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August 2014

Can email addresses constitute an Intangible Asset?

By Dolphy D’Souza Chartered Accountant
Reading Time 10 mins
With the growth of E-commerce,
wherein Indian companies and start-ups have been investing heavily on
building their customer databases, the accounting treatment of
purchasing the said databases has gained importance with regards to
Indian GAAP. In this Article, the learned author has expressed and
justified the accounting treatment under different scenarios for
purchase of such database of E-mail ID’s based on facts of the cases put
forth in the following article, by referring to technical definitions
and relevant extracts of Accounting Standard-26 ‘Intangible Assets’.

Limited (referred to as the company or Online) is specialised in the
online selling of a range of products. The company’s commercial strategy
relies on purchase of databases of email address containing lists of
people who may be interested in purchasing its products. The lists are
provided by the specialised vendors based on the specifications of
Online. These specifications include:
(i) M inimum amount of data, e.g., email address, first name and last name.
Based on the potential to buy its products, Online has defined various
categories of data, e.g., income, employment, education, residential
location, past history, age, etc. The person should fall under one or
more of these prescribed categories.
(iii) D ata check against the
existing lists of Online – The purpose of this check is to avoid
duplication with existing email address lists.

The email addresses meeting these specifications are treated as valid email addresses.

Scenario 1
specialised vendors carry out search activities to identify valid email
addresses. The company makes payment to these vendors on cost plus
margin basis. Though the company will monitor the quality of work of the
vendor it would nonetheless have to make the payment, even if they have
not found any valid email address. Also, vendors do not guarantee any
exclusivity and they may provide the same email address lists to other
companies also.

Scenario 2
The specialised vendors
carry out search activities to identify valid email addresses. The
company makes payment to these vendors on performance basis. If vendors
do not provide any valid email address, they will not be entitled to any
payment from the company. Also, vendors need to guarantee exclusivity
and they cannot provide the same lists to the competitors of Online.

Can Online recognise the lists of email addresses as an intangible asset under AS 26 Intangible Assets?


1. AS 26 defines the terms intangible assets and assets as below:

intangible asset is an identifiable non-monetary asset, without
physical substance, held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes.

An asset is a resource:

(a) Controlled by an enterprise as a result of past events, and
(b) From which future economic benefits are expected to flow to the enterprise.”

2. A s per paragraph 20 of AS 26, an intangible asset should be recognised if, and only if:
(a) It is probable that the future economic benefits that are attributable to the asset will flow to the enterprise, and
(b) T he cost of the asset can be measured reliably.

3. Paragraphs 11 to 13 of AS 26 explain the requirement concerning “identifiability” as below:

The definition of an intangible asset requires that an intangible asset
be identifiable. To be identifiable, it is necessary that the
intangible asset is clearly distinguished from goodwill. …

An intangible asset can be clearly distinguished from goodwill if the
asset is separable. An asset is separable if the enterprise could rent,
sell, exchange or distribute the specific future economic benefits
attributable to the asset without also disposing of future economic
benefits that flow from other assets used in the same revenue earning

13. Separability is not a necessary condition for
identifiability since an enterprise may be able to identify an asset in
some other way. For example, if an intangible asset is acquired with a
group of assets, the transaction may involve the transfer of legal
rights that enable an enterprise to identify the intangible asset. …”

4. Paragraphs 14 and 17 of AS 26 provide as under with regard to “control”:

A n enterprise controls an asset if the enterprise has the power to
obtain the future economic benefits flowing from the underlying resource
and also can restrict the access of others to those benefits. The
capacity of an enterprise to control the future economic benefits from
an intangible asset would normally stem from legal rights that are
enforceable in a court of law. In the absence of legal rights, it is
more difficult to demonstrate control. However, legal enforceability of a
right is not a necessary condition for control since an enterprise may
be able to control the future economic benefits in some other way.

A n enterprise may have a portfolio of customers or a market share and
expect that, due to its efforts in building customer relationships and
loyalty, the customers will continue to trade with the enterprise.
However, in the absence of legal rights to protect, or other ways to
control, the relationships with customers or the loyalty of the
customers to the enterprise, the enterprise usually has insufficient
control over the economic benefits from customer relationships and
loyalty to consider that such items (portfolio of customers, market
shares, customer relationships, customer loyalty) meet the definition of
intangible assets.”

