Chapter 5: Asset Based Accounting Standards - Test 4: answer key

Question 1 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. Orion Diagnostics Ltd. is developing a proprietary molecular-testing technology for commercial use in its diagnostic laboratories. The company closes its books on 31 March 2027. Its Balance Sheet at 31 March 2026 disclosed no internally generated intangible assets. The project commenced on 1 April 2026, initially involving original scientific investigations into new testing techniques. During April to August 2026, the company incurred research expenditure of ₹9.60 lakh. On 1 September 2026, management completed the technical validation and formally established all six development-recognition conditions under AS 26. The board approved completion and commercial deployment, a technical team was appointed, adequate funding was committed, the company demonstrated probable future economic benefits through signed laboratory contracts, and expenditure attributable to the project could be reliably measured. Expenditure incurred from September 2026 to March 2027 was as follows: Direct developers' salaries: ₹12.00 lakh; prototype materials: ₹3.60 lakh; external technical testing: ₹2.40 lakh; amortisation of patents directly used in development: ₹0.60 lakh; reasonably allocated development overhead: ₹1.20 lakh; general administrative expenditure: ₹0.90 lakh; employee training: ₹0.50 lakh; initial operating inefficiencies: ₹0.70 lakh; and product-launch advertising: ₹0.40 lakh. The technology was not ready for commercial use on 31 March 2027. The company's technical assessment estimated its value in use at ₹18.20 lakh and its net selling price at ₹16.50 lakh. The finance manager proposes capitalising all expenditure from April 2026 because the project is expected to generate substantial future revenue. The audit committee requires the correct distinction between research and development expenditure, the amount of expenditure eligible for capitalisation, and the treatment of the resulting intangible asset at the reporting date.

What is the amount of internally generated development expenditure eligible for capitalisation by Orion Diagnostics Ltd. up to 31 March 2027?

1. ₹19.80 lakh (correct answer)
2. ₹22.30 lakh
3. ₹29.40 lakh
4. ₹10.80 lakh

Answer: A — ₹19.80 lakh

Explanation. Capitalisation begins only on 1 September 2026, when all six development-recognition conditions are satisfied. Eligible expenditure comprises developers' salaries ₹12.00 lakh, prototype materials ₹3.60 lakh, technical testing ₹2.40 lakh, directly attributable patent amortisation ₹0.60 lakh and allocated development overhead ₹1.20 lakh. Total capitalisable expenditure is ₹19.80 lakh. General administration, training, inefficiencies and advertising are excluded. Including the research expenditure or these excluded development costs would overstate the intangible asset.

Where it goes wrong. Capitalising all project expenditure instead of applying the recognition criteria from the date when all six development conditions are first satisfied.

Authority. AS 26 paras 44 and 52-54

Question 2 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

How should Orion Diagnostics Ltd. account for the ₹9.60 lakh incurred between April and August 2026?

1. Capitalise the amount because the project ultimately proved technically feasible.
2. Defer the amount until the technology becomes commercially available.
3. Recognise the entire amount as research expenditure in profit or loss. (correct answer)
4. Capitalise the amount retrospectively from the development-recognition date.

Answer: C — Recognise the entire amount as research expenditure in profit or loss.

Explanation. The April-August activities constitute the research phase because they involve original scientific investigations and searching for technical knowledge. AS 26 para 41 requires research expenditure to be expensed as incurred. The subsequent success of the project does not permit retrospective capitalisation of the ₹9.60 lakh. The development phase commenced only when the recognition conditions were demonstrated on 1 September 2026. Therefore, the full research expenditure is charged to the current-period Statement of Profit and Loss.

Where it goes wrong. Retrospectively capitalising research expenditure merely because the subsequent development project succeeds.

Authority. AS 26 paras 39-43; AS 26 para 58

Question 3 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

What amount of expenditure incurred during the development phase must be recognised immediately as an expense, excluding the research expenditure?

1. ₹1.80 lakh
2. ₹3.20 lakh
3. ₹1.60 lakh
4. ₹2.50 lakh (correct answer)

Answer: D — ₹2.50 lakh

Explanation. The development-phase costs excluded from capitalisation are general administration ₹0.90 lakh, employee training ₹0.50 lakh, initial operating inefficiencies ₹0.70 lakh and advertising ₹0.40 lakh. Their aggregate is ₹2.50 lakh. These costs are not directly attributable qualifying development expenditure. AS 26 specifically excludes training, clearly identified inefficiencies and general administrative costs unless directly attributable to preparing the asset for use. Future commercial benefits do not automatically justify capitalising these expenses.

