facts
- Indefinite useful life explicitly recognised; no amortisation
- Revaluation model available (requires active market — rare for intangibles)
Key Disclosures Required Under Ind AS 38
Companies must disclose for each class of intangible assets:
- Whether useful lives are finite or indefinite; if finite, the useful lives or amortisation rates
- Amortisation methods used
- Gross carrying amount and accumulated amortisation at beginning and end of period
- Reconciliation of carrying amount — additions, disposals, amortisation, impairment losses
- For indefinite-life intangibles: carrying amount and reasons supporting indefinite life assessment
- Description, carrying amount, and remaining amortisation period of any individually material intangible
- For intangibles acquired in business combinations: fair value and amortisation period
- Amount of research and development expenditure recognised as expense in the period