Page 225 - DMGT104_FINANCIAL_ACCOUNTING

Unit 10: Accounting and Depreciation for Fixed Assets

10.1.5 Valuation of Intangible Assets Notes

The following guiding principles of AS-10 are kept in mind for the valuation of fixed assets of
special type (intangible assets):

Goodwill

1. Goodwill, in general, is recorded in the books only when some consideration in money or
money’s worth has been paid for it. Whenever a business is acquired for a price (payable
either in cash or in shares or otherwise) which is in excess of the value of the net assets of
the business taken over, the excess is termed as ‘goodwill’. It arises from business
connections, trade name or reputation of an enterprise or from other intangible benefits
enjoyed by an enterprise.
2. As a matter of financial prudence, goodwill is written off over a period. However, many
enterprises do not write off goodwill and retain it as an asset.

Patent
3. Patents are normally acquired in two ways:

(i) By purchase, in which case patents are valued at the purchase cost including incidental
expenses, stamp duty, etc. and
(ii) By development within the enterprise, in which case identifiable costs incurred in
developing the patents are capitalized. Patents are normally written off over their
legal term of validity or over their working life, whichever is shorter.

Know-how

4. Know-how, in general, is recorded in the books only when some consideration in money
or money’s worth has been paid for it. Know-how is generally of two types:
(i) Relating to manufacturing processes; and

(ii) Relating to plans, designs and drawings of buildings or plant or machinery
5. Know-how related to plans, designs and drawings of buildings or plant and machinery is
capitalized under the relevant asset heads. In such cases depreciation is calculated on the
total cost of those assets, including the cost of the know-how capitalized. Know-how
related to manufacturing processes is usually expensed in the year in which it is incurred.
6. Where the amount paid for know-how is a composite sum in respect of both the types
mentioned in above (5) such consideration is apportioned amongst them on a reasonable
basis.
7. Where the consideration for the supply of know-how is a series of recurring annual
payments as royalties, technical assistance fees, contribution to research, etc., such payments
are charged to the profit and loss statement each year.
10.1.6 Disclosure regarding Fixed Assets

The following information should be disclosed in the financial statements:
1. Gross and net book values of fixed assets at the beginning and end of an accounting period
showing additions, disposals, acquisitions and other movements;
2. Expenditure incurred on account of fixed assets in the course of construction or acquisition;
and

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