Where it goes wrong. Capitalising training, advertising and general administrative expenditure merely because it relates to a successful development project.

Authority. AS 26 paras 52-55; AS 26 para 58

Question 4 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What impairment loss should Orion Diagnostics Ltd. recognise on the internally generated technology at 31 March 2027?

1. ₹3.30 lakh
2. ₹1.60 lakh (correct answer)
3. ₹2.50 lakh
4. ₹1.10 lakh

Answer: B — ₹1.60 lakh

Explanation. The capitalised development cost before impairment is ₹19.80 lakh. Recoverable amount is the higher of value in use ₹18.20 lakh and net selling price ₹16.50 lakh, namely ₹18.20 lakh. Consequently, impairment loss is ₹19.80 − ₹18.20 = ₹1.60 lakh. The technology is not yet available for use, so its recoverable amount must be estimated at least annually even without an impairment indicator. Capitalising the loss-free development cost would overstate the asset.

Where it goes wrong. Ignoring mandatory impairment assessment for an intangible asset that is not yet available for use.

Authority. AS 26 paras 81 and 83-84; AS 28 para 4.1

Question 5 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. Sterling Retail Technologies Ltd. is developing its own e-commerce website to facilitate online ordering, customer account management and direct sales of its products. The company prepares financial statements for the year ended 31 March 2027. Its Balance Sheet at 31 March 2026 disclosed no internally generated website or related intangible asset. The website project commenced in February 2026. Expenditure on feasibility studies, defining specifications and evaluating alternative platforms during February to May 2026 amounted to ₹2.40 lakh. On 1 June 2026, the company demonstrated technical feasibility, its intention and ability to complete and operate the website, probable future economic benefits through documented online-order forecasts, availability of adequate resources and reliable measurement of attributable expenditure. All six development-recognition conditions were therefore met on that date. Subsequent expenditure incurred up to 31 December 2026 was as follows: application coding and software development ₹4.80 lakh; graphical design of the website ₹1.60 lakh; creation and uploading of a product catalogue specifically for the website ₹1.20 lakh; and directly attributable testing and debugging ₹0.60 lakh. The product catalogue does not constitute a separately identifiable copyright or licence. The company also purchased server hardware for ₹2.00 lakh, incurred Internet-service-provider hosting charges of ₹0.30 lakh, employee training expenditure of ₹0.50 lakh and launch advertising expenditure of ₹0.70 lakh. The website became available for use on 1 January 2027. Its estimated useful life is four years and its residual value is nil. The company follows the straight-line method for intangible assets when the consumption pattern cannot be determined reliably. The finance manager proposes capitalising all website-related expenditure, including planning, hardware, hosting and training costs. The auditor requires a stage-wise assessment under AS 26 and determination of the appropriate first-year amortisation.

What amount should Sterling Retail Technologies Ltd. recognise as the internally generated intangible asset representing its website on 31 December 2026?

1. ₹6.40 lakh
2. ₹10.20 lakh
3. ₹8.20 lakh (correct answer)
4. ₹9.10 lakh

Answer: C — ₹8.20 lakh

Explanation. All six development criteria were demonstrated on 1 June 2026. Eligible website expenditure comprises application coding ₹4.80 lakh, graphical design ₹1.60 lakh, directly attributable product-catalogue content ₹1.20 lakh and testing ₹0.60 lakh. Total qualifying cost is ₹8.20 lakh. The content is not a separate identifiable asset and is necessary for the website's intended use. Planning expenditure is research-stage expenditure, while hosting, training and advertising are expensed. Server hardware is accounted for separately under AS 10.

Where it goes wrong. Capitalising all expenditure associated with a website without considering the development stage and nature of the expenditure.

Authority. AS 26 paras 44 and 52-54; AS 26 Appendix II, paras 1-8: Illustrative Application of AS to Website Costs

Question 6 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

How should the ₹2.00 lakh expenditure on server hardware and the ₹0.30 lakh Internet-service-provider hosting charge be accounted for?

1. Recognise ₹2.00 lakh as PPE and ₹0.30 lakh as an expense. (correct answer)
2. Include ₹2.30 lakh in the website intangible asset.
3. Recognise ₹2.00 lakh as an expense and ₹0.30 lakh as PPE.
4. Include both amounts in the internally generated website asset.

Answer: A — Recognise ₹2.00 lakh as PPE and ₹0.30 lakh as an expense.

