Wednesday, July 9, 2014

Determine the USEFUL LIVES of Intangible Assets

IAS 38 regarding Intangible Assets defines USEFUL LIFE as :

  1. the period over which an asset is expected to be available for use by an entity; or
  2. the number of production or similar units expected to be obtained from the asset by an entity

Further, IAS 38 requires an entity to assess whether the useful life of an intangible asset is FINITE or INDEFINITE and, if finite, the length of, or number of production or similar units constituting, that useful life. An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

IAS 38 contains guidance on factors to be taken into account when estimating useful life of an intangible asset, which includes :

  1. Expected usage by the entity of the asset and whether it could be managed efficiently by another management team;
  2. The typical product life cycle for the asset and published information about useful lives of similar assets that are used in a similar way. This might include comparison with useful lives disclosed in the financial statements of companies that have a similar business using similar assets;
  3. Technical, technological, commercial or other types of obsolescence;
  4. The stability of the industry in which the asset operates and changes in market demand for the products or services from or related to the asset;
  5. Expected actions by actual or potential competitors;
  6. The level of maintenance required to maintain the asset’s operating capability and whether management intends to perform that level of maintenance;
  7. The period for which the entity has control of the asset and any legal or similar limits on the asset’s use, including for example, expiry dates of leases or licences or geographical restrictions;
  8. Whether the asset’s useful life is dependent on the useful life of other assets of the entity. For example, use of a trademark or brand may cease if production of the goods represented by the trademark or brand is discontinued.

An Intangible Asset that is determined to have an INDEFINITE USEFUL LIFE is not amortized. While, assets having a FINITE USEFUL LIFE must be amortized over the useful life, and this may be done in any of the usual ways (pro rata over time, over units of production, etc.). If control over the future economic benefits from an intangible asset is achieved through legal rights for a finite period, then the useful life of the intangible asset should not exceed the period of legal rights, unless the legal rights are renewable and the renewal is a virtual certainty. Thus, as a practical matter, the shorter legal life will set the upper limit for an amortization period in most cases.

There are illustrative examples in IAS 38 that cover assessing of the useful life of intangible assets, which include the Customer Lists, Patents, Copyrights, and also Renewable License Rights. Please refer to IAS 38 for further explanation.

The Useful Life of a finite life intangible asset should be reviewed at least at each financial year end. Changes in useful lives should be accounted for as changes in estimates in accordance with IAS 8.

Where an intangible asset is not being amortized because its useful life is considered to be indefinite, an entity should carry out a review in each accounting period to confirm whether or not events and circumstances still support the assumption of an indefinite life. If they don’t, the change from the indefinite to finite useful life should be accounted for as a change in estimate under IAS 8 (HRD).

Sources :

  1. Manual of Accounting, IFRS 2014 – Vol.2 (PwC)
  2. Wiley, 2013 Interpretation and Application of IFRS

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