Amortisation method and charge

Learning objectives

• Calculate the amortisation charge using the straight-line method or the units of production method.L1, L2, L3
• Recognise the amortisation charge.L1, L2
• Determine the amortisation method that reflects the pattern of consumption.L2, L3
• Determine whether an amortisation charge is recognised as an expense or included in the carrying amount of another asset.L2

Normative references

• IAS 38 §97The depreciable amount of an intangible asset with a finite useful life is allocated on a systematic basis over its useful life, starting when the asset is available for use (location and condition intended by management). Amortisation ceases at the earlier of the date the asset is classified as held for sale (IFRS 5) and the date it is derecognised. The method reflects the pattern in which the benefits are expected to be consumed; if that pattern cannot be determined reliably, the straight-line method is used. The charge is recognised in profit or loss unless a Standard permits or requires it to be included in the carrying amount of another asset.
• IAS 38 §98A variety of amortisation methods can be used to allocate the depreciable amount on a systematic basis, including the straight-line method, the diminishing balance method and the units of production method; the method is selected on the basis of the expected pattern of consumption of the benefits.
• IAS 38 §99Amortisation is normally recognised in profit or loss. When the future economic benefits of an asset are absorbed in producing other assets, the amortisation charge forms part of the cost of those other assets and is included in their carrying amount; this is the case for the amortisation of intangible assets used in a production process, which is included in the carrying amount of inventories (IAS 2).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

