Ind AS on Intangible Assets, Investment Property and Leases

Three standards about assets that are not physical stock or plant

Inventories and PPE, the previous chapter's territory, are physical assets whose value is relatively intuitive to picture. This chapter's three standards deal with assets that are either not physical at all (intangibles), physical but held for a purpose other than use in operations (investment property), or physical but not owned outright (the right-of-use asset under a lease). Each standard's hardest questions are scope questions — does this expenditure even qualify as an asset at all, does this property genuinely meet the investment property definition, does this arrangement actually meet the definition of a lease — which is why this chapter, more than most, rewards getting the initial classification right before any measurement is attempted.

Ind AS 38: Intangible Assets

Recognition criteria. An intangible asset is recognised only if it is identifiable (either separable — capable of being sold, transferred or licensed separately — or arising from contractual or legal rights), controlled by the entity, and expected to generate future economic benefits, with the added recognition criteria of it being probable those benefits will flow to the entity and the cost being reliably measurable.

The internally generated intangibles trap. Ind AS 38 explicitly prohibits recognising internally generated goodwill, brands, mastheads, publishing titles, customer lists and similar items as intangible assets, regardless of the expenditure incurred on them, because such items cannot be reliably distinguished from the cost of developing the business as a whole — this scope exclusion was flagged in the method chapter as a recurring trap, and it recurs here as this standard's own single most tested point.

Research versus development. Expenditure on research — original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge — is always expensed as incurred, because at the research stage an entity cannot yet demonstrate that an intangible asset exists that will generate probable future economic benefits. Expenditure on development — the application of research findings to a plan or design for a new or substantially improved product or process before commercial production begins — is capitalised, but only from the point an entity can demonstrate all six specific criteria simultaneously: technical feasibility of completing the asset; intention to complete and use or sell it; ability to use or sell it; how it will generate probable future economic benefits (existence of a market or, for internal use, its usefulness); availability of adequate technical, financial and other resources to complete it; and ability to reliably measure the expenditure attributable to it. Failing even one of these six criteria means the expenditure remains research-stage and must be expensed, which is precisely why this six-point checklist is worth memorising as a checklist, not a paragraph — a Final-level question typically gives you a fact pattern and asks you to test it against all six explicitly.

Useful life: finite versus indefinite. An intangible asset with a finite useful life is amortised over that life, on a systematic basis reflecting the pattern of consumption of benefits (straight-line if that pattern cannot be reliably determined), and is also tested for impairment only when an indicator exists, exactly like PPE. An intangible asset with an indefinite useful life — where there is no foreseeable limit to the period over which the asset is expected to generate cash flows, not merely a long life — is not amortised at all, but is instead tested for impairment at least annually, and whenever there is an indicator, mirroring the treatment goodwill itself receives.

Ind AS 40: Investment Property

Definition and the crucial distinction from owner-occupied property. Investment property is property (land or a building, or part of a building, or both) held to earn rentals or for capital appreciation, or both, rather than for use in the production or supply of goods or services, for administrative purposes, or for sale in the ordinary course of business. The critical distinguishing test is purpose: identical physical property can be investment property in one entity's hands and owner-occupied PPE in another's, depending entirely on why it is held, which is why fact patterns in this area are built around subtle scope questions rather than obvious ones — property leased to another group company under an operating lease is investment property from the perspective of the entity holding it (since it is earning rental from a lessee, even if that lessee happens to be a related party), but is treated as owner-occupied from the perspective of the group as a whole in consolidated financial statements, since the group as a whole is using the property for its own operations.

Measurement model choice. Ind AS 40 permits an entity to choose, as an accounting policy applied to all its investment property, either the cost model (essentially the same cost-less-depreciation-and-impairment approach as Ind AS 16) or the fair value model — under which investment property is carried at fair value at each reporting date, with changes in fair value recognised directly in profit or loss, not through OCI as PPE revaluation surplus would be, and, distinctively, investment property carried at fair value is not depreciated at all, since the fair value remeasurement itself already captures any decline in value each period.

Transfers. A transfer to or from investment property is made only when there is an actual change in use, evidenced by specific events — the start of owner-occupation (transfer to PPE), the start of development with a view to sale (transfer to inventory), or the end of owner-occupation (transfer to investment property) — not merely a change in management's intention without a corresponding change in actual use.

Ind AS 116: Leases

The single biggest conceptual shift this standard introduced is that the historic operating-versus-finance-lease distinction, which determined whether a lessee kept a lease off its balance sheet entirely, has been abolished for lessees. Under Ind AS 116, a lessee recognises a right-of-use asset and a lease liability for almost every lease, with only narrow exceptions for short-term leases (twelve months or less, with no purchase option) and leases of low-value underlying assets, which may still be expensed on a straight-line basis without balance sheet recognition.

Definition of a lease. A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration, and control requires both the right to obtain substantially all the economic benefits from use of the identified asset, and the right to direct how and for what purpose the asset is used throughout the period of use. If the supplier has a substantive right to substitute the asset throughout the period of use, the asset is not identified, and the arrangement is not a lease — this substitution test is a frequently tested scope boundary.

Lessee accounting. At commencement, a lessee recognises a lease liability measured at the present value of the lease payments not yet paid, discounted using the rate implicit in the lease if readily determinable, or otherwise the lessee's incremental borrowing rate, and a right-of-use asset measured at the amount of the lease liability, plus any lease payments made at or before commencement, plus initial direct costs, plus an estimate of restoration costs (echoing Ind AS 16's decommissioning provision logic), less any lease incentives received. The right-of-use asset is subsequently depreciated (generally straight-line over the shorter of the lease term and the asset's useful life), and the lease liability is subsequently measured using the effective interest method, with interest expense recognised in profit or loss separately from the depreciation charge — meaning a lease that used to generate one straight-line operating lease expense now generates two separate charges, front-loaded in total expense in early years because interest, computed on a larger opening liability balance, is highest at the start of the lease.

Lessor accounting remains substantially unchanged. A lessor still classifies each lease as either a finance lease — where substantially all the risks and rewards incidental to ownership are transferred — or an operating lease, using indicators such as whether the lease transfers ownership by the end of the lease term, whether the lessee has a purchase option it is reasonably certain to exercise, and whether the lease term is for the major part of the asset's economic life. A finance lease lessor derecognises the underlying asset and recognises a receivable; an operating lease lessor keeps the underlying asset on its own balance sheet and recognises lease income, generally on a straight-line basis over the lease term.

Why this chapter's scope questions matter more than its computations

Every one of these three standards has, at its heart, a threshold question that must be answered correctly before any measurement is even attempted: does this expenditure meet all six development-capitalisation criteria, or is it still research; is this property held for rental or capital appreciation, or is it owner-occupied; does this contract convey control over an identified asset, or is it a service arrangement with no identified asset at all. A candidate who reaches for a formula before settling these threshold questions is answering the wrong question correctly, which earns fewer marks than answering the right question with a smaller arithmetic slip — precisely the scope-first discipline the method chapter established as this paper's organising principle.