A. Facts of the Case
1. A listed company is in the publication business since its
inception and publishes a daily newspaper. It commenced its
business after taking over the running business of a partnership
firm, acquiring all assets and liabilities, except the ‘publishing title’,
which continued to be owned by the partnership firm which, at the
time of transfer of business to the company, granted the rights to
use the publishing title for a consideration which was payable
annually on recurring basis.
2. The querist has stated that in the financial year 1996-97, the
firm also sold the publishing title to the company for a lump sum
consideration of Rs. 17 crore. The said publishing title is about 65
years old. The company accounted for the consideration paid as a
fixed asset upto its financial year ended on 31st March, 2002.
3. The querist has further stated that during the period from
financial year 1996-97 to 2001-02, the company did not amortise
the value of this asset at all. However, under section 35A of the
Income-tax Act, 1961, the company has been allowed, since
beginning, deduction from income @ 1/14, in view of the deemed
life of the asset as 14 years, as per the provisions of the said
section. According to the querist, this life is only for the purposes
of tax allowance and in no way, can be assumed to be the actual
useful life for accounting purposes because it is a well-settled
principle that tax and accounting treatments are quite independent
and one does not affect the other.
4. In the financial year ended on 31st March, 2003, the company
wrote-off the entire amount of Rs. 17 crore by debit to the profit
and loss account to comply, as per the querist, with the practice
and guidelines of the Institute of Chartered Accountants of India,
then prevalent in respect of intangible assets and suggesting writeoff
of intangible assets in 3-5 years, although in the opinion of the
company’s Board of Directors, the value of this asset had
considerably appreciated since acquisition of the title. Appropriate
disclosure of such write-off and the opinion of the Board of Directors
was made by way of note to the accounts.
5. The querist has stated that in the financial year ended on 31st
March, 2005, in the light of Accounting Standard (AS) 26, ‘Intangible
Assets’, issued by the Institute of Chartered Accountants of India,
becoming applicable to the company w.e.f. 1st April, 2003, the
company reviewed the accounting treatment given in the financial
year 2002-03 and came to the conclusion that the write-off needed
reversal in terms of paragraphs 20 and 99 of AS 26 and
reinstatement of this asset is required in the books since economic
benefits from this asset were expected to flow in future. Accordingly,
the value of the publishing title was reinstated in the books partly
by credit to general reserve and partly by credit to deferred tax
asset, making appropriate disclosure regarding reinstatement,
reasons for such reinstatement and also accounting treatment
given in the books of account by way of notes to the accounts.
The amount credited to deferred tax asset represented the writeoff
of deferred tax asset created at the time of complete write-off
of publishing title in March 2003, which was remaining unadjusted
till 31st March, 2005.
6. According to the querist, while the company has been
continuing to claim the deduction under section 35A of the Incometax
Act, 1961, the company has not been amortising the value of
publishing title after its reinstatement in the books in the financial
year 2004-05 on the following grounds:
(i) The asset, for which consideration was paid, is
appreciating in value year after year, which is evident
from the following:
(a) Valuation of the publishing title was done by the
experts in 2000, i.e., after 4 years from the date of
purchase and the value was assessed at Rs. 288
crore as against Rs. 17 crore paid in the financial
year 1996-97.
(b) The company had made an Initial Public Offer (IPO)
in February, 2006 and its current enterprise value is
Rs. 2000 crore approximately, out of which the value
of tangible assets was Rs. 650 crore approximately,
implying thereby that the value of publishing title,
being intangible asset was over Rs. 1300 crore.
(ii) AS 26 requires determination of following in order to be
in a position to amortise the value of intangible assets,
such as a publishing title:
(a) The useful life of an intangible asset on best estimate
basis,
(b) Residual value,
(c) Depreciable amount which is the difference between
the cost of an asset and its residual value, and
(d) Systematic amortisation which means that the
amortisation can not be ad hoc/arbitrary.
