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An entity capitalises ₹4 lakh for designing and migrating a data centre on a 5-year outsourcing contract that can renew for two 1-year periods. Average customer relationship is 7 years. The amortisation period should be:
ASeven years — the expected period over which the entity will provide services under the contract and reasonable renewals
BTen years — the maximum possible contract life including both renewal periods
CFive years — the initial fixed contract term only
DTwo years — the renewal options only, since the initial period is reflected in operating margin
Answer & Solution
Correct answer: A. Seven years — the expected period over which the entity will provide services under the contract and reasonable renewals
The amortisation period under para 99 is the period over which the related goods/services are transferred, including reasonable anticipated renewals. The entity expects 7 years on average (initial 5 + ~2 renewals), so 7 years is the appropriate amortisation period. Not the strict initial term, not the maximum theoretical life.
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