The contract term sets a ceiling unless renewal is supported
Under Ind AS 38 paragraph 94, the useful life of an intangible asset arising from contractual or other legal rights ordinarily does not exceed the period of those rights and may be shorter. Include renewal periods only when evidence supports renewal without significant cost. A management plan to renew does not by itself establish the conditions.
Read the applicable text: MCA Ind AS 38, paragraphs 88–96, 97 and 104 MCA Ind AS 8, changes in estimates and errors.
Test both control and economic use
Compare the legal term with the period for which the entity expects to use the asset and obtain benefits. Paragraph 95 distinguishes economic factors from legal factors; use the shorter supportable period. Product migration, obsolescence or loss of complementary assets can reduce the period despite a longer legal term.
Document consent, conditions and cost
Paragraph 96 identifies prior experience or other evidence of renewal, evidence of third-party consent if needed, fulfilment of renewal conditions, and cost relative to expected future economic benefits. Do not apply a universal numeric cutoff for significant cost. If renewal cost is significant relative to the benefits, the standard treats it in substance as the cost of acquiring a new intangible asset at renewal, subject to applicable recognition analysis then.
Separate reacquired rights in business combinations
The specific rule in paragraph 94 for a reacquired right recognised as an intangible asset in a business combination is to use the remaining contractual period of the grant and exclude renewal periods. Verify the acquisition classification before applying the general renewal test to such a right.
Reassess amortisation when evidence changes
For a finite-life asset, amortisation starts when it is available for use. Use the method that reflects the pattern of expected consumption; use straight line if that pattern cannot be determined reliably. Residual value is normally zero, subject to the exceptions in paragraph 100. Review the amortisation period and method at least at each financial year end under paragraph 104. If expectations change, update the estimate prospectively under Ind AS 8 as applicable. Distinguish new information from a prior-period error. Under Ind AS 8, correct a material prior-period error retrospectively, subject to the standard’s impracticability exception.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Economic use ends before the contract
A licence has eight enforceable years left but a supported replacement plan limits use to five. With cost ₹50 lakh, nil residual and straight line, annual amortisation is ₹10 lakh over five years.
Illustrative example 2: Support one renewal period
A right has four initial years and an evidenced three-year renewal without significant cost; economic use is seven years. With ₹56 lakh cost and nil residual, straight-line amortisation is ₹8 lakh per year over seven years.
Illustrative example 3: Consent is not supported
A ₹36 lakh right has a six-year term and a four-year option dependent on a third party. There is no support that consent will be given; with six years of expected use and nil residual value, annual straight-line amortisation is ₹6 lakh. A ten-year assumption would yield ₹3.60 lakh.
Illustrative example 4: Cost evidence rules out including renewal
A ₹28 lakh right has four enforceable years. The renewal would cost ₹17 lakh against expected benefits of ₹20 lakh on a comparable basis (85%). Assume the cost is assessed as significant on the evidence. Exclude the renewal; with nil residual, annual straight-line amortisation is ₹7 lakh.
Illustrative example 5: Reacquired right
A business combination results in recognition of a reacquired right of ₹45 lakh with three remaining contractual years. Exclude a possible two-year extension. Assuming use throughout those three years, straight line and nil residual value, annual amortisation is ₹15 lakh.
Illustrative example 6: Prospective change after a new restriction
A ₹48 lakh asset originally has an eight-year life with nil residual and straight line. After two years, accumulated amortisation is ₹12 lakh. New evidence shortens the remaining life to three years; allocate the ₹36 lakh carrying amount over those three years, ₹12 lakh annually, assuming no impairment or residual change.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the recognised right | Contract and asset register |
| 2 | Verify start and contractual end | Executed terms and available-for-use evidence |
| 3 | Identify the supported economic use period | Product plan and benefits forecast |
| 4 | Read renewal rights and conditions | Option, notice and approval terms |
| 5 | Verify any necessary third-party consent | Correspondence and renewal history |
| 6 | Assess renewal cost against benefits | Supported costs and cash-flow evidence |
| 7 | Screen for a reacquired right | Business combination file |
| 8 | Set life, method and residual assumptions | Amortisation calculation and approval |
| 9 | Review at the reporting date | New facts, estimates and impairment review |
| 10 | Tie the conclusion to records | Asset ledger and relevant financial disclosures |
Sixteen practitioner FAQs
1. Does a licence always run for its full term in the books?
No. Expected economic use can be shorter.
2. Can a renewal option be assumed automatically?
No. Evidence must support renewal without significant cost.
3. What if renewal needs regulator consent?
Evaluate whether evidence supports that the consent will be given and other conditions met.
4. Is a nominal administrative fee decisive?
Review all renewal costs and their significance relative to expected benefits.
5. Does Ind AS 38 set a numeric significance threshold?
No. Document the cost and benefit comparison on the facts.
6. What if renewal is effectively a new purchase?
Significant renewal cost is treated in substance as acquisition of a new intangible asset at renewal.
7. Can a reacquired right include renewal periods?
No. Paragraph 94 uses the remaining contractual period for that right.
8. Do repeated renewals automatically make life indefinite?
No. An indefinite life requires evidence that there is no foreseeable limit to the period of expected net cash inflows. Indefinite does not mean infinite.
9. When does amortisation start?
When the finite-life asset is available for use.
10. Can contractual right expiry be ignored because the software still works?
No. Legal control can limit useful life despite technical usability.
11. Does a change in estimate reopen all prior periods?
A genuine change in estimate is applied prospectively under Ind AS 8.
12. What if management ignored reliable original evidence?
Assess whether this is an error rather than a new estimate.
13. How often is the finite-life amortisation period reviewed?
At least at each financial year end.
14. Can the expected migration date be relevant?
Yes. Supported obsolescence or replacement may shorten economic use.
15. What if impairment is indicated?
Apply the impairment requirements separately and use the appropriate carrying amount.
16. What makes the renewal file reviewable?
Preserve the contract, evidence of consent and conditions, expected benefits, costs and approved calculation.
Official sources
MCA Ind AS 38, paragraphs 88–96, 97 and 104 MCA Ind AS 8, changes in estimates and errors