Explanation. Website-related hardware, including servers, is outside the intangible-asset treatment in AS 26 and is accounted for under AS 10, subject to its recognition conditions. Therefore, the ₹2.00 lakh server cost is considered separately as PPE. Hosting charges paid to an Internet-service provider for using its servers are recognised as an expense. Capitalising both amounts as website development cost would incorrectly combine hardware, an intangible asset and an operating service expense.

Where it goes wrong. Treating website infrastructure hardware and Internet hosting services as components of one intangible asset.

Authority. AS 26 Appendix II, paras 4-6; AS 10 para 7

Question 7 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What amortisation charge should Sterling Retail Technologies Ltd. recognise for the website for the year ended 31 March 2027?

1. ₹1.0250 lakh
2. ₹0.5125 lakh (correct answer)
3. ₹2.0500 lakh
4. ₹0.6833 lakh

Answer: B — ₹0.5125 lakh

Explanation. The website's recognised cost is ₹8.20 lakh, its residual value is nil and its useful life is four years. Annual straight-line amortisation is ₹8.20 ÷ 4 = ₹2.05 lakh. The website was available for use only from 1 January 2027, so amortisation covers three months. The charge is ₹2.05 × 3/12 = ₹0.5125 lakh. Charging a full year's amortisation would ignore the date on which the asset became available for use.

Where it goes wrong. Beginning amortisation when website development expenditure commences instead of when the website becomes available for use.

Authority. AS 26 paras 63 and 72-74; AS 26 Appendix II para 7

Question 8 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What is the aggregate expenditure that should be recognised immediately in profit or loss, comprising planning, hosting, training and advertising costs?

1. ₹2.40 lakh
2. ₹3.20 lakh
3. ₹4.60 lakh
4. ₹3.90 lakh (correct answer)

Answer: D — ₹3.90 lakh

Explanation. Planning expenditure of ₹2.40 lakh is expensed because the planning stage is analogous to research. Hosting ₹0.30 lakh, training ₹0.50 lakh and advertising ₹0.70 lakh are also expenses. Total immediate expense is ₹2.40 + ₹0.30 + ₹0.50 + ₹0.70 = ₹3.90 lakh. Server hardware of ₹2.00 lakh is separately considered under AS 10, while qualifying website development expenditure is capitalised under AS 26. Including either category in this expense total would be incorrect.

Where it goes wrong. Confusing website planning and operating expenditure with directly attributable development expenditure eligible for capitalisation.

Authority. AS 26 paras 41 and 55-58; AS 26 Appendix II paras 6 and 8

Question 9 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. Vardhan Biotech Ltd. develops and commercialises patented pharmaceutical technologies. Its Balance Sheet at 31 March 2026 included intangible assets of ₹15.50 lakh, comprising acquired licences and proprietary software. During the current year, the company acquired an exclusive technology patent on 1 April 2026 for ₹30.00 lakh. Directly attributable registration fees were ₹1.20 lakh and legal professional fees were ₹0.80 lakh. Staff training relating to the patent cost ₹0.30 lakh. The patent was available for use on 1 October 2026, after completion of necessary validation procedures. The patent grants enforceable rights for fifteen years. The company has signed long-term supply arrangements with pharmaceutical manufacturers, and technical and market evidence supports economic benefits throughout the legal-right period. Management has persuasive evidence supporting a useful life of fifteen years. No residual value is expected. At 31 March 2027, the value in use of the patent was estimated at ₹29.80 lakh and its net selling price at ₹29.40 lakh. On 1 October 2026, the company also completed internally generated software at an accumulated qualifying cost of ₹10.00 lakh. The software became available for use immediately. Its total expected lifetime output is 50,000 transactions, of which 9,000 transactions were processed between October 2026 and March 2027. The expected pattern of economic benefit consumption can be measured reliably using completed transactions. The company additionally disposed of an obsolete licensing right on 31 March 2027. Its original cost was ₹9.00 lakh and accumulated amortisation immediately before disposal was ₹6.30 lakh. Gross sale proceeds were ₹2.40 lakh and directly attributable disposal costs were ₹0.15 lakh. The finance director proposes applying a blanket ten-year useful life to all intangible assets and ignoring the impairment requirements for the patent because no general indication of impairment has arisen.

What is the amortisation charge on the acquired patent for the year ended 31 March 2027, before considering impairment?

1. ₹1.0667 lakh (correct answer)
2. ₹2.1333 lakh
3. ₹3.2000 lakh
4. ₹1.6000 lakh

Answer: A — ₹1.0667 lakh

Explanation. Patent cost is ₹30.00 lakh + ₹1.20 lakh registration fees + ₹0.80 lakh legal fees = ₹32.00 lakh. Training expenditure is excluded. Since persuasive evidence supports a fifteen-year useful life and the legal rights extend for fifteen years, annual amortisation is ₹32.00 ÷ 15 = ₹2.1333 lakh. The patent became available for use on 1 October 2026, so only six months are amortised: ₹2.1333 × 6/12 = approximately ₹1.0667 lakh.

