## Amortization
Methods allowed (same as AS 10 PPE):
- Straight Line Method (SLM)
- Written Down Value (WDV)
- Units of Production
---
## Amortization Period
| Event | Impact |
|---|
| Start | When the asset is available for use |
| Stop | When the asset is disposed/sold, or CA reaches Residual Value |
> Once CA = Residual Value → no further amortization.
---
## Useful Life — Key Rules
| Rule | Detail |
|---|
| Presumption (AS 26) | Useful life cannot exceed 10 years |
| Exceeding 10 years | Allowed only if company provides evidence |
| Goodwill (AS 14 — Amalgamation) | Must be amortised over maximum 5 years |
---
## Residual Value
- Since intangibles have no physical substance, residual value is presumed to be ZERO (no scrap).
- Exception: If a third party has committed to purchase the intangible at the end of its useful life → that committed price = residual value.
---
## Change in Estimates (Useful Life / Residual Value)
- Treated as a Change in Accounting Estimate per AS 5.
- Apply Prospective accounting — adjust remaining amortization going forward; do NOT restate past periods.
```
Revised Annual Amortization = Carrying Amount at date of change
÷ Revised remaining useful life
```
### Example 1
Prior Period Error — Amortization Not Charged (Illustration from notes):
Cost of intangible = ₹20 lakhs, Life = 10 years. Asset not amortised for 6 years (error).
Amortization for 6 years = ₹20L × 6/10 = ₹12 lakhs → Prior Period item (P&L)
Amortization for current year (Year 7) = ₹20L/10 = ₹2 lakhs → P&L
Journal Entry:
```
Prior Period Item (P&L) Dr 12 lakhs
Amortization (P&L) Dr 2 lakhs
To Intangible Asset 14 lakhs
```
CA on 31.3.47 = ₹20L – ₹14L = ₹6 lakhs
### Example 2
Change in Useful Life — Patent (Q9):
Cost of Patent = ₹80 lakh, Original life = 8 years, Amortization per year = ₹10 lakh.
After 2 years: CA = ₹60 lakh. Life revised to 3 years remaining (total 5 years).
Revised annual amortization = ₹60L ÷ 3 = ₹20 lakh per year (prospective)
| Year | Amortization |
|---|
| 1 | ₹10 lakh (old rate) |
| 2 | ₹10 lakh (old rate) |
| 3–5 | ₹20 lakh each (revised rate) |
No retrospective restatement — change in estimate, not error.
### Example 3
Evidence required for >10 year life (Q3 from notes):
Intangible asset acquired 01-04-2016, Cost = ₹120 lakhs, Company assumes 15-year life (no evidence provided).
AS 26 mandates maximum 10-year life without evidence.
Amortization for 6 years @ 10-year life = ₹120L × 6/10 = ₹72 lakhs
CA as per AS 26 on 31-03-2022 = ₹48 lakhs
CA in Company's books (using 15-year life) = ₹72 lakhs
Shortfall = ₹24 lakhs → Prior Period Item (P&L)
```
Revenue Reserve Dr 24 lakhs (or Prior Period P&L)
To Intangible Asset 24 lakhs
```