1.26 Query:

Amortisation of goodwill, trade marks

and copyrights purchased.

1. A company has spent a substantial amount on purchase of goodwill, trade marks and copyrights, of which 95 % of the amount has been spent on the purchase of trade marks and copyrights. Schedule XIV to the Companies Act, 1956, does not give any rate of depreciation for these assets.

2. In the opinion of the querist, based on prudent accounting principles, these intangible assets should be amortised in the financial records over their useful estimated economic life as may be best determined by the management of the company. However, the company is not willing to amortise these intangible assets in the financial records on the contention that these are permanent in nature and do not require any amortisation.

3. The querist has sought the opinion of the Expert Advisory Committee that in case of non-amortisation of the intangible assets in question, does the auditor need to give a note in the financial accounts and, if yes, does the auditor give a note in the Notes to the accounts and refer to it in the report or a note should be given in the auditors’ report?

                                                                        Opinion                                   October 17, 1997

1. The Committee notes para 38 of Accounting Standard (AS) 14 on ‘Accounting for Amalgamations’, issued by the Institute of Chartered  Accountants of India, which is reproduced below:

“The goodwill arising on amalgamation should be amortised to income on a systematic basis over its useful life. The amortisation period should not exceed five years unless a somewhat a longer period can be justified.”

2. The Committee further notes that Accounting Standard (AS) 6 (Revised) on ‘Depreciation Accounting’, issued by the Institute of Chartered Accountants of India, does not apply to ‘goodwill’ as per para 1 thereof. However, it applies to other intangible assets such as patents, copyrights and trade marks since the same are not excluded from the application of the standard as per the aforesaid paragraph. Further, the definition of the term ‘depreciation’, “includes amortisation of assets whose useful life is predetermined” (para 3.1). The definition of the term ‘useful life’ as per para 3.3 of AS 6 is as below:

“Useful life is either (i) the period over which a depreciable asset expected to be used by the enterprise; or (ii) the number of production or similar units expected to be obtained from the use of the asset by the enterprise.”

3. The Committee also notes with regard to patents, the nature of which is similar to that of copyrights, that Accounting Standard (AS) 10 on ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, requires in para 37 as below:

“ The direct costs incurred in developing the patents should be capitalised and written off over their legal term of validity or over their working life, whichever is shorter.”

4. The Committee is further of the view that since the nature of trade marks, in substance, is akin to that of goodwill, the accounting treatment thereof should also be the same. Accordingly, trade marks should be written off over a period not exceeding five years unless a somewhat longer period is justified.

5. On the basis of the above, the Committee is of the opinion that:

(a)        goodwill and trademarks should be written off over a period not exceeding five years unless a somewhat longer period is justified, and

(b)        copy rights should be written off over their legal term of validity or over their working life, whichever is shorter.

In case the company does not amortise the aforesaid intangible assets as suggested above, it would be the duty of the auditor to qualify his report or give an adverse opinion, depending upon the materiality of the amounts involved, whether or not a note stating the non-amortisation of the said assets is included in the notes to accounts.

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