useful lives of similar assets that are used in a similar way;
(c) technical, technological, commercial or other types of obsolescence;
(d) the stability of the industry in which the asset operates and changes in the market
demand for the products or services output from the asset;
(e) expected actions by competitors or potential competitors;
(f) the level of maintenance expenditure required to obtain the expected future
economic benefits from the asset and the entity’s ability and intention to reach
such a level;
Intangible
assets
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(g) the period of control over the asset and legal or similar limits on the use of the
asset, such as the expiry dates of related leases, discussed further at 9.1.2 below;
and
(h) whether the useful life of the asset is dependent on the useful life of other assets
of the entity. [IAS 38.90].
The standard explicitly warns against both:
• overestimating the useful life of an intangible asset. For example, a history of rapid
changes in technology means that the useful lives of computer software and many
other intangible assets that are susceptible to technological obsolescence will be
short; [IAS 38.92] and
• underestimating the useful life. Whilst uncertainty justifies estimating the useful
life of an intangible asset on a prudent basis, it does not justify choosing a life that
is unrealistically short. [IAS 38.93].
Where an intangible asset is acquired in a business combination, but the acquiring entity
does not intend to use it to generate future cash flows, it is unlikely that it could have
anything other than a finite useful life. Indeed, whilst in our view an entity would not
recognise an immediate impairment loss on acquisition, the estimated useful life of the
asset is likely to be relatively short (see Chapter 9 at 5.5.6).
The following examples, based on those in IAS 38’s Illustrative Examples, show how some
of the features that affect the useful life are taken into account in assessing that life.
Example 17.11: Assessing the useful life of an intangible asset
Acquired customer list
A direct-mail marketing company acquires a customer list and expects that it will be able to derive benefit
from the information on the list for at least one year, but no more than three years.
The customer list would be amortised over management’s best estimate of its useful life, say 18 months.
Although the direct-mail marketing company may intend to add customer names and other information to the
list in the future, the expected benefits of the acquired customer list relate only to the customers on that list
at the date it was acquired. The customer list also would be reviewed for indicators of impairment in
accordance with IAS 36 at the end of each reporting period. [IAS 36.9].
An acquired trademark used to identify and distinguish a leading consumer product that has been a market-
share leader for the past eight years
The trademark has a remaining legal life of five years but is renewable every 10 years at little cost. The
acquiring entity intends to renew the trademark continuously and evidence supports its ability to do so. An
analysis of product life cycle studies, market, competitive and environmental trends, and brand extension
opportunities provides evidence that the trademarked product will generate net cash inflows for the acquiring
entity for an indefinite period.
The trademark would be treated as having an indefinite useful life because it is expected to contribute to net
cash inflows indefinitely. Therefore, the trademark would not be amortised until its useful life is determined
to be finite. It would be tested for impairment in accordance with IAS 36 annually and whenever there is an
indication that it may be impaired. [IAS 36.10].
It is clear from the above discussion that despite the fairly detailed guidance in the
standard an entity will need to exercise judgement in estimating the useful life of
intangible assets.
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9.1.2
Useful life of contractual or other legal rights
Where an intangible asset arises from contractual or other legal rights, the standard
requires an entity to take account of both economic and legal factors influencing its
useful life and determine the useful life as the shorter of:
• the period of the contractual or other legal rights; and
• the period (determined by economic factors) over which the entity expects to
obtain economic benefits from the asset. [IAS 38.94-95].
If the contractual or other legal rights can be renewed, the useful life of the intangible
asset should include the renewal period only if there is evidence to support renewal by
the entity without significant cost.
However, renewal periods must be ignored if the intangible asset is a reacquired right
that was recognised in a business combination. [IAS 38.94]. The existence of the following
factors may indicate that an entity is able to renew the contractual or other legal rights
without significant cost:
(a) there is evidence, possibly based on experience, that the contractual or other legal
rights will be renewed. If renewal is contingent upon the consent of a third party,
this includes evidence that the third party will give its consent;
(b) there is evidence that any conditions necessary to obtain renewal will be satisfied;
and
(c) the cost to the entity of renewal is not significant when compared with the future
economic benefits expected to flow to the entity from renewal. [IAS 38.96].
