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7. Mr. E, an Articled Clerk, was not sure about which items should be considered as intangible assets in PQ Ltd. According to AS-26, which of the following items should not be recognized as intangible assets? (I) Internally generated Goodwill (II) Compact disk in the case of computer software (III) Copyrights (IV) Computer software for computer-controlled machine tools that cannot operate without that specific software, which is an integral part of the related hardware.

Options

AI & II above
BII & III above
CIII & IV above
DI & IV above
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Correct Answer

Option DI & IV above

All Options:

  • AI & II above
  • BII & III above
  • CIII & IV above
  • DI & IV above

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Detailed Solution & Explanation

Correct Answer: Option **D**

Explanation:
Under **AS-26 (Intangible Assets)**, we evaluate the status of each item as follows:

1. **(I) Internally generated Goodwill**: AS-26 specifically states that internally generated goodwill should *not* be recognized as an asset. This is because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost. Thus, statement (I) is correct in stating it should not be recognized.
2. **(II) Compact disk in the case of computer software**: A compact disk containing computer software represents the physical medium of the software. The software itself is intangible, and since it is the principal component, it is recognized as an intangible asset. Thus, it *should* be recognized as an intangible asset.
3. **(III) Copyrights**: Copyrights are identifiable non-monetary assets without physical substance, and they are recognized as intangible assets under AS-26.
4. **(IV) Computer software for computer-controlled machine tools**: AS-26 specifies that if an asset contains both tangible and intangible elements, the entity must assess which element is more significant. If the software is an integral part of the related hardware (such as software for a computer-controlled machine tool that cannot operate without that specific software), it is treated as Property, Plant and Equipment (PPE), *not* as an intangible asset. Thus, it should not be recognized as an intangible asset.

Therefore, the items that should **not** be recognized as intangible assets are **(I)** (internally generated goodwill) and **(IV)** (integral machine software). This corresponds to statements (I) and (IV), which is Option D.

Hence, **Option D** is the correct answer.

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