Where it goes wrong. Charging a full year's amortisation or including employee-training expenditure in the patent's acquisition cost.

Authority. AS 26 paras 23-25; AS 26 paras 63-70

Question 10 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What impairment loss should Vardhan Biotech Ltd. recognise on the patent at 31 March 2027?

1. ₹1.5333 lakh
2. ₹2.2000 lakh
3. ₹0.8000 lakh
4. ₹1.1333 lakh (correct answer)

Answer: D — ₹1.1333 lakh

Explanation. The patent's cost is ₹32.00 lakh and six-month amortisation is approximately ₹1.0667 lakh. Its carrying amount before impairment is therefore ₹30.9333 lakh. Recoverable amount is the higher of net selling price ₹29.40 lakh and value in use ₹29.80 lakh, namely ₹29.80 lakh. Impairment loss is ₹30.9333 − ₹29.80 = approximately ₹1.1333 lakh. An asset amortised over more than ten years requires an annual recoverability estimate even without impairment indicators.

Where it goes wrong. Ignoring mandatory annual impairment assessment for an intangible asset whose useful life exceeds ten years.

Authority. AS 26 paras 67 and 81-83; AS 28 para 4.1

Question 11 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What amortisation charge should Vardhan Biotech Ltd. recognise on the internally generated software for the year ended 31 March 2027?

1. ₹1.0000 lakh
2. ₹2.0000 lakh
3. ₹1.8000 lakh (correct answer)
4. ₹2.5000 lakh

Answer: C — ₹1.8000 lakh

Explanation. The software's depreciable amount is ₹10.00 lakh, with nil residual value. The expected lifetime output is 50,000 transactions, and actual output during the year is 9,000 transactions. Under the units-of-production method, amortisation is ₹10.00 lakh × 9,000/50,000 = ₹1.80 lakh. The software was available for use on 1 October 2026, and the stated output relates only to the period after that date. Straight-line amortisation would fail to reflect the reliably measurable consumption pattern.

Where it goes wrong. Applying straight-line amortisation when the pattern of consumption of economic benefits can be measured reliably using output.

Authority. AS 26 paras 63 and 72-74

Question 12 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What loss should Vardhan Biotech Ltd. recognise on the disposal of the obsolete licensing right on 31 March 2027?

1. ₹0.30 lakh
2. ₹0.45 lakh (correct answer)
3. ₹0.60 lakh
4. ₹0.75 lakh

Answer: B — ₹0.45 lakh

Explanation. The licensing right's carrying amount is ₹9.00 lakh − ₹6.30 lakh = ₹2.70 lakh. Net disposal proceeds are ₹2.40 lakh − ₹0.15 lakh = ₹2.25 lakh. The resulting loss is ₹2.70 − ₹2.25 = ₹0.45 lakh, recognised in the Statement of Profit and Loss. Comparing carrying amount with gross proceeds would produce an incorrect loss because directly attributable disposal costs must be deducted before calculating the disposal result.

Where it goes wrong. Using gross sale proceeds instead of net disposal proceeds when calculating the gain or loss on disposal.

Authority. AS 26 paras 87-88

Question 13 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A manufacturing company acquires a contractual technology right that can generate economic benefits only when used together with its existing production facility. The right is legally enforceable, separately identifiable through its contractual documentation, and its future economic benefits and acquisition cost can be demonstrated reliably. Which treatment is appropriate?

A manufacturing company acquires a contractual technology right that can generate economic benefits only when used together with its existing production facility. The right is legally enforceable, separately identifiable through its contractual documentation, and its future economic benefits and acquisition cost can be demonstrated reliably. Which treatment is appropriate?

1. Recognise the right as an intangible asset if the general recognition criteria are satisfied. (correct answer)
2. Reject recognition because the right cannot be sold separately from the facility.
3. Recognise the right only when it becomes independently saleable to another entity.
4. Include the right in internally generated goodwill because it is used with other assets.

Answer: A — Recognise the right as an intangible asset if the general recognition criteria are satisfied.

Explanation. An intangible asset must be identifiable, controlled and expected to generate future economic benefits. Separability is one means of establishing identifiability, but AS 26 para 13 expressly recognises that legal or contractual rights may identify an asset even when it cannot be separately disposed of. Since the right is legally enforceable, has identifiable benefits and satisfies the recognition criteria, it can be recognised separately. Independent saleability is not an additional mandatory recognition condition.