A renewal period is only added to the estimate of useful life if its cost is insignificant
when compared with the future economic benefits expected to flow to the entity from
renewal. [IAS 38.94]. If this is not the case, then the original asset’s useful life ends at the
contracted renewal date and the renewal cost is treated as the cost to acquire a new
intangible asset. [IAS 38.96]. An entity needs to exercise judgement in assessing what it
regards as a significant cost.
In the case of a reacquired contractual right, recognised as an intangible asset in a
business combination accounted for under IFRS 3, its useful life is the remaining
contractual period of the contract in which the right was granted. Renewal periods may
not be taken into account. [IAS 38.94].
The following examples are derived from those in IAS 38’s Illustrative Examples and
show the effect of contractual or other legal rights on the useful life of an intangible
asset, when assessed together with other factors. The useful life may be shorter than the
legal rights or, if supported by facts and circumstances, renewal rights could mean that
the intangible asset’s life is indefinite.
Example 17.12: Legal rights and useful life
An acquired copyright that has a useful life that is shorter than its remaining legal life of 50 years
An analysis of consumer habits and market trends provides evidence that the copyrighted material will
generate net cash inflows for only 30 more years.
The copyright would be amortised over its 30-year estimated useful life and not over the term of the legal
rights of 50 years. The copyright also would be reviewed for impairment in accordance with IAS 36 by
> assessing at the end of each reporting period whether there is any indication that it may be impaired.
Intangible
assets
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An acquired broadcasting licence that expires in five years but is assessed as having an indefinite useful life
The broadcasting licence is renewable every 10 years if the entity provides at least an average level of service
to its customers and complies with the relevant legislative requirements. The licence may be renewed
indefinitely at little cost and has been renewed twice before the most recent acquisition. The acquiring entity
intends to renew the licence indefinitely and evidence supports its ability to do so. Historically, there has been
no compelling challenge to the licence renewal. The technology used in broadcasting is not expected to be
replaced by another technology at any time in the foreseeable future. Therefore, the licence is expected to
contribute to the entity’s net cash inflows indefinitely.
The broadcasting licence would be treated as having an indefinite useful life because it is expected to
contribute to the entity’s net cash inflows indefinitely. Therefore, the licence would not be amortised until its
useful life is determined to be finite. The licence would be tested for impairment in accordance with IAS 36
annually (as part of a cash-generating unit) and whenever there is an indication that it may be impaired.
An acquired airline route authority between two European cities that expires in three years but is assessed
as having an indefinite useful life
The route authority may be renewed every five years, and the acquiring entity intends to comply with the
applicable rules and regulations surrounding renewal. Route authority renewals are routinely granted at a
minimal cost and historically have been renewed when the airline has complied with the applicable rules and
regulations. The acquiring entity expects to provide service indefinitely between the two cities from its hub
airports and expects that the related supporting infrastructure (airport gates, slots, and terminal facility leases)
will remain in place at those airports for as long as it has the route authority. An analysis of demand and cash
flows supports those assumptions.
Because the facts and circumstances support the acquiring entity’s ability to continue providing air service
indefinitely between the two cities, the intangible asset related to the route authority is treated as having an
indefinite useful life. Therefore, the route authority would not be amortised until its useful life is determined
to be finite. It would be tested for impairment in accordance with IAS 36 annually (as part of a cash-generating
unit) and whenever there is an indication that it may be impaired.
9.2
Intangible assets with a finite useful life
9.2.1
Amortisation period and method
Amortisation is the systematic allocation of the depreciable amount of an intangible
asset over its useful life. The depreciable amount is the cost of an asset, or other amount
substituted for cost (e.g. revaluation), less its residual value. [IAS 38.8]. The depreciable
amount of an intangible asset with a finite useful life should be allocated on a systematic
basis over its useful life in the following manner: [IAS 38.97]
• amortisation should begin when the asset is available for use, i.e. when it is in the
location and condition necessary for it to be capable of operating in the manner
intended by management. Therefore, even if an entity is not using the asset, it
should still be amortised because it is available for use, although there may be
exceptions from this general rule (see 9.2.3 below);
• amortisation should cease at the earlier of:
• the date that the asset is classified as held for sale, or included in a disposal
group that is classified as held for sale, in accordance with IFRS 5; and
• the date that the asset is derecognised.
