or events have been broadcast to the same audience before and as result of the passage
of time, e.g. audiences lose interest in old programmes or repeats of events for which
the result is known or the right is for a limited period. In accounting for this diminution
in value, in practice, entities usually take into account how often a programme has been
broadcast and, less frequently, the passage of time as such.
When an entity accounts for broadcast rights as inventory, the problem arises that IAS 2
requires valuation ‘at the lower of cost and net realisable value’ and does not appear to
recognise the concept of amortisation of inventories. [IAS 2.9]. However, it has been
argued that a programme right embodies a series of identifiable components, i.e. first
transmission, second transmission, etc., which an entity should account for separately.
This appears to be the approach that ITV applies in writing off its programme rights (see
Extract 17.2 at 2.2.2 above).
An entity that accounts for programme and other broadcast rights as intangible assets
would need to comply with the requirements of IAS 38, which requires that the
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amortisation method reflects the pattern in which the asset’s future economic benefits
are expected to be consumed by the entity. [IAS 38.97]. As discussed at 9.2.1 above, the
standard permits a range of amortisation methods (e.g. the straight-line method, the
diminishing balance method and the unit of production method), provided that the
chosen method reflects the pattern in which the asset’s future economic benefits are
expected to be consumed. [IAS 38.97-98].
RAI is an example of a company that amortises some of its programme rights on a
straight-line basis.
Extract 17.9: RAI – Radiotelevisione italiana S.p.A. (2016)
Notes to the financial statements as at 31 December 2016 [extract]
3) Accounting principles [extract]
Non-current assets [extract]
Intangible assets [extract]
Intangible assets with a finite useful life are systematically amortised over their useful life, which is the estimated
period in which the assets will be used by the Company and are structured as follows:
a) programmes: acquisition and production costs, which comprise the external costs that can be allocated directly to each production and the costs of the internal resources used for the creation of each programme, are accounted for as follows: 1) costs for repeated-use TV productions are capitalised under intangible assets. If such productions are ready for use,
the costs are amortised on a straight-line basis from the month when they are realised or the right is available, over
the period of their estimated useful life. If such repeated-use productions are not yet useable at period –end, the costs are reported as intangible assets under development and payments on account.
9.2.2 Revenue-based
amortisation
Consumption of the future economic benefits of an asset is the principle on which
amortisation is based. Whether this completely precluded revenue-based methods of
amortisation had become a matter of debate, particularly in the context of service
concession arrangements that are accounted for using the intangible asset model (see
Chapter 26 at 4.3.1).
In May 2014, the IASB clarified IAS 38 by introducing a rebuttable presumption that
a revenue-based approach is not appropriate. Revenue reflects the output of the
intangible asset but it also measures the impact of other factors, such as changes in
sales volumes and selling prices, the effects of selling activities and changes to inputs
and processes. The price component of revenue may be affected by inflation.
[IAS 38.98A].
The following example illustrates how a revenue-based method of amortisation
diverges from the units-of-production method when the price per unit is not fixed.
Example 17.14: Output-based versus revenue-based amortisation
Entity Z acquires a five-year licence to manufacture a product for a cost of £1,220,000. It is expected that the
production line used for making the product has a capacity of 100,000 units per year. The entity plans to
produce at full capacity each year and to sell all of its output. However, it expects the price per unit to be £10
in year 1 and increase by 10% each year thereafter. On this basis, the profile of amortisation on a unit of
production basis (UoP) and on a revenue basis would be as follows:
Intangible
assets
1265
Units
UoP
charge
Revenue
Charge
Year 1
100,000
244,000
1,000,000
200,000
Year 2
100,000
244,000
1,100,000
220,000
Year 3
100,000
244,000
1,210,000
242,000
Year 4
100,000
244,000
1,330,000
266,000
Year 5
100,000
244,000
1,460,000
292,000
Total
500,000
1,220,000
6,100,000
1,220,000
The IASB acknowledged certain ‘limited circumstances’ that would allow revenue-
based amortisation. Therefore, the presumption that they are not acceptable is
rebuttable only:
(a) when the rights embodied in that intangible asset are expressed as a measure of
revenue; or
(b) when it can be demonstrated that revenue and the consumption of the economic
benefits embodied in the intangible asset are highly correlated. [IAS 38.98A].