Where it goes wrong. Treating separability as an essential condition of identifiability rather than recognising contractual or legal rights as an alternative basis.

Authority. AS 26 paras 6 and 11-13; AS 26 paras 19-23

Question 14 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A company incurs ₹4.50 lakh to train employees in a new technical process. Management forecasts that employees' improved skills will reduce production costs by ₹12 lakh over the next three years. Employment contracts do not restrict employees from resigning, and no enforceable arrangement prevents them from using their skills elsewhere. What is the appropriate treatment?

A company incurs ₹4.50 lakh to train employees in a new technical process. Management forecasts that employees' improved skills will reduce production costs by ₹12 lakh over the next three years. Employment contracts do not restrict employees from resigning, and no enforceable arrangement prevents them from using their skills elsewhere. What is the appropriate treatment?

1. Capitalise ₹4.50 lakh because the expected savings exceed the expenditure.
2. Capitalise ₹3.00 lakh and expense the balance as general administration.
3. Recognise ₹4.50 lakh as an expense because control over the expected benefits is lacking. (correct answer)
4. Defer ₹4.50 lakh and amortise it over the employees' expected service period.

Answer: C — Recognise ₹4.50 lakh as an expense because control over the expected benefits is lacking.

Explanation. The expected production savings demonstrate possible future economic benefits, but the company does not control the employees' skills because employees may resign and use those skills elsewhere. The expenditure therefore fails the control element of the intangible-asset definition. Training expenditure is also specifically identified as an expense when incurred. Accordingly, the full ₹4.50 lakh is charged to profit or loss. Future savings alone do not establish an identifiable, controlled intangible asset.

Where it goes wrong. Recognising staff training as an asset merely because it is expected to produce future economic benefits.

Authority. AS 26 paras 14-17; AS 26 paras 55-57

Question 15 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. Nova Pharmaceuticals Ltd. separately purchases a patent for ₹18.00 lakh. It incurs non-refundable import duty of ₹1.20 lakh and directly attributable legal fees of ₹0.80 lakh. The vendor grants a trade discount of ₹0.60 lakh. Recoverable GST is ₹3.24 lakh, staff training costs ₹0.40 lakh and a launch advertisement campaign costs ₹0.50 lakh. What is the initial cost of the patent?

Nova Pharmaceuticals Ltd. separately purchases a patent for ₹18.00 lakh. It incurs non-refundable import duty of ₹1.20 lakh and directly attributable legal fees of ₹0.80 lakh. The vendor grants a trade discount of ₹0.60 lakh. Recoverable GST is ₹3.24 lakh, staff training costs ₹0.40 lakh and a launch advertisement campaign costs ₹0.50 lakh. What is the initial cost of the patent?

1. ₹20.00 lakh
2. ₹23.24 lakh
3. ₹18.80 lakh
4. ₹19.40 lakh (correct answer)

Answer: D — ₹19.40 lakh

Explanation. The patent's acquisition cost includes purchase price ₹18.00 lakh, non-refundable import duty ₹1.20 lakh and directly attributable legal fees ₹0.80 lakh. The trade discount of ₹0.60 lakh is deducted. Therefore, cost is ₹18.00 + ₹1.20 + ₹0.80 − ₹0.60 = ₹19.40 lakh. Recoverable GST is excluded, while training and advertising are expensed. Option (a) incorrectly includes the trade discount without deduction.

Where it goes wrong. Capitalising recoverable GST, training and advertising while failing to deduct trade discounts.

Authority. AS 26 paras 23-25; AS 26 paras 55-57

Question 16 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A company has developed a popular brand name, a publishing title and substantial internally generated goodwill through its advertising campaigns and customer relationships. Management believes these items have measurable market values and will generate substantial future revenue. Which accounting treatment is appropriate under AS 26?

A company has developed a popular brand name, a publishing title and substantial internally generated goodwill through its advertising campaigns and customer relationships. Management believes these items have measurable market values and will generate substantial future revenue. Which accounting treatment is appropriate under AS 26?

1. Capitalise all three items if independent market valuations are obtained.
2. Expense internally generated brands and publishing titles and do not recognise internally generated goodwill. (correct answer)
3. Capitalise the brand and publishing title but expense internally generated goodwill.
4. Recognise goodwill at the difference between market value and net asset carrying amount.

Answer: B — Expense internally generated brands and publishing titles and do not recognise internally generated goodwill.

