Identify what the contract gives the company
This workflow covers a separately acquired, controlled software licence meeting Ind AS 38 recognition requirements, rather than a hosted access arrangement that gives the customer only a service. Review the licence terms, deployment rights and obligations. A vendor invoice can combine the licence, setup, employee training, post-launch support and financing; the total is not automatically intangible asset cost.
Read the applicable text: ICAI Ind AS 38, paragraphs 18–32, 69–70 and 97; MCA Ind AS 38, Intangible Assets; MCA Ind AS 23, paragraphs 5, 7 and 8; MCA Ind AS 109, paragraph 4.2.1 and Appendix A.
Measure the licence and qualifying preparation
Under Ind AS 38 paragraphs 27–30, distinguish purchase price after discounts and rebates, including applicable non-refundable taxes, from costs directly attributable to bringing the asset into working condition. Testing and professional work may qualify when they meet that test. Training, ordinary support services and overhead do not become licence cost merely because they are bundled in the same order. Establish the actual services and supported price breakdown rather than allocating an arbitrary percentage.
Strip financing out of the licence cost
Paragraph 32 uses the cash price equivalent where payment is deferred beyond normal credit terms. The difference between that measure and total deferred payments is interest expense over the credit period unless eligible for capitalisation under Ind AS 23. Compare a contemporaneous cash offer for the same rights and scope, or use a supported discounting working when appropriate. The examples assume a ready-to-use or quickly prepared licence that does not qualify for borrowing cost capitalisation.
Reconcile both schedules to closing balances
Maintain separate schedules for the licence and the vendor liability. For a vendor liability subsequently measured at amortised cost under Ind AS 109, reconcile opening liability, effective interest, payments and closing liability. An invoice or signing date need not be the date the asset is available for use under paragraph 97. Identify the actual readiness date and remaining useful life. Account for separate support over the applicable service period and track any related prepayment without classifying it as part of the licence.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Cash quote and separate training
A ready licence has a comparable cash price of ₹10 lakh and requires a single ₹11 lakh payment after one year, outside normal terms. Training of ₹80,000 is separately paid and received. Initial licence cost is ₹10 lakh, finance cost over the year ₹1 lakh, and the training expense is ₹80,000.
Illustrative example 2: Two annual vendor payments
Two year-end payments of ₹1,21,000 and ₹1,21,000 have a supported 10% annual discount rate. Initial cash price equivalent is ₹2,10,000. First-year interest is ₹21,000; after payment the liability is ₹1,10,000. Second-year interest is ₹11,000 and the last payment clears it.
Illustrative example 3: Upfront and deferred elements
An acquired licence has ₹3 lakh paid immediately and ₹6,05,000 due in two years. At a supported 10% rate the deferred leg is ₹5 lakh. Initial licence cost is ₹8 lakh, initial deferred liability ₹5 lakh and total finance difference ₹1,05,000.
Illustrative example 4: Setup, support and readiness
Licence cash price is ₹12 lakh, necessary testing is ₹60,000 and the separately identified one-year support contract costs ₹1,20,000. The initial licence cost is ₹12.60 lakh. Support is separate; if paid in advance and three months have been provided, the stipulated even service pattern gives ₹30,000 expense and ₹90,000 prepayment.
Illustrative example 5: Discount and non-refundable tax
A cash price of ₹5,00,000 before a ₹25,000 trade discount attracts a stipulated ₹15,000 non-refundable charge. Directly attributable preparation adds ₹10,000. Licence cost is ₹5,00,000. The non-refundable charge is assumed and is not a stated tax rate.
Illustrative example 6: Amortisation and financing are separate
A licence with initial cost ₹9,60,000 becomes available on 1 January. Four years of useful life from that date, nil residual value and a straight-line method (assumed appropriate for this example) yield ₹60,000 for the three months to 31 March. Separately, supported interest on the vendor liability for the same reporting period is ₹25,000. The two expenses total ₹85,000 under the example assumptions.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Read the software rights | Licence and hosting terms. |
| 2 | Confirm intangible asset recognition | Control and intended use memo. |
| 3 | Separate service deliverables | Vendor scope and price evidence. |
| 4 | Identify ordinary and extended terms | Cash offer and payment schedule. |
| 5 | Verify cash price equivalent | Comparable quote or supported discount rate. |
| 6 | Separate attributable costs | Testing, rebates, taxes and excluded costs. |
| 7 | Document borrowing cost treatment | Ind AS 23 applicability review. |
| 8 | Set available-for-use date | Acceptance, testing and deployment record. |
| 9 | Reconcile licence and supplier schedules | Cost, amortisation, payments and finance cost. |
| 10 | Tie out service expense and prepayments | Support period and closing ledger. |
Sixteen practitioner FAQs
1. Does a vendor call every software arrangement a licence?
Labels vary. Establish whether the customer controls a software right or receives access as a service.
2. Can the full invoice be posted to the intangible ledger?
Break out services and financing and test attributable costs.
3. Is there a fixed number of days for normal credit terms?
Paragraph 32 does not set a universal number. Use supportable commercial evidence.
4. What is a comparable cash quote?
A cash price for equivalent rights, scope and terms at the relevant date.
5. What if no comparable quote exists?
Support a valuation or discounting approach with actual terms and market evidence.
6. Does extended credit increase initial licence cost?
The cost is the cash price equivalent, subject to other eligible acquisition costs.
7. Can all finance charges be spread equally by year?
Reconcile the charges to the liability using the applicable accounting method; timing can change the amount.
8. When can interest be capitalised?
Only if the relevant Ind AS 23 requirements are met.
9. Can testing be included in cost?
Yes, where directly attributable to preparing the asset for use.
10. Does training count as preparation cost?
Employee training is expensed as received.
11. Is post-launch maintenance a licence asset?
Routine support is normally a separate service; assess the terms.
12. Can advance support payments be recognised as a prepayment?
Yes where the service is yet to be received and the prepayment criteria are met.
13. When does licence amortisation begin?
When it is available for intended use.
14. Can financing and amortisation start on different dates?
Yes. They reflect different obligations and events.
15. How do trade discounts affect cost?
Deduct them from the purchase price before adding eligible costs.
16. Does this determine tax depreciation or withholding?
No. Tax analysis is separate.
Official sources
ICAI Ind AS 38, paragraphs 18–32, 69–70 and 97; MCA Ind AS 38, Intangible Assets; MCA Ind AS 23, paragraphs 5, 7 and 8; MCA Ind AS 109, paragraph 4.2.1 and Appendix A