In the view of the company, if either (a) or (b) is not
determinable, or any of these two can not be scientifically/
properly determined, or in other words, formulae prescribed
for amortisation can not be applied, there can not be a
“systematic” amortisation and, therefore, amortisation is neither
possible nor desirable in terms of AS 26, because if it is done,
it will be a “forced” amortisation as against “systematic”
amortisation and will vitiate true and fair view of the accounts,
which can not be the intention of any Accounting Standard.
(iii) Useful life as defined in AS 26 is not determinable as
“the period of time over which an asset is expected to
be used by the enterprise” can not be quantified even
on prudent basis as required by paragraph 68 of AS 26,
even after taking into consideration, the factors, such
as those listed in paragraph 64 of AS 26. There is no
way to limit the life of publishing title and particularly
because the value of title, as detailed above, has been
appreciating considerably and with the growing literacy,
prosperity and economy of the country, expectations
are that in foreseeable future the useful life of a
publishing title in the country will not be over and the
value thereof will significantly appreciate with every
passing year. The querist has drawn the attention of the
Committee to the illustrative list of factors, particularly
clause (b) of paragraph 64 of AS 26, to be considered
for determining the useful life. As per the querist, none
of the factors can help in estimating useful life, except
“public information on estimates of useful lives of similar
types of assets that are used in a similar way”. In this
connection, it may be noted that there are publishing
titles, which are nearly 200 years old and enjoy much
higher value than the value of publishing title of the
company and are still going very strong with no signs or
indications available of their useful lives lasting in
foreseeable future. In fact, it is typical of newspaper
industry that the older is the title, the higher is the value.
(iv) Residual value as defined under AS 26 is “the amount
which an enterprise expects to obtain for an asset
at the end of its useful life after deducting the
expected costs of disposal”. As stated above, the
publishing title purchased at Rs. 17 crore nearly 10
years ago has current value of over Rs. 1300 crore and
this value is expected to increase further with every
passing year in foreseeable future. Even if the company
attempts to arbitrarily attach a useful life to the publishing
title, the expected value at the end of such useful life
will be several times higher than its present book value
and thus, the company will have a negative depreciable
amount. It may be noted that there is an active market
for the asset, it is probable that such a market will exist
at the end of useful life so determined and it is
determined with reference to that market. Therefore, in
the view of the company, its value can never be assumed
to be zero at any point of time.
7. In view of the above facts and circumstances, the querist has
stated that the company does not find itself competent to estimate
useful life and residual value. Also, the company has not been
able to identify anyone who can advise or assist it in estimating
the useful life of the publishing title and to the best of its knowledge,
there is no scientific method/ expert available to estimate the useful
life of a publishing title even on prudent basis.
8. As per the querist, the auditors of the company are of the
view that:
(i) each intangible asset has its useful life and, accordingly,
useful life of the title must be determined,
(ii) useful life is always finite and can never be infinite in
view of paragraph 68 of AS 26, and
(iii) value of publishing title should be amortised over its
useful life and non-amortisation amounts to noncompliance
of AS 26.
B. Query
9. The querist has sought the opinion of the Expert Advisory
Committee on the following issues:
(i) Whether it is mandatory to ascertain finite life for an
intangible asset.
(ii) Whether the company is justified in not amortising the
value of publishing title.
(iii) If not, how can the useful life as well as residual value
as defined by AS 26 be determined?
(iv) Whether the life of 14 years, deemed for allowing
deduction of amount paid for title under section 35A of
the Income-tax Act, 1961 can be construed as useful
life.
(v) Whether the residual value can ever be assumed to be
zero.
(vi) If useful life and residual value, both are determined
under the constraints explained above, whether it will
be fair and whether the amortisation based on such
determination will not be arbitrary as against “systematic”,
and not vitiate the true and fair view of the accounts.
(vii) Under the given circumstances, whether it will be proper
and in accordance with AS 26, not to amortise the value
and disclose it alongwith the reasons for nonamortisation.