• the amortisation method should reflect the pattern of consumption of the
economic benefits that the intangible asset provides. If that pattern cannot be
reliably determined, a straight-line basis should be used.
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Amortisation of an intangible asset with a finite useful life continues until the asset has
been fully depreciated or is classified as held for sale, as noted above, or derecognised.
Amortisation does not cease simply because an asset is not being used, [IAS 38.117],
although this fact might give rise to an indicator of impairment.
The standard allows a variety of amortisation methods to be used to depreciate the asset
on a systematic basis over its useful life, such as the straight-line method, the diminishing
balance method and the unit of production method. [IAS 38.98]. The factors to consider in
determining the most appropriate amortisation method are similar to those that are
relevant for the depreciation of property, plant and equipment in accordance with IAS 16
(see Chapter 18). For example, entities can adopt a ‘sum of the digits’ methodology, where
amortisation reflects higher consumption of benefits in the earlier part of the asset’s useful
life, as this is a variant of the diminishing balance method (see Chapter 18).
The amortisation charge for each period should be recognised in profit or loss unless
IFRS specifically permits or requires it to be capitalised as part of the carrying amount
of another asset (e.g. inventory or work in progress). [IAS 38.97, 99].
There is a rebuttable presumption that an amortisation method based on the pattern of
expected revenues is not appropriate. This is because a revenue-based method reflects
a pattern of generation of economic benefits from operating the business (of which the
asset is a part), rather than the consumption of the economic benefits embodied in the
asset itself (see 9.2.2 below). By contrast, an amortisation method based on estimated
total output (a unit of production method) is appropriate.
The future economic benefits of some intangible assets are clearly consumed on a declining
balance basis. This often applies to customer relationships and similar assets acquired as
part of a business combination. Both the fair value and the future economic benefits from
the customer relationship or similar asset decline over time as the consumption of the
economic benefits embodied in the asset declines. Therefore amortising the customer
relationship on a declining balance method would be appropriate.
It is important to distinguish this from an asset whose fair value shows a declining
balance profile over its life but where the future economic benefits are consumed on a
time basis, e.g. a motor vehicle where the entity will obtain as much benefit in year 4 as
in year 1. A straight-line method of amortisation properly reflects the consumption of
benefits from the motor vehicle.
9.2.1.A
Amortising customer relationships and similar intangible assets
In practice entities rarely use declining balance methods for amortisation. One reason for
customer relationships and similar intangible assets is the uncertainty about the future
economic benefits that might arise several years in the future and the difficulty in
distinguishing them from cash flows that have been generated by internally-generated assets
of the business. As a pragmatic solution, sup
ported by valuations experts, entities often use a
straight-line method over a shorter period so that at all points the amortised carrying amount
of the asset is below the curve for the expected benefits. This is illustrated in the following
example and chart. As long as the benefits expected to arise in the period after the intangible
asset is fully amortised are not expected to be significant and the entity applies the
requirements of IAS 38 to review the useful life and amortisation method (see 9.2.3 below),
this method will give a reasonable approximation of the consumption of economic benefits.
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1263
Example 17.13: Amortisation method and useful life for customer relationships
An entity identifies a customer relationship on acquiring another business. The entity completes its initial
accounting at the end of 20X0 and the customer relationship is valued at €4 million. The valuations expert
consulted by the entity assesses the total period from which benefits will be derived from the customer
relationship is 9 years but that the benefits will show a declining balance over this period. After discussions
with the valuer, the entity concludes that the best estimate of the useful life of the customer relationship for
accounting purposes is 5 years and a straight-line method over this period will adequately reflect the
consumption of future economic benefits from the customer relationship, given that the amount and timing
of benefits after 5 years is inherently uncertain as to timing or amount. The entity notes that a straight-line
method over 9 years would not adequately reflect the consumption of future economic benefits.
The relationship between the total economic life, useful life and amortisation method is illustrated in the
following chart.
Million
4
3
Carrying value if
2
economic life
Fair
was used
value
Carrying value
1
using useful life
0
1
2
3
4
5
6
7
8
9 Years
9.2.1.B
Amortisation of programme and other broadcast rights
The value of programme and other broadcast rights diminishes because the programmes
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 249