Accounting for costs incurred on internally generated intangible asset
Facts of the case:
Company X Ltd. has undertaken set up of Global business solution (GBS). GBS refers to set up a shared service function of automation of various functions including accounts, commercial, HR, supply chain management in order to improve efficiency which will result in cost saving. Set up GBS is divided into 4 stages namely
1. Diagnosis study- In this stage preliminary study conducted with the support of consultant to check potential scope for shared service, proposed operating model. Post diagnosis study, it was decided to set up GBS on the basis existence of technical feasibility, availability of resources, intention to complete. Future economic benefits in the form of cost savings. Expenditure incurred on this stage- consultant fee and travel expenses.
2. Predetailed design- In this stage following activities are done. - Team identification - Vendor selection for transition, transformation, software tooling, outsourcing of a one activities. Expenditure incurred- salary of new hired people specially for GBS project and their travelling.
3. Detailed design- in this stage following activities are undertaken - Scope of shared service - Detailed transition plan - New hiring Expenditures incurred- consultant fee for detail design study, transitioning and transformation, training, salary of newly hired 10 people for GBS function, international travelling. Directly attributable general and admin overhead.
4. Implementation- roll out of GBS function - expenditure on software and tolling purchase, consultant fee, training, travelling.
Issue/Query:
My query is that whether the set up of GBS function can be capitalised as Intangible assets? If yes what nomenclature we can use in balance sheet?
As per our view, stage 1 is research phase and expenditure incurred there is charged off to P&L. From stage 2 development phase begin since all conditions of India as 38 are met. Please let us know which expenditure can be capitalised from stage 2 to 4. Thanks
Response:
The query is on which costs can be capitalised as internally generated intangible asset. The querist has identified research phase and development phase of Global Business Solution (GBS). Therefore, the response below discusses only the composition of costs of GBS as an internally generated intangible asset.
Paragraph 24 of Ind AS 38 Intangible Assets states that an intangible asset shall be measured initially at cost. Further, paragraphs 65 to 67 of Ind AS 38 provide guidance on composition of costs of internally generated intangible asset as under:
“65 The cost of an internally generated intangible asset for the purpose of paragraph 24 is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria in paragraphs 21, 22 and 57. Paragraphs 71 prohibits reinstatement of expenditure previously recognised as an expense.
66 The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Examples of directly attributable costs are:
a. Costs of materials and services used or consumed in generating the intangible asset;
b. Costs of employee benefits (as defined in IAS 19) arising from the generation of the intangible asset;
c. Fees to register a legal right; and
d. Amortisation of patents and licenses that are used to generate the intangible asset.
Ind AS 23 specifies the criteria for the recognition of interest as an element of the cost of an internally generated intangible asset.
67 The following are not components of the cost of an internally generated intangible asset:
a. Selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use;
b. Identified inefficiencies and initial operating losses incurred before the asset achieves planned performance; and
c. Expenditure on training staff to operate the asset.”
The querist has submitted that the company incurs the following expenditure from stage 2 identified by the querist as the beginning of development phase:
1. Salary of newly hired people specially for GBS project and their travelling
2. Consultant fee for detail design study, transitioning and transformation
3. Training
4. Salary of new hired 10 people for GBS function
5. International travelling
6. Directly attributable general and admin overhead
7. Expenditure on software and tolling purchase
Considering the guidance given in paragraphs 65 to 67 of Ind AS 38, all the expenses identified above except the cost incurred for training can be recognised as cost of the internally generated intangible asset. The nomenclature may be “Internally developed GBS”.