The querist has drawn the attention of the
Committee to paragraph 67 of AS 26, which states that
if the presumption that the useful life of an intangible
asset generally does not exceed 10 years is rebutted,
disclosure to that effect should be made.
C. Points considered by the Committee
10. The Committee notes from the definition of the term ‘fixed
asset’ as given in paragraph 6.1 of Accounting Standard (AS) 10,
‘Accounting for Fixed Assets’, issued by the Institute of Chartered
Accountants of India, and the Facts of the Case as stated in
paragraph 2 above that the publishing title when it was acquired
and at present, is of the nature of fixed asset. Accordingly, in the
view of the Committee, even before AS 26 came into effect, the
accounting treatment in respect of publishing title would have been
governed by AS 10. The Committee further notes that since AS 10
does not require any specific accounting treatment in respect of
‘publishing titles’, the general provisions applicable in respect of
fixed assets would have been applicable to it. Further, in the view
of the Committee, the allocation of the cost thereof less residual
value, i.e., amortisation of depreciable amount thereof would have
been governed by Accounting Standard (AS) 6, ‘Depreciation
Accounting’, issued by the Institute of Chartered Accountants of
India. The Committee further notes that AS 6 requires that the
depreciable amount of a depreciable asset should be allocated on
a systematic basis to each accounting period during the useful life
of the asset. In this regard, the Committee notes the definition of
the terms ‘useful life’ and ‘depreciable amount’, as provided under
paragraphs 3.3 and 3.4 of AS 6, which state as follows:
AS 6
“3.3 Useful life is either (i) the period over which a depreciable
asset is 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.
3.4 Depreciable amount of a depreciable asset is its historical
cost, or other amount substituted for historical cost in the
financial statements, less the estimated residual value.”
11. The Committee also notes from the above that AS 6 excludes
only ‘goodwill’ from the application of the Standard and that the
term ‘depreciation’ includes ‘amortisation’. Accordingly, the
Committee is of the view that even before AS 26 came into force,
AS 6 required determination of useful life and residual value of the
title, and the allocation of the depreciable amount over its useful
life. Thus, in the view of the Committee, the company should have
amortised the depreciable amount of publishing title over its useful
life keeping in view the provisions of the then prevailing AS 6.
Thus, it is not correct to state, as stated by the querist in paragraph
4 above, that the guidelines issued by the Institute of Chartered
Accountants of India, suggested write-off of intangible assets within
3-5 years.
12. The Committee further notes from the Facts of the Case that
the company has reinstated the value of publishing title relying
upon the provisions of paragraphs 20 and 99 of AS 26. The
Committee notes that paragraph 20 deals with ‘initial’ recognition
and, therefore, does not apply in case of reinstatement. The
Committee further notes paragraph 99 of AS 26, containing the
transitional provisions required to be made on the date of AS 26
coming into effect, which, states as follows:
“99. Where, on the date of this Statement coming into
effect, an enterprise is following an accounting policy of
not amortising an intangible item or amortising an
intangible item over a period longer than the period
determined under paragraph 63 of this Statement and the
period determined under paragraph 63 has expired on
the date of this Statement coming into effect, the carrying
amount appearing in the balance sheet in respect of that
item should be eliminated with a corresponding
adjustment to the opening balance of revenue reserves.
In the event the period determined under paragraph 63
has not expired on the date of this Statement coming into
effect and:
(a) if the enterprise is following an accounting policy of
not amortising an intangible item, the carrying
amount of the intangible item should be restated, as
if the accumulated amortisation had always been
determined under this Statement, with the
corresponding adjustment to the opening balance of
revenue reserves. The restated carrying amount
should be amortised over the balance of the period
as determined in paragraph 63.
(b) if the remaining period as per the accounting policy
followed by the enterprise:
(i) is shorter as compared to the balance of the
period determined under paragraph 63, the
carrying amount of the intangible item should
be amortised over the remaining period as per
the accounting policy followed by the enterprise,
(ii) is longer as compared to the balance of the
period determined under paragraph 63, the
carrying amount of the intangible item should
be restated, as if the accumulated amortisation
had always been determined under this
Statement, with the corresponding adjustment
to the opening balance of revenue reserves. The
restated carrying amount should be amortised
over the balance of the period as determined in
paragraph 63.”