Explanation. Internally generated goodwill is not recognised because it is not an identifiable resource controlled by the enterprise whose cost can be measured reliably. Similarly, internally generated brands, mastheads, publishing titles and customer lists cannot be distinguished from the cost of developing the business as a whole. Their expected commercial value does not override the specific prohibition in AS 26. A separate market valuation does not permit an entity to capitalise these internally generated items.

Where it goes wrong. Capitalising internally generated brands or goodwill merely because management can estimate their commercial value.

Authority. AS 26 paras 35-37; AS 26 para 51

Question 17 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. An enterprise is developing a new manufacturing process. It incurs expenditure of ₹1.20 lakh each month from May 2026 to March 2027. Technical feasibility, intention to complete, ability to use, probable future economic benefits and reliable measurement are demonstrated by 1 September 2026. However, adequate financial resources are not secured until 1 December 2026, when all six development-recognition conditions are first satisfied. What amount may be capitalised by 31 March 2027?

An enterprise is developing a new manufacturing process. It incurs expenditure of ₹1.20 lakh each month from May 2026 to March 2027. Technical feasibility, intention to complete, ability to use, probable future economic benefits and reliable measurement are demonstrated by 1 September 2026. However, adequate financial resources are not secured until 1 December 2026, when all six development-recognition conditions are first satisfied. What amount may be capitalised by 31 March 2027?

1. ₹8.40 lakh
2. ₹6.00 lakh
3. ₹4.80 lakh (correct answer)
4. ₹0.00 lakh

Answer: C — ₹4.80 lakh

Explanation. All six conditions must be demonstrated cumulatively before development expenditure can qualify for recognition. Although five conditions were satisfied on 1 September, adequate financial resources were not secured until 1 December 2026. Expenditure from December to March is therefore capitalisable: four months × ₹1.20 lakh = ₹4.80 lakh. The earlier expenditure of ₹8.40 lakh remains an expense and cannot be reinstated in the intangible asset merely because the recognition conditions are subsequently met.

Where it goes wrong. Capitalising development expenditure from the date five out of six recognition conditions are met.

Authority. AS 26 para 44(e); AS 26 paras 52-54 and 58

Question 18 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. An enterprise spends ₹6.40 lakh on a scientific project involving investigation, experiments and preliminary technical development. The accounting records do not permit the research phase to be distinguished reliably from the development phase. How should the entire expenditure be treated?

An enterprise spends ₹6.40 lakh on a scientific project involving investigation, experiments and preliminary technical development. The accounting records do not permit the research phase to be distinguished reliably from the development phase. How should the entire expenditure be treated?

1. Capitalise ₹3.20 lakh and expense the remaining ₹3.20 lakh.
2. Defer the full expenditure until technical feasibility is established.
3. Capitalise the full amount because the project has development potential.
4. Recognise the full ₹6.40 lakh as an expense when incurred. (correct answer)

Answer: D — Recognise the full ₹6.40 lakh as an expense when incurred.

Explanation. AS 26 para 40 specifically requires an enterprise that cannot distinguish the research phase from the development phase to treat all expenditure as if it were incurred during research. Research expenditure is expensed as incurred under para 41. Accordingly, the full ₹6.40 lakh is charged to the Statement of Profit and Loss. An expectation of future technical feasibility does not permit a speculative split between the two phases.

Where it goes wrong. Arbitrarily dividing project expenditure between research and development when the two phases cannot be distinguished.

Authority. AS 26 paras 39-43

Question 19 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A company owns a registered patent with a carrying amount of ₹8.00 lakh. It spends ₹2.40 lakh on a technological enhancement that increases the patent's originally assessed production capability and is expected to generate additional economic benefits. The cost is separately identifiable and reliably measurable. Routine maintenance of the patent costs another ₹0.80 lakh. What amount should be added to the patent's carrying amount?

A company owns a registered patent with a carrying amount of ₹8.00 lakh. It spends ₹2.40 lakh on a technological enhancement that increases the patent's originally assessed production capability and is expected to generate additional economic benefits. The cost is separately identifiable and reliably measurable. Routine maintenance of the patent costs another ₹0.80 lakh. What amount should be added to the patent's carrying amount?

1. ₹2.40 lakh (correct answer)
2. ₹3.20 lakh
3. ₹0.80 lakh
4. Nil

Answer: A — ₹2.40 lakh

Explanation. Subsequent expenditure is normally expensed unless it is probable that the expenditure will increase future economic benefits beyond the originally assessed standard of performance and the cost can be measured and attributed reliably. The ₹2.40 lakh enhancement satisfies both conditions and is added to the patent's carrying amount. The ₹0.80 lakh routine maintenance expenditure merely maintains the existing standard of performance and is expensed. Capitalising both amounts would incorrectly include maintenance costs.

