Revenue-based amortisation: rebuttable presumption

Learning objectives

• Assess whether the presumption against revenue-based amortisation can be rebutted.L3, L4

Normative references

• IAS 38 §98AThere is a rebuttable presumption that an amortisation method based on the revenue generated by an activity that includes the use of an intangible asset is inappropriate: that revenue reflects factors not directly linked to the consumption of the benefits (other inputs and processes, selling activities, changes in sales volumes and prices, inflation). The presumption can be overcome only in limited circumstances: (a) when the intangible asset is expressed as a measure of revenue (para. 98C); or (b) when it can be demonstrated that revenue and the consumption of the benefits are highly correlated.
• IAS 38 §98BIn choosing an amortisation method, the entity could determine the predominant limiting factor inherent in the intangible asset: for example, the contract may limit its use to a number of years, a number of units produced or a fixed total amount of revenue to be generated. That factor is the starting point for determining the amortisation base, but another base may be applied if it more closely reflects the expected pattern of consumption of the benefits.
• IAS 38 §98CWhen the predominant limiting factor inherent in an intangible asset is the achievement of a revenue threshold, the revenue to be generated can be an appropriate basis for amortisation: for example, a concession to explore and extract that expires when a cumulative amount of sales is reached, rather than on the basis of time or quantities extracted, the contract specifying that total amount.

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

6 questions

• A board game publisher proposes to amortise the licence for a comic-strip character in proportion to the revenue earned from the games that use it, its sales forecasts being considered reliable. How should this proposal be assessed?L3
• In which of the following situations can an entity rebut the presumption that revenue-based amortisation is inappropriate?L3
• The audit committee of a media group is reviewing the revenue-based amortisation used for certain acquired rights. Which of the following statements are correct?L4
• 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