Are Intangible Assets always needs to be amortised?

A. Facts of the Case

• A Government Company engaged in the business of refining of crude oil and marketing of petroleum products. For the purpose of laying the pipelines, the company acquires ‘right of way’, i.e., right of use in land (ROU) under which pipeline is to be laid.
• The company owns pipelines for movement of petroleum products. These pipelines are underground pipelines having sectionalising valve stations/intermediate, pigging stations/booster pumping stations in between.
• The Company has perpetual and absolute right to enter the land under which pipeline has been laid for the purpose of maintaining, examining, repairing or for doing any other acts necessary for any of the aforesaid purposes.
• Current Accounting Treatment: The accounting policy of the company on intangible assets states that “cost of right of way that is perennial in nature is not amortised as no finite useful life can be identified for the same”. Therefore, the cost of ROU is capitalized as intangible asset, disclosed separately and not amortised.

B. Query

The company had sought the opinion that whether the view of the company is appropriate. If not, what should be the useful life to be considered for computing the amortisation in view of the fact that the right of way is perennial in nature?

C. Opinion

On the basis of the above, the opinion in respect of the query raised by the company:

• As per paragraph 68 of AS 26, specifically envisages that the useful life of an intangible asset is always finite, howsoever long and indefinite it may be. It stipulates that the life has to be determined on a prudent and rational basis.
• The useful life of the land right of way may be determined considering various technical, legal and economic factors, such as, useful life of petroleum reserves from which the petroleum products are being produced and then transported, technological changes in the transportation modes, alternative resources of energy, etc.
• Therefore, the depreciable amount should be allocated on a systematic basis over the best estimate of its useful life.
• Hence, the current practice of the company not to amortise the land right of way is not correct

The above opinion was affirmed by the ICAI-Expert Advisory Committee.

Taran Arora, Audit Associate, SW India