Where it goes wrong. Capitalising routine maintenance expenditure together with genuine enhancements that increase future economic benefits.

Authority. AS 26 paras 59-61

Question 20 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. An intangible asset has an original cost of ₹15.00 lakh, nil residual value and an expected lifetime output of 40,000 production units. During the current accounting year, the enterprise produces 10,000 units. The units-of-production method reliably reflects the consumption of economic benefits. What amortisation should be charged for the year?

An intangible asset has an original cost of ₹15.00 lakh, nil residual value and an expected lifetime output of 40,000 production units. During the current accounting year, the enterprise produces 10,000 units. The units-of-production method reliably reflects the consumption of economic benefits. What amortisation should be charged for the year?

1. ₹3.00 lakh
2. ₹3.75 lakh (correct answer)
3. ₹5.00 lakh
4. ₹2.50 lakh

Answer: B — ₹3.75 lakh

Explanation. The depreciable amount is ₹15.00 lakh because residual value is nil. Under the units-of-production method, annual amortisation is based on the proportion of expected lifetime output actually achieved. The production ratio is 10,000/40,000 = 25%. Therefore, amortisation is ₹15.00 lakh × 25% = ₹3.75 lakh. Applying straight-line amortisation merely because it is commonly used would disregard the reliably measurable consumption pattern specified in the question.

Where it goes wrong. Using straight-line amortisation despite reliable evidence that economic benefits are consumed according to production output.

Authority. AS 26 paras 72-74

Question 21 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. An acquired intangible asset has a cost of ₹12.00 lakh and an estimated useful life of four years. A financially capable third party has provided a binding commitment to purchase the asset for ₹2.40 lakh at the end of its useful life. Estimated disposal costs will be ₹0.20 lakh. What is the annual straight-line amortisation charge?

An acquired intangible asset has a cost of ₹12.00 lakh and an estimated useful life of four years. A financially capable third party has provided a binding commitment to purchase the asset for ₹2.40 lakh at the end of its useful life. Estimated disposal costs will be ₹0.20 lakh. What is the annual straight-line amortisation charge?

1. ₹3.00 lakh
2. ₹2.55 lakh
3. ₹2.45 lakh (correct answer)
4. ₹2.40 lakh

Answer: C — ₹2.45 lakh

Explanation. Residual value is not automatically nil where a third party has committed to purchase the intangible asset at the end of its useful life. The estimated residual value is ₹2.40 lakh less disposal costs of ₹0.20 lakh = ₹2.20 lakh. Depreciable amount is therefore ₹12.00 − ₹2.20 = ₹9.80 lakh. Annual amortisation over four years is ₹9.80 ÷ 4 = ₹2.45 lakh. Ignoring the binding purchase commitment would overstate annual amortisation.

Where it goes wrong. Assuming a zero residual value despite the existence of a qualifying third-party purchase commitment.

Authority. AS 26 paras 63 and 75-77

Question 22 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A company is developing an intangible asset that is not yet available for use. Its carrying amount at 31 March 2027 is ₹6.20 lakh. Its value in use is ₹6.00 lakh and its net selling price is ₹5.70 lakh. Management has identified no specific impairment indicator. What accounting treatment is required?

A company is developing an intangible asset that is not yet available for use. Its carrying amount at 31 March 2027 is ₹6.20 lakh. Its value in use is ₹6.00 lakh and its net selling price is ₹5.70 lakh. Management has identified no specific impairment indicator. What accounting treatment is required?

1. Recognise no impairment because the asset is still under development.
2. Write down the asset to ₹5.70 lakh because this is its net selling price.
3. Recognise an impairment loss of ₹0.50 lakh based on net selling price.
4. Recognise an impairment loss of ₹0.20 lakh and carry the asset at ₹6.00 lakh. (correct answer)

Answer: D — Recognise an impairment loss of ₹0.20 lakh and carry the asset at ₹6.00 lakh.

Explanation. Recoverable amount is the higher of value in use ₹6.00 lakh and net selling price ₹5.70 lakh. It is therefore ₹6.00 lakh. The impairment loss is ₹6.20 − ₹6.00 = ₹0.20 lakh. AS 26 requires annual recoverability estimation for an intangible asset that is not yet available for use, even if there is no impairment indicator. The asset must be carried at its recoverable amount after recognising the impairment loss.

Where it goes wrong. Assuming an internally generated intangible asset under development is exempt from annual impairment testing.

