Annual review of amortisation period and method

Learning objectives

• Calculate the revised amortisation charge after a change in useful life.L2, L3
• Explain the prospective treatment of a change in useful life or method.L2

Normative references

• IAS 38 §104The amortisation period and method are reviewed at least at each financial year-end; changes are accounted for as changes in accounting estimates.
• IAS 38 §121Reminder of IAS 8: the entity discloses the nature and amount of a change in an accounting estimate that has a material effect in the current period or is expected to have a material effect in subsequent periods. For intangible assets, this may arise from a change in (a) the assessment of the useful life, (b) the amortisation method or (c) residual values.

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

15 questions

• A technology acquired for {cost} is amortised on a straight-line basis over {original_life}, with no residual value. After {elapsed_years} of amortisation, the year-end review shows that a competitor will make the technology obsolete: the remaining useful life is now only {remaining_life}. The impairment test performed under IAS 36 as a result of this indication shows no impairment loss. What is the charge for the year following the revision?L3
• A food group holds an acquired brand, recognised for several years with an indefinite useful life. A new health regulation will ban, in four years, the sale of the products marketed under this brand, and no repositioning is planned. The head of consolidation believes it is enough to continue the annual impairment test. Write a judgement memo on the treatment of the brand at the year-end.L4
• Opérateur Telvane acquires a licence to use radio frequencies for 15 years. At expiry, the frequencies will be reallocated by auction, at a market price the entity estimates to be comparable to the initial price. The strategic plan provides for abandoning the technology using these frequencies after 12 years. The chief executive wants to amortise the licence over 30 years, assuming it will be renewed. Write a judgement memo on the useful life of the licence.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
• 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
• During the annual review, a carrier finds that the useful life of its parcel tracking software will be longer than expected. How is this change accounted for?L2
• How often, at a minimum, must an entity review the amortisation period and method of an intangible asset with a finite useful life?L2
• 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
• On 1 January 20X1, Cartéo acquired mapping software for 300,000, amortised on a straight-line basis over 6 years with no residual value. At the year-end review at 31 December 20X2, after recognising the 20X2 charge, management concludes that a change in technical standards will make the software unusable at the end of 20X4: the remaining useful life is now only 2 years. The finance director proposes to restate 20X1 and 20X2 over a total life of 4 years. Which treatment should be adopted?L3
• At the year-end, a press publisher concludes that the magazine title it had acquired, previously regarded as having an indefinite useful life, now has a useful life of only 6 years. Which of the following consequences are correct?L3
• The Brindor group holds a trade name acquired for a range of biscuits, with a carrying amount of 600,000, not amortised because its useful life was judged indefinite. In December 20X4, the board decides to discontinue the range and stop using the name in 3 years, with no residual value. The test under IAS 36 shows a recoverable amount of 650,000. Which treatment should be adopted?L4
• Corbanne acquired for {cost} an operating right amortised on a straight-line basis over {useful_life} years. As a third party has committed to buy back the right at the end of that period, Corbanne used a residual value of {initial_residual_value}. After {years_elapsed} years of amortisation, the buy-back commitment is renegotiated and the residual value is reduced to {revised_residual_value}; the total useful life and the amortisation method are unchanged. Calculate the carrying amount of the right at the date of the revision and the new annual amortisation charge.L2