13. The Committee notes from the above, that the Standard
requires restatement of the carrying amount of an intangible item
on the Standard coming into effect only when the enterprise is
following an accounting policy of not amortising an intangible item
or the remaining period of amortisation as per the accounting
policy followed by the company is higher than the useful life
determined under paragraph 63 of AS 26. The Committee notes
from the Facts of the Case that on the date of Standard coming
into effect, there is no carrying amount of the publishing title existing
in the books of account. Accordingly, paragraph 99 of AS 26 also
does not apply for reinstatement of publishing title.
14. The Committee is, however, of the view that the reinstatement
is permissible as a prior period item as per the provisions of AS 5
since to write it off was an error as stated in paragraph 11 above.
However, the reinstatement would have to be made at the value at
which the asset would have appeared in the books of account, if
the correct accounting treatment had been followed from the
beginning as per the requirements of AS 6 and AS 10.
15. As far as determination of useful life is concerned, the
Committee notes the definition of the term ‘useful life’ as given in
paragraph 6 of AS 26 and paragraphs 63, 64, 66, 67 and 68 of AS
26, which state as follows:
“Useful life is either:
(a) the period of time over which an asset is
expected to be used by the enterprise; or
(b) the number of production or similar units
expected to be obtained from the asset by the
enterprise.”
“63. The depreciable amount of an intangible asset should
be allocated on a systematic basis over the best estimate
of its useful life. There is a rebuttable presumption that
the useful life of an intangible asset will not exceed ten
years from the date when the asset is available for use.
Amortisation should commence when the asset is
available for use.
64. As the future economic benefits embodied in an intangible
asset are consumed over time, the carrying amount of the
asset is reduced to reflect that consumption. This is achieved
by systematic allocation of the cost of the asset, less any
residual value, as an expense over the asset’s useful life.
Amortisation is recognised whether or not there has been an
increase in, for example, the asset’s fair value or recoverable
amount. Many factors need to be considered in determining
the useful life of an intangible asset including:
(a) the expected usage of the asset by the enterprise
and whether the asset could be efficiently managed
by another management team;
(b) typical product life cycles for the asset and public
information on estimates of useful lives of similar
types of assets that are used in a similar way;
(c) technical, technological or other types of
obsolescence;
(d) the stability of the industry in which the asset
operates and changes in the market demand for
the products or services output from the asset;
(e) expected actions by competitors or potential
competitors;
(f) the level of maintenance expenditure required to
obtain the expected future economic benefits from
the asset and the company’s ability and intent to
reach such a level;
(g) the period of control over the asset and legal or
similar limits on the use of the asset, such as the
expiry dates of related leases; and
(h) whether the useful life of the asset is dependent on
the useful life of other assets of the enterprise.”
“66. Estimates of the useful life of an intangible asset generally
become less reliable as the length of the useful life increases.
This Statement adopts a presumption that the useful life of
intangible assets is unlikely to exceed ten years.
67. In some cases, there may be persuasive evidence that
the useful life of an intangible asset will be a specific period
longer than ten years. In these cases, the presumption that
the useful life generally does not exceed ten years is rebutted
and the enterprise:
(a) amortises the intangible asset over the best estimate
of its useful life;
(b) estimates the recoverable amount of the intangible
asset at least annually in order to identify any
impairment loss (see paragraph 83); and
(c) discloses the reasons why the presumption is
rebutted and the factor(s) that played a significant
role in determining the useful life of the asset (see
paragraph 94(a)).
68. The useful life of an intangible asset may be very long
but it is always finite. Uncertainty justifies estimating the useful
life of an intangible asset on a prudent basis, but it does not
justify choosing a life that is unrealistically short.”
