How to approach it
- Development: capitalise only from the date every criterion is met (the last one to be met sets the date).
- Exclude allocated general overheads, advertising and training even after that date.
- Amortisation starts when the asset is available for use.
- Licence: review useful life each year; if renewal at nominal cost is expected indefinitely, stop amortising and test for impairment annually.
Key rules to apply
- IAS 38: all six criteria must be met before capitalisation starts.
- A change from finite to indefinite life is a change in estimate (prospective).
- Intangibles with indefinite lives are tested for impairment annually; the cost model does not allow write-ups above cost less amortisation.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Starting capitalisation when most criteria were met rather than all (examiners' point).
- Starting amortisation when capitalisation starts.
- Continuing to amortise a licence that is now indefinite-life.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q5 without copying it.
Original practice question
Development project and indefinite-life licence
Research January–February 2024 cost Rs 5m. Development March–June 2024 cost Rs 5m a month; all criteria were met on 1 May 2024. July–December 2024 directly attributable costs were Rs 30m, plus Rs 2m of allocated admin overhead and Rs 1m of advertising. The system was available for use on 1 January 2025 (life 4 years).
A licence bought on 1 January 2024 for Rs 36m (6-year term) was amortised in 2024. From 1 January 2025 it can be renewed indefinitely at nominal cost and the company intends to renew. Recoverable amount at 31 December 2025: Rs 40m.
Required: Calculate the 2024 and 2025 figures.
Worked solution
| Rs m | 2025 | 2024 |
|---|---|---|
| Development cost: May–Jun 10 + Jul–Dec 30 | 40.0 | 40.0 |
| Amortisation | (10.0) | – |
| Expensed in P&L (research, Mar–Apr dev., overhead, advertising) | – | 18.0 |
| Licence carrying amount | 30.0 | 30.0 |
| Licence amortisation | – | 6.0 |
Answer: Platform Rs 30m at end-2025 after Rs 10m amortisation. Licence stays at Rs 30m: no amortisation from 2025, no impairment, no write-up to Rs 40m.