A ‘highly correlated’ outcome would only be achieved where a revenue-based
method of amortisation is expected to give a similar answer as one of the other
methods permitted by IAS 38. For example, if revenue is earned evenly over the
expected life of the asset, the pattern of amortisation would be similar to a straight-
line basis. In situations where unit prices are fixed and all production is sold, the
pattern of amortisation would replicate the use of the units-of-production method.
However, when unit prices are not fixed, revenue would not provide the same
answer and its use would therefore be inappropriate (as in the example above).
[IAS 38.98B]. The revised standard notes that revenue is the predominant limiting factor
that is inherent in the intangible asset in circumstances in which it is appropriate to
use it as the basis of amortisation. In other words, in these circumstances, revenue
determines the useful life of the asset, rather than, for example, a number of years or
the number of units produced.
The amended standard includes two examples in which revenue earned can be
regarded as a measure of consumption of an intangible asset.
• A contract may allow the extraction of gold from a mine until total cumulative
revenue from the sale of gold reaches $2 billion; or
• The right to operate a toll road could be based on a fixed total amount of revenue
to be generated from cumulative tolls, i.e. the operator can collect up to
€100 million from the tolls collected. [IAS 38.98C].
Some respondents had argued that a units of production method did
not seem
practicable when the units of production were not homogeneous. For example, a
producer of a motion picture generates revenue through showing the picture in
theatres, selling DVDs, licensing the rights to characters to toy manufacturers and
licensing the broadcast rights to television. The IASB acknowledges that such
situations require the exercise of judgement. The Board did consider whether an
intangible asset should be divided into components for amortisation purposes ‘but
refrained from developing guidance in this respect for intangible assets’.
[IAS 38.BC72H-72I].
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9.2.3
Review of amortisation period and amortisation method
An entity should review the amortisation period and the amortisation method for an
intangible asset with a finite useful life at least at each financial year-end. If the expected
useful life of the asset has changed, the amortisation period should be changed
accordingly. [IAS 38.104]. An entity may, for example, consider its previous estimate of the
useful life of an intangible asset inappropriate upon recognition of an impairment loss
on the asset. [IAS 38.105].
If the expected pattern of consumption of the future economic benefits embodied in
the asset has changed, the amortisation method should be changed to reflect the new
pattern. [IAS 38.104]. The standard provides two examples of when this might happen:
• if it becomes apparent that a diminishing balance method of amortisation is
appropriate rather than a straight-line method; [IAS 38.106] and
• if use of the rights represented by a licence is deferred pending action on other
components of the business plan. In this case, economic benefits that flow from
the asset may not be received until later periods. [IAS 38.106]. This implies that
circumstances may exist in which it is appropriate not to recognise an
amortisation charge in relation to an intangible asset, because the entity may
not yet be ready to use it. For example, telecommunication companies acquired
UMTS (3G) licences, before constructing the physical network necessary to use
the licence. Note that an entity must perform an impairment test at least
annually for any intangible asset that has not yet been brought into use.
[IAS 36.10].
Both changes in the amortisation period and the amortisation method should be
accounted for as changes in accounting estimates in accordance with IAS 8 –
Accounting Policies, Changes in Accounting Estimates and Errors – which requires such
changes to be recognised prospectively by revising the amortisation charge in the
current period and for each future period during the asset’s remaining useful life.
[IAS 8.36, 38, IAS 38.104].
9.2.4 Residual
value
The residual value of an intangible asset is the estimated amount that an entity would
currently obtain from disposal of the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in the condition expected at the end of
its useful life. [IAS 38.8].
IAS 38 requires entities to assume a residual value of zero for an intangible asset
with a finite useful life, unless there is a commitment by a third party to purchase
the asset at the end of its useful life or there is an active market (as defined by
IFRS 13) for the asset from which to determine its residual value and it is probable
that such a market will exist at the end of the asset’s useful life. [IAS 38.100]. This
presumption has been retained from the previous version of IAS 38 as an anti-abuse
measure to prevent entities from circumventing the requirement to amortise all
intangible assets. [IAS 38.BC59].