37 questions

• An entity uses a process patent whose benefits are consumed mainly in the first years, as the technology then becomes less and less competitive. This pattern is reliably documented. Which amortisation method should it use?L3
• An entity acquires for {licence_cost} a manufacturing licence allowing it to produce at most {total_units} of a patented component, within a term of {contract_term}. It expects to reach this cap well before the end of the term: the benefits of the licence are therefore consumed as production occurs. It produces {year_units} in the first year. No residual value is expected. What is the amortisation charge for the first year?L3
• An entity holds exclusive distribution rights acquired for {cost}, available for use since the start of the year. Their useful life is estimated at {useful_life}; the pattern of consumption of benefits cannot be determined reliably and no residual value is used. Record the amortisation entry for the year.L2
• Valtera is developing fleet management software for which the recognition criteria are met. For the quarter, it records {staff_costs} of employee benefits for staff assigned to the project (not yet paid), {external_services} of external services consumed by the development (paid), {licence_amortisation} of amortisation of a software licence already recognised as an asset and used by the team, and {training} of training (paid) for the managers who will operate the software. Record the summary entry for the quarter.L2
• Bravane acquires an operating licence for 60,000, available for use on 1 January 20X1, and measures it under the cost model. Its useful life is 5 years, its residual value is nil and the straight-line method reflects the expected pattern of consumption. No impairment loss is recognised. What is its carrying amount at 31 December 20X3?L2
• Laboratoires Vireux acquire for {licence_cost} a licence to use a scientific database, granted for {contract_term} and renewable once for {renewal_term}. Renewal is automatic, for negligible administrative fees, and the entity has evidence showing that it will obtain it. It plans to use the database for {expected_use}. The licence is amortised on a straight-line basis, with no residual value. Determine the useful life and the annual amortisation charge.L2
• Studio Ondine acquires for {right_cost} the right to exploit a film catalogue commercially for {contract_term}. At expiry, the right can be extended, but only against payment of a new price negotiated on market terms. Studio Ondine expects to exploit the catalogue for {expected_use}. The right is amortised on a straight-line basis, with no residual value. What are the useful life of the right and its annual amortisation charge?L3
• Autocars Cévenols obtain for {authorisation_cost} an authorisation to operate a scheduled route, granted for {contract_term} and renewable twice, each renewal covering {renewal_term}. The authority has always renewed these authorisations, at a low administrative cost, for operators complying with their specifications, which the entity does. However, it plans to abandon the route after {expected_use}, when a rail link opens. The authorisation is amortised on a straight-line basis, with no residual value. Determine the useful life and the annual amortisation charge.L3
• True or false? A firm of architects acquires a modelling software licence for 120,000, usable for 4 years. The pattern in which the benefits are consumed cannot be determined reliably and no residual value is assumed. The annual amortisation charge is 30,000.L1
• True or false? IAS 38 requires the straight-line method for all intangible assets with a finite useful life, whatever the pattern in which their benefits are consumed.L2
• The management accountant of a logistics company must select the amortisation method for separately acquired warehouse management software. Which criterion should guide that choice?L2
• A biotechnology company is drafting its amortisation policy for intangible assets with a finite useful life. Which of the following statements comply with IAS 38?L3
• A flight school acquires a flight simulation software licence for {licence_cost}. The contract allows at most {total_hours} hours of simulation, and the school expects to use them all. The licence's benefits are therefore consumed as simulation hours are used. During the first year, students completed {year_hours} hours. No residual value is expected. What is the amortisation charge for the first year?L2
• An agricultural engineering firm acquires, for {licence_cost}, a right of access to a satellite image bank, limited to {download_cap} image downloads over a contractual period of {contract_term} years. The download cap will be reached well before the contract expires: it is the cap that determines the consumption of the benefits. During the year, {downloads_year} images were downloaded. No residual value is expected. What is the amortisation charge for the year?L2
• A pharmacy chain closes its accounts on 31 December 20X1. It acquired prescription management software for {software_cost}, ready for use on 1 April 20X1, that is {months_in_use} months before the year-end. Its useful life is {useful_life} years; the pattern of consumption of the benefits cannot be determined reliably and no residual value is assumed. Record the amortisation entry at 31 December 20X1.L2
• The Fournil d'Opale bakery network buys an exclusive regional franchise contract for {franchise_cost}. The contract is signed in March 20X3, but the rights can only be exercised from 1 July 20X3, when the first outlet opens, that is {months_available} months before the year-end of 31 December 20X3. The useful life is {franchise_life} years, the straight-line method is used and the residual value is nil. Which amortisation entry should be recorded for 20X3?L2
• Lumivert acquires a licence to operate a lighting process for 900,000 and will use it for 6 years. A competitor has contractually committed to buy the licence back for 180,000 at the end of those 6 years. The benefits are consumed evenly and the straight-line method is used. The intern calculates an annual charge of 150,000. What is the correct annual charge?L3
• Canal Boréal acquires the exclusive right to broadcast a television game show format for 6,000,000. The contract provides that the right ends as soon as the cumulative advertising revenue generated by the programme reaches 30,000,000, with no time limit. The right has a nil residual value. Management estimates that this threshold will be reached in about 5 years. During the first year, the programme's advertising revenue amounts to 7,500,000. What amortisation charge should be recognised for the first year?L4
• The Ondelia platform acquires the streaming rights to a film catalogue for 10 years. Subscriptions are sold at variable prices depending on promotions, and the share of revenue attributable to the catalogue fluctuates widely with no link to the use of the rights. The contract sets no revenue cap. Management proposes to amortise the rights in line with subscription revenue. What do you conclude?L3
