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CA Foundation · Accounting · Depreciation and Amortisation

Which of the following statements about amortisation of an intangible asset under AS 26 is correct?

Residual value of an intangible asset is taken as zero unless a third party has committed to buy it at the end of its useful life or an active market exists to determine it. Amortisation starts when the asset is available for use and is charged irrespective of profits.

  1. AAmortisation begins when the asset is purchased, even if not yet available for use
  2. BAmortisation is charged only if the enterprise earns a profit in that year
  3. CResidual value is assumed to be zero unless a third party has committed to buy it or an active market existsCorrect
  4. DAmortisation period must be reviewed only when the asset is sold

Explanation

AS 26 assumes the residual value of an intangible asset is zero unless there is a commitment by a third party to buy it at the end of its life or an active market exists from which residual value can be determined. Amortisation starts when the asset is available for use and is charged regardless of profit. The period is reviewed at least at each financial year-end.

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