16. On the basis of the above, the Committee is of the view that
AS 26 envisages that the useful life of an intangible asset has to
be finite, howsoever long it may be. It stipulates that the life has to
be determined on a prudent and rational basis. The Committee
also does not agree with the view of the querist that the useful life
of a publishing title in the country will not be over. In the view of
the Committee, the useful life of a publishing title depends upon
many factors, apart from the growing literacy, prosperity and
economy of the country, as stipulated by the querist, such as, the
competition in the print media industry, demand for the product,
expectations of the consumers, etc. Thus, not only the factor listed
in clause (b) of paragraph 64 of AS 26 is relevant, but also the
other factors listed in that paragraph need to be considered while
determining the useful life of the publishing title.
17. The Committee is of the view that paragraph 67 does not
remedy non-amortisation; it only requires disclosures where the
useful life is considered more than ten years. Such a disclosure is
required, if, for instance, the company considers the life of the title
is, say 30 years, then disclosures are warranted under paragraph
67.
18. As regards the determination of residual value is concerned,
the Committee notes paragraphs 75 to 77 of AS 26 which state as
follows:
“75. The residual value of an intangible asset should be
assumed to be zero unless:
(a) there is a commitment by a third party to
purchase the asset at the end of its useful life;
or
(b) there is an active market for the asset and:
(i) residual value can be determined by
reference to that market; and
(ii) it is probable that such a market will exist
at the end of the asset’s useful life.
76. A residual value other than zero implies that an enterprise
expects to dispose of the intangible asset before the end of
its economic life.
77. The residual value is estimated using prices prevailing
at the date of acquisition of the asset, for the sale of a similar
asset that has reached the end of its estimated useful life and
that has operated under conditions similar to those in which
the asset will be used. The residual value is not subsequently
increased for changes in prices or value.”
The Committee notes that the querist has not informed about
whether there is any commitment by a third party to purchase the
asset at the end of its useful life. From the Facts of the Case, it
appears that there is no such commitment. The Committee notes
that although the querist has mentioned that active market exists
for the title and is expected to exist at the end of its life, the
Committee does not agree with the querist in view of the fact that
the characteristics of an ‘active market’ as commonly understood
in the commercial and accounting parlance, do not exist. The
Committee notes that as per AS 26, an active market is “a market
where all the following conditions exist:
(a) the items traded within the market are homogeneous;
(b) willing buyers and sellers can normally be found at
any time; and
(c) prices are available to the public.”
Further, the fact that the title has been valued, does not indicate
that ‘active’ market exists. Also, the fact of the value of the title
being much in excess of the original cost and its likely increase in
future has no relevance in the case of historical cost accounting
on which AS 26 is based. The purpose of historical cost accounting
is to allocate the original cost of the asset over its useful life
irrespective of its fair value. Accordingly, the residual value of the
asset should be taken at zero.
D. Opinion
19. On the basis of the above, the Committee is of the following
opinion on the issues raised in paragraph 9 above:
(i) Yes, as per the requirements of AS 26, the life of an
intangible asset has to be ascertained.
(ii) No, the company is not justified in not amortising the
value of publishing title.
(iii) The useful life and residual value should be determined
keeping in view the principles of AS 26, as discussed in
paragraphs 15 to 18 above.
(iv) The life deemed for allowing deduction under the
Income-tax Act is not necessarily the useful life for the
purposes of AS 26. The useful life should be determined
keeping in view the requirements of AS 26 as discussed
in paragraphs 15 and 16 above.
(v) As per the requirements of AS 26, the residual value
is assumed to be zero as discussed in paragraph 18
above.
(vi) The useful life and residual value determined as per the
requirements of AS 26 would be fair and the amortisation
based on such determination would be systematic and
would portray the true and fair view of accounts within
the purview of the extant generally accepted accounting
principles (GAAPs).
(vii) No, as per the requirements of AS 26, it would not be
proper, not to amortise the value of publishing title and
disclosing it along with the reasons, taking the plea of
paragraph 67 of AS 26.
1 Opinion finalised by the Committee on 14.5.2007.
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