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CA Intermediate · Advanced Accounting · AS 26 Intangible Assets

Bharat Softech Ltd acquired a software licence on 1 April 2024 for Rs 12,00,000 with a useful life of 5 years and nil residual value, amortised on a straight-line basis. On 1 April 2026 the company incurred Rs 1,20,000 on a routine annual maintenance contract for the software. What is the amortisation charge for the year ended 31 March 2027, and the treatment of the maintenance cost?

Amortisation is Rs 2,40,000 (Rs 12,00,000 over 5 years) and the Rs 1,20,000 maintenance cost is expensed. Routine maintenance only preserves the originally assessed benefits and does not create a new asset or improve the standard of performance, so AS 26 does not allow capitalisation.

  1. ARs 2,40,000; maintenance expensedCorrect
  2. BRs 2,64,000; maintenance capitalised
  3. CRs 2,40,000; maintenance capitalised
  4. DRs 3,60,000; maintenance expensed

Explanation

Amortisation is 12,00,000/5 = Rs 2,40,000 per year. Routine maintenance only maintains the expected benefits and does not enhance them, so it is expensed. Capitalising it would wrongly change the carrying amount and charge.

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