Creation of an intangible asset (License) on account of pre-operational expenditure.

A. Fact of case:

• A Company is the wholly owned subsidiary company of ABC India Limited and is the largest maintenance repair and overhaul (MRO) set up in India.
• The Company would be providing MRO services to ABC India Ltd. and its group of companies and also to other Indian and foreign airlines only after obtaining license (CAR 145) from Director General of Civil Aviation, India (DGCA) for which, it is essential to submit the Business Plan of the applicant company and to demonstrate to DGCA that all necessary requirements/facilities for carrying on MRO activities are in place and available.
• The final resubmission to DGCA was made by the Company in July 2014 and DGCA granted approval to MRO facilities of the Company w.e.f. 1st January, 2015. However, the requisite, sufficient and qualified personnel and payroll was transferred to the Company only on 1st October, 2014 when the entire process of obtaining approval of DGCA was at a very advanced stage.
• During the period up to 1st January, 2015 before the business of the Company was set up, Salary to Technicians/Engineers of Rs 271.39 Crore was incurred and capitalized as cost of License under ‘Intangible Assets’.

B. Issue:

The Querist has sought opinion from the Expert Advisory Committee of ICAI is on the following issues:

• Whether the decision taken by the Company was correct to create the intangible assets as regards to salary expenses booked for engineers of Rs. 248.19 crores, on account of pre-operation expenditure incurred by the Company during the period October-December, 2014, these expenses include only salary expenses for engineers.
• While the Company has tested the intangible assets for impairment and in view of the fact that due to capability enhancement by the Company and other factors, there is no diminution in the value of assets so created, whether the decision to not amortize the assets so created, as regards to salary expenses booked for engineers as stated in above point is correct.

C. Opinion:

The Committee is of the following opinion:

• It was not appropriate to capitalize expenditure incurred on salaries of engineers during October to December 2014, as cost of License as per the requirements of AS 26.
• Since the expenditure incurred on salaries of engineers was not required to be capitalized as intangible asset, the question of any impairment or amortization on such intangible asset created purely on account of salary costs does not arise.