Amortisation
Amortisation is the systematic write-off of the cost of an intangible asset over its useful economic life, analogous to depreciation for tangible assets.
Intangible assets subject to amortisation include software, patents, licences, trademarks with finite lives, and customer lists acquired in business combinations. Under Ind AS 38 (Intangible Assets), intangible assets with finite useful lives must be amortised; those with indefinite useful lives (such as acquired brands that are expected to persist indefinitely) are not amortised but must be tested annually for impairment.
In India's pharmaceutical sector, amortisation of acquired drug licences and marketing rights has been a significant accounting consideration. When Indian pharma companies like Sun Pharmaceutical or Dr. Reddy's acquired US generic drug licences or branded drug portfolios, the purchase price was partly allocated to these intangible assets. The subsequent amortisation of these intangibles reduced reported profits but was a non-cash charge — adding back amortisation (as part of EBITDA) gave a cleaner view of cash operating performance.
Technology companies that developed proprietary software often capitalised development costs as intangible assets and amortised them over the expected product life. This accounting choice involves significant judgement — whether the development project meets the recognition criteria under Ind AS 38 (technical feasibility, intention to complete, ability to use or sell, etc.). Aggressive capitalisation of development costs inflates the asset base and defers expenses, while conservative immediate expensing reduces assets and reduces reported profit in the development year but creates a cleaner balance sheet.
Amortisation of goodwill — a common practice under Indian GAAP — was eliminated under Ind AS. Instead, goodwill is tested annually for impairment. This change significantly affected reported profits for companies that had large goodwill balances from acquisitions: under old GAAP, goodwill amortisation was a steady annual drag on profits; under Ind AS, that drag disappears but is replaced by the risk of a large impairment charge if the acquired business underperforms.
For retail investors, paying attention to intangible asset balances on the balance sheet and the amortisation schedule in the notes is important when assessing asset-backed book values. A balance sheet with large intangibles that are amortised quickly carries less impairment risk than one with indefinite-life intangibles that are not regularly written down.