Authority. AS 26 paras 81 and 83-84; AS 28 para 4.1

Question 23 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A company acquires an exclusive technology right for ₹24.00 lakh. Persuasive technical and commercial evidence supports a useful life of twelve years, and the legal rights also extend for twelve years. Three complete years have elapsed since the asset became available for use. Assuming nil residual value, what is the annual amortisation charge and the additional mandatory impairment-related requirement?

A company acquires an exclusive technology right for ₹24.00 lakh. Persuasive technical and commercial evidence supports a useful life of twelve years, and the legal rights also extend for twelve years. Three complete years have elapsed since the asset became available for use. Assuming nil residual value, what is the annual amortisation charge and the additional mandatory impairment-related requirement?

1. ₹1.50 lakh annually, with impairment testing only when indicators arise.
2. ₹2.00 lakh annually, with annual recoverability estimation. (correct answer)
3. ₹2.40 lakh annually, with annual recoverability estimation.
4. ₹2.00 lakh annually, with no impairment test unless the asset is retired.

Answer: B — ₹2.00 lakh annually, with annual recoverability estimation.

Explanation. The twelve-year useful life is supported by persuasive evidence and is within the period of enforceable legal rights. Annual amortisation is ₹24.00 lakh ÷ 12 = ₹2.00 lakh. The rebuttable presumption that useful life generally does not exceed ten years has therefore been overcome. However, AS 26 para 67 requires recoverable amount to be estimated at least annually for an intangible asset amortised over more than ten years. The requirement applies even when no impairment indicator exists.

Where it goes wrong. Assuming that rebutting the ten-year useful-life presumption removes the annual impairment-estimation requirement.

Authority. AS 26 paras 63 and 66-70; AS 26 para 83(b)

Question 24 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. An intangible asset with a carrying amount of ₹3.60 lakh is retired from active use on 31 March 2027 and held for disposal. Its estimated net disposal proceeds are ₹3.10 lakh. No impairment assessment has yet been carried out for the reporting date. What amount should be retained at the date of retirement?

An intangible asset with a carrying amount of ₹3.60 lakh is retired from active use on 31 March 2027 and held for disposal. Its estimated net disposal proceeds are ₹3.10 lakh. No impairment assessment has yet been carried out for the reporting date. What amount should be retained at the date of retirement?

1. ₹3.60 lakh, subject to the required impairment assessment. (correct answer)
2. ₹3.10 lakh, with an immediate write-down of ₹0.50 lakh.
3. Nil, because the asset is no longer being actively used.
4. ₹3.35 lakh, representing the average of carrying amount and disposal value.

Answer: A — ₹3.60 lakh, subject to the required impairment assessment.

Explanation. Under AS 26 para 89, an intangible asset retired from active use and held for disposal is carried at its carrying amount on the date of retirement. Therefore, the amount immediately retained is ₹3.60 lakh. However, the asset must still be tested for impairment at the financial year-end under AS 28. The lower expected disposal proceeds do not by themselves require automatic measurement at net disposal proceeds on the retirement date.

Where it goes wrong. Applying the PPE retirement measurement rule to an intangible asset held for disposal under AS 26.

Authority. AS 26 paras 87-89

Question 25 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A company disposes of a registered software licence with a carrying amount of ₹4.90 lakh. Gross disposal consideration is ₹5.60 lakh and directly attributable disposal costs are ₹0.30 lakh. What is the accounting result on derecognition?

A company disposes of a registered software licence with a carrying amount of ₹4.90 lakh. Gross disposal consideration is ₹5.60 lakh and directly attributable disposal costs are ₹0.30 lakh. What is the accounting result on derecognition?

1. Recognise a gain of ₹0.70 lakh in profit or loss.
2. Recognise a loss of ₹0.30 lakh in profit or loss.
3. Recognise a gain of ₹0.40 lakh in profit or loss. (correct answer)
4. Recognise a gain of ₹0.60 lakh in profit or loss.

Answer: C — Recognise a gain of ₹0.40 lakh in profit or loss.

Explanation. Net disposal proceeds are ₹5.60 lakh − ₹0.30 lakh = ₹5.30 lakh. The carrying amount of the software licence is ₹4.90 lakh. Therefore, the gain on derecognition is ₹5.30 − ₹4.90 = ₹0.40 lakh, recognised in the Statement of Profit and Loss. Gross sale consideration must not be compared directly with carrying amount because the standard requires disposal proceeds to be stated net of directly attributable disposal costs.

Where it goes wrong. Calculating the disposal gain using gross sale proceeds without deducting directly attributable disposal costs.

Authority. AS 26 paras 87-88