5. Paragraph 18 of AS 26 explains the requirement concerning “Future Economic Benefits”:

The future economic benefits flowing from an intangible asset may
include revenue from the sale of products or services, cost savings, or
other benefits resulting from the use of the asset by the enterprise.
For example, the use of intellectual property in a production process
may reduce future production costs rather than increase future

6. Paragraph 24 of AS 26 states that if an intangible
asset is acquired separately, the cost of the intangible asset can
usually be measured reliably.

7. Paragraphs 50 and 51 of AS 26 state as under:

I nternally generated brands, mastheads, publishing titles, customer
lists and items similar in substance should not be recognised as
intangible assets.

51. T his Standard takes the view that
expenditure on internally generated brands, mastheads, publishing
titles, customer lists and items similar in substance cannot be
distinguished from the cost of developing the business as a whole.
Therefore, such items are not recognised as intangible assets.”

View 1 – The email address lists cannot be recognised as an intangible asset.

An item without physical substance should meet the following four criteria to be recognised as intangible asset under AS 26:
(a) Identifiability
(b) Future economic benefits
(c) Control
(d) R eliable measurement of cost

the present case, the email address lists are acquired separately and
the company has the ability to sell them to a third party. Thus, based
on guidance in paragraph 12 of AS 26, the lists satisfy identifiablity
criterion for recognition as intangible asset. Online will use the email
address lists to generate additional sales. Therefore, future economic
benefits are expected to derive from the use of these lists and the
second criterion is also met.

However, the third criterion, viz., control, for  recognition of intangible asset is not met. email addresses are public information and the company cannot effectively restrict their use by other companies. hence, in scenario 1, the control criterion for recognition of intangible asset is not met.

The following additional arguments can be made:

(a)    Purchase of email address lists can be analysed as  outsourcing.  these  lists  are  prepared  by  the suppliers based on the specifications of the com- pany, which is not different from the situation where the company would have built them in-house. hence, guidance in paragraph 50 and 51 of as 26 should apply which prohibit recognition of internally generated intangible assets of such nature.

(b)    These  lists  can  be  viewed  as  marketing  tool,  such as leaflets or catalogues; their purchase price being similar to a marketing expense. in accordance with paragraph 56(c) of as 26, expenditure on advertising and promotional activities cannot be recognised as an intangible asset.

View 2 – the email address lists can be recognised as an intangible asset.

Based on the analysis in view 1, the first two criteria for recognition of an intangible asset (identifiability and future economic benefits) are met.

Regarding the third criterion, viz., future economic benefits are controlled by the company; it may be argued that the company acquires the ownership of the email address lists prepared by the vendor as well as the exclusivity of their use. it is able to restrict the access of third parties to those benefits. Hence, in scenario 2, the third criterion is also met.

Online can reliably measure the cost of acquiring email address lists. indeed, in accordance with paragraph 24 of as 26, the cost of a separately acquired intangible item can usually be measured reliably, particularly when the consideration is in the form of cash.

The  author  believes  that  the  company,  which  sub-contracts the development of intangible assets to other parties (its vendors), must exercise judgment in determining whether it is acquiring an intangible asset or whether it is obtaining goods and services that are being used in the development of a customer relationship by the entity itself. in determining whether a vendor is providing services to develop an internally generated intangible asset, the terms of the supply agreement should be examined to see whether the supplier is bearing a significant proportion of the risks associated with a failure of the project. for example, if the supplier is always compensated irrespective of the project’s outcome, the company on whose behalf the development is undertaken should account for those activities as its own. however, if the vendor bears a significant proportion of the risks associated with a failure of the project, the company is acquiring developed intangible asset, and therefore the requirements relating to separate acquisition of intangible asset should apply.

Under this view, the company will amortise intangible asset over its estimated useful life. the author believes that due to the following key reasons, the asset may have relatively small useful life, say, not more than two years:

(a)    the  company  will  use  email  address  lists  to  generate future sales. once the conversion takes place,  the email address lists will lose their relevance for  the company and a new customer relationship asset comes into existence which is an internally generated asset.

(b)    for  email  addresses  which  do  not  convert  into  customers over the next 12 to 24 months, it may be reasonable to assume that they may not be interested in buying company products.

(c)    email addresses may be subject to frequent changes.

Concluding remarks
in scenario 1, the control criterion is not met. Besides the vendor is providing the company a service rather than selling an intangible asset. therefore the author believes that only view 1 should apply in scenario 1. in scenario 2, view 2 is justified. In scenario 2, the exclusivity criterion and consequently the control requirement is met. secondly, since the payment to the vendor is based on performance the company pays for an intangible asset, rather than for services. however, the amortisation period will generally be very short.

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