Identify which assets absorb the benefit
Ind AS 38 paragraph 99 generally recognises amortisation in profit or loss, but includes it in the carrying amount of another asset where that asset absorbs the benefits. For a production intangible, inventory may absorb the charge under Ind AS 2. This guide assumes a recognised finite-life intangible. Under Ind AS 38 paragraph 97, amortisation begins when the asset is available for use. Allocate the depreciable amount over the useful life using the expected pattern of benefit consumption; use straight line if that pattern cannot be determined reliably. Calculate the inventory allocation separately.
Read the applicable text: MCA: Ind AS 38, paragraphs 97–99 MCA: Ind AS 2, paragraphs 10–16, 28–34.
Classify production and other uses
Map the licence to the production process and support any split with actual access, usage or another rational driver. Charge selling or unrelated administrative use to expense where it does not bring inventory to its present location and condition. Confirm that the model does not allocate the same amortisation both directly to products and through the overhead pool.
Apply normal capacity to fixed production overhead
If the production charge behaves as fixed production overhead, apply Ind AS 2 paragraphs 12–13. Use normal capacity, considering normal operating conditions and planned maintenance. Actual output can be used if it approximates normal capacity. Do not raise the per-unit fixed cost because of low output or idle plant: expense unallocated overhead. During abnormally high production reduce allocation per unit so inventories are not measured above cost on that account.
Tie the closing cost to the financial statements
Reconcile the gross amortisation to accumulated amortisation, production cost, direct period expense and any idle amount. Follow production costs through work in progress, finished goods and expense when sold. Check net realisable value on the inventory as a whole at the appropriate level under Ind AS 2. Where relevant, review separate impairment indicators for the intangible; an inventory write-down is not a substitute.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Normal output and remaining stock
Annual production amortisation is ₹12 lakh, normal and actual output 60,000 units. Allocation is ₹20 per unit. Of 15,000 units remaining, ₹3 lakh of this component stays in stock; ₹9 lakh relates to sold units.
Illustrative example 2: Idle production capacity
Fixed production amortisation is ₹12 lakh, normal capacity 60,000 units and actual output 45,000. Allocate ₹9 lakh at ₹20 per unit and expense ₹3 lakh as unallocated overhead.
Illustrative example 3: Abnormally high production
With ₹12 lakh of fixed charge and 75,000 units in an abnormally high period, using ₹20 would allocate ₹15 lakh. In the simplified one-product model, ₹16 per unit allocates only the actual ₹12 lakh.
Illustrative example 4: Production and selling use
An evidenced 75:25 split applies to ₹8 lakh of amortisation. ₹6 lakh enters the production allocation pool and ₹2 lakh of selling use is period expense.
Illustrative example 5: Units sold and closing inventory
A ₹6 lakh allocation across 30,000 equivalent finished units yields ₹20 each. With 21,000 sold and 9,000 held, ₹4.2 lakh flows to expense on sale and ₹1.8 lakh is the inventory component before NRV testing.
Illustrative example 6: NRV review
A batch of 1,000 units costs ₹145 per unit including ₹20 of allocated amortisation; supported NRV is ₹136. The batch write-down is ₹9,000 and the resulting inventory is ₹1.36 lakh. Do not simply remove the amortisation component.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the intangible is recognised and finite-life | Intangible asset register and policy |
| 2 | Verify the available-for-use date and amortisation | Commissioning and amortisation working |
| 3 | Map the benefits to production or other uses | Process and licence usage evidence |
| 4 | Classify fixed versus variable production overhead | Cost policy and behaviour analysis |
| 5 | Support normal capacity and maintenance assumptions | Capacity history and operating plan |
| 6 | Calculate the allocation and idle-cost difference | Production volumes and overhead reconciliation |
| 7 | Check for high-output over-allocation | Comparison of allocated and actual charge |
| 8 | Roll cost through WIP, finished goods and sales | Inventory and cost-of-sales schedules |
| 9 | Test the closing stock against NRV | Product-level price and completion or selling cost evidence |
| 10 | Reconcile the postings and review evidence | Amortisation roll-forward and GL bridge |
Sixteen practitioner FAQs
1. Does paragraph 99 require all software amortisation to enter inventory?
No. Determine whether the asset’s benefits are absorbed in producing inventory.
2. When does amortisation begin?
For a finite-life intangible, when it is available for use under Ind AS 38.
3. Does a production allocation change the useful life?
No. Useful life and amortisation pattern are separate from where the charge is recorded.
4. Can a licence used by sales teams be included in the production pool?
Selling use is excluded from inventory cost under Ind AS 2; support the split.
5. Does every production intangible create a fixed overhead?
Classify the charge by its nature and behaviour before selecting the driver.
6. Can a plant budget always stand in for normal capacity?
Support normal capacity using expected production under normal conditions and account for planned maintenance.
7. When may actual production be used?
Ind AS 2 permits it if it approximates normal capacity.
8. Can idle capacity be absorbed by fewer units?
Do not increase fixed overhead allocated per unit because of low production or idle plant.
9. What changes during abnormally high output?
Reduce the unit allocation so inventory is not measured above cost on that account.
10. How should several products share one licence?
Use a rational and consistent basis that reflects the benefits absorbed, supported by the production data.
11. Can the same amortisation be charged directly to products and through overhead?
No. Trace cost pool postings and prevent double counting.
12. Should a variable overhead use normal capacity by default?
Ind AS 2 allocates variable production overhead based on actual use of production facilities.
13. When does the closing stock component reach profit or loss?
When related inventory is sold, subject to write-downs and other requirements.
14. Does NRV compare only with the amortisation component?
Compare the relevant inventory carrying amount in total with its NRV.
15. Does inventory impairment automatically impair the licence?
Assess any intangible impairment indicators separately under the applicable standard.
16. Which records support the journal?
Use the intangible schedule, allocation model, production counts and inventory-to-expense roll-forward.
Official sources
MCA: Ind AS 38, paragraphs 97–99 MCA: Ind AS 2, paragraphs 10–16, 28–34