Given the definition of ‘active market’ (see 8.2.1 above) it seems highly unlikely that,
in the absence of a commitment by a third party to buy the asset, an entity will ever
Intangible
assets
1267
be able to prove that the residual value is other than zero. A residual value other
than zero implies that the entity intends to dispose of the asset before the end of its
economic life. [IAS 38.101]. Third party commitments can be found in contracts in the
scope of IFRIC 12 – Service Concession Arrangements (see Chapter 26) and one of
IAS 38’s Illustrative examples includes a residual value; see Example 17.15 below.
If an entity can demonstrate a case for estimating a residual value other than zero,
its estimate should be based on current prices for the sale of a similar asset that has
reached the end of its useful life and has operated under conditions similar to those
in which the asset will be used. [IAS 38.102]. The standard requires a review of the
residual value at each financial year end. This review can result in an upward or
downward revision of the estimated residual value and thereby affect the
depreciable amount of the asset; that change to depreciation should be accounted
for prospectively as a change in an accounting estimate in accordance with IAS 8.
[IAS 38.102].
The following example is based on one of IAS 38’s Illustrative Examples. The intangible
asset being considered has a residual value at the end of its useful life.
Example 17.15: Amortisation of an intangible asset with a residual value
An acquired patent that expires in 15 years
A product protected by patented technology is expected to be a source of net cash inflows for at least 15 years.
The entity has a commitment from a third party to purchase that patent in five years for 60 per cent of the fair
value of the patent at the date it was acquired, and the entity intends to sell the patent in five years.
The patent will be amortised over its five-year useful life to the entity, with a residual value equal to 60 per
cent of the patent’s fair value at the date it was acquired. The patent will also 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.
The standard does not permit negative amortisation in the event that the residual value
of an intangible asset increases to an amount greater than the asset’s carrying amount.
Instead, the asset’s amortisation charge will be zero until its residual value decreases to
an amount below the asset’s carrying amount. [IAS 38.103].
9.3
Intangible assets with an indefinite useful life
IAS 38 prohibits amortisation of an intangible asset with an indefinite useful life.
[IAS 38.107]. Instead, IAS 36 requires such an asset to be tested for impairment annually
and whenever there is an indication that the intangible asset may be impaired. [IAS 38.108].
An entity should review and validate at the end of each reporting period its
decision to classify the useful life of an intangible asset as indefinite. [IAS 38.109]. If
events and circumstances no longer support an indefinite useful life, the change
from indefinite to finite life should be accounted for as a change in accounting
estimate under IAS 8, [IAS 38.109], which requires such changes to be recognised
prospectively (i.e. in the current and future periods). [IAS 8.36]. Furthermore,
reassessing the useful life of an intangible asset as finite rather than indefinite is
> an indicator that the asset may be impaired. [IAS 38.110]. See Chapter 20 for a
discussion on impairment.
1268 Chapter 17
The following examples from IAS
38’s Illustrative Examples illustrate
circumstances in which an entity considers whether the useful life of an intangible
asset is still indefinite.
Example 17.16: Review of indefinite useful lives
A broadcasting licence is no longer to be renewed
The facts are as in Example 17.12 above. A licensing authority has allowed broadcast licences to be renewed
indefinitely at little cost and an entity, having renewed the licence twice, had concluded that it had an
indefinite useful life. However, the licensing authority subsequently decides that it will no longer renew
broadcasting licences, but rather will auction the licences. At the time the licensing authority’s decision is
made, the entity’s broadcasting licence has three years until it expires. The entity expects that the licence will
continue to contribute to net cash inflows until the licence expires.
Because the broadcasting licence can no longer be renewed, its useful life is no longer indefinite. Thus, the
acquired licence would be amortised over its remaining three-year useful life and immediately tested for
impairment in accordance with IAS 36.
A trademark for a line of products acquired several years ago in a business combination
At the time of the business combination the acquiree had been producing the line of products for 35 years
with many new models developed under the trademark. At the acquisition date the acquirer expected to
continue producing the line, and an analysis of various economic factors indicated there was no limit to the
period the trademark would contribute to net cash inflows, so the trademark was not amortised by the acquirer.
However, management has recently decided that production of the product line will be discontinued over the
next four years.
Because the useful life of the acquired trademark is no longer regarded as indefinite, the carrying amount of
the trademark would be tested for impairment in accordance with IAS 36, written down to recoverable amount
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 250