• Médisud acquires the exclusive right to distribute a medical device in three countries. The contract ends on the earlier of two dates: the day on which cumulative sales of the device reach 50,000,000, or after 8 years. According to the business plan, the sales threshold would be reached in 4 to 5 years. The finance director wants to amortise the right in proportion to sales; the auditor points to the presumption against revenue-based methods. Write a judgement memo on the amortisation method.L4
• A testing laboratory acquires a licence to use a screening method for {licence_cost} and will operate it for {useful_life} years. A peer laboratory has contractually committed to buy the licence back for {buyback_price} at the end of that period. The straight-line method is used. Calculate the depreciable amount and the annual charge.L2
• The Marée Haute fishing company acquires a transferable fishing quota for {quota_cost} and will use it for {quota_life} years. These quotas are traded on an active market, by reference to which the residual value at the end of use is determined at {market_residual}; that market will probably still exist at the end of the quota's use. The quota is available for use on 1 October 20X1, that is {months_first_year} months before the year-end of 31 December 20X1. The straight-line method is used. Calculate the depreciable amount and the charge for 20X1.L3
• A travel agency acquires an online booking platform for {platform_cost} and will use it for {platform_life} years, on a straight-line basis. Its director believes it could be resold for {hoped_resale} at the end of that period, but no buyer has made any commitment and there is no active market for this type of asset. What is the annual amortisation charge?L2
• On 1 January 20X1, Tissavel acquires a right to use a patented textile pattern for 1,000,000 and will exploit it for 4 years. A competing manufacturer has contractually committed to buy this right back for 200,000 at the end of the 4 years. The entity applies the cost model and the straight-line method. What is the carrying amount of the right at 31 December 20X2?L3
• A patent acquired for {patent_cost} is amortised on a straight-line basis over {initial_life} years, with no residual value. After {years_elapsed} years of amortisation, the year-end review shows that the technology will remain usable for longer than expected: the remaining useful life is now {new_remaining_life} years. Calculate the carrying amount at the time of the revision and the revised annual charge.L2
• A music label acquired the exploitation rights to a catalogue of recordings for {catalogue_cost}, amortised on a straight-line basis over {original_total_life} years with no residual value. After {years_amortised} years of amortisation, the catalogue's lasting success in digital streaming leads to an increase of its total useful life, since acquisition, to {revised_total_life} years. What is the annual charge for the following years?L3
• A bicycle manufacturer amortises, on a straight-line basis over {initial_life} years with no residual value, a right to use a welding process acquired for {tool_cost}. After {years_elapsed} years, the year-end review shows that the benefits are in fact consumed as frames are welded, which can now be measured reliably: {remaining_units} frames remain to be produced with this process. The units of production method is adopted from year 3, during which {year3_units} frames are welded. What is the charge for year 3?L3
• A market research company amortises a consumer database acquired for {database_cost} using a units-based method, according to the number of queries. At the start of the year, accumulated amortisation amounts to {accumulated_amortisation}. The previous year-end review showed that use of the database is no longer linked to the number of queries and that the pattern of consumption can no longer be determined reliably; the remaining useful life is {remaining_life} years, with no residual value. What is the charge for the year?L3
• A solar panel manufacturer acquired a patent on an anti-reflective coating for {patent_cost}, amortised on a straight-line basis over {patent_life} years with no residual value. After {years_amortised} years of amortisation, the emergence of a more efficient competing technology leads to a test under IAS 36, which shows a recoverable amount of {recoverable_amount}. No impairment loss has been recognised so far. Under IAS 36, when the recoverable amount is lower than the carrying amount, the difference is recognised as an impairment loss in profit or loss. Calculate the carrying amount before the test and the impairment loss.L3
• A ferry company amortises on a straight-line basis over {system_life} years, with no residual value, a ticketing system acquired for {system_cost} and measured under the cost model. At the start of the year, accumulated amortisation amounts to {opening_amortisation}. At the year-end, following the loss of a sea route, a test under IAS 36 gives a recoverable amount of {recoverable_amount}. Under IAS 36, when the recoverable amount is lower than the carrying amount, the difference is recognised as an impairment loss in profit or loss. Record the charge for the year, then the impairment entry.L3
• Brenoval acquired planning software on 1 January 20X1 for {cost}, available for use on that date and amortised on a straight-line basis over {useful_life} years, with no residual value. It sells the software on 30 September 20X3 for {sale_price}, with no costs of disposal and without prior classification as held for sale (IFRS 5). Its reporting date is 31 December. Calculate the carrying amount at the date of disposal and the result on disposal.L3
• The professional sports club Tormelis obtained an image broadcasting right on 1 January 20X2 for {cost}, usable immediately and amortised on a straight-line basis over {useful_life} years, with no residual value. On 30 June 20X4, it resells this right to a television channel for {sale_price} and bears {disposal_costs} of deed costs, without prior classification as held for sale (IFRS 5). Its financial year is the calendar year. Determine the carrying amount of the right on the day of the resale and the result arising.L3
• True or false? A software platform with a finite useful life, amortised on a straight-line basis, withdrawn from operations while management decides on its future, continues to be amortised.L2
• Pellardi holds several intangible assets with finite useful lives that are amortised on a straight-line basis and not yet fully amortised. In which of these situations does amortisation of the asset cease?L2
• Corvenne acquired a licence for training content for 60,000, amortised on a straight-line basis over 10 years with no residual value. In 20X3, for lack of trainers, the licence is not used at all; it is not classified as held for sale and will be used again in 20X4. What amortisation charge does Corvenne recognise for 20X3?L2
• A management controller asks why amortisation of a finite-life licence, amortised on a straight-line basis, continues although it remained unused for the whole year. Which answer is consistent with IAS 38?L2
• Nérédis uses a patent on a moulding process to manufacture its finished products. The annual amortisation of the patent amounts to 30,000. At the reporting date, some of the products manufactured during the year are still in inventory. How is the amortisation of the patent accounted for?L2