Useful life of contractual or legal rights and renewals

Learning objectives

• Determine the useful life of a licence or a renewable right.L2, L3
• Calculate the amortisation charge of a licence using the period of the rights and of the supported renewals.L2, L3
• Assess whether renewals of rights are supported by evidence and can be obtained without significant cost.L3

Normative references

• IAS 38 §94The useful life of an intangible asset that arises from contractual or other legal rights does not exceed the period of those rights, but may be shorter depending on the period over which the entity expects to use the asset. Renewal periods are included only if there is evidence to support renewal without significant cost. For a reacquired right recognised in a business combination, the useful life is the remaining contractual period, without renewals.
• IAS 38 §96Factors, among others, indicating that the entity will be able to renew its contractual or other legal rights without significant cost: (a) evidence, possibly based on experience, that the rights will be renewed, including, if renewal is contingent on the consent of a third party, evidence that the third party will give its consent; (b) evidence that any conditions necessary to obtain renewal will be satisfied; (c) a cost of renewal that is not significant compared with the future economic benefits expected to flow from renewal. If that cost is significant, it represents, in substance, the cost to acquire a new asset at the renewal date.

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

13 questions

• An entity acquires a licence to use a technology for 5 years, renewable once for 5 years. Renewal is automatic, at a negligible cost, and the entity has always renewed this type of licence. However, it plans to replace the technology after 8 years, when its new platform is ready. What useful life should be used for the licence?L3
• A radio station acquires a broadcasting licence granted for ten years by the regulator. The licence can be renewed with no limit at a low administrative cost; the regulator has always renewed it for operators meeting their obligations, and the station intends to keep it and has the means to meet those obligations. Its transmission equipment should be replaced in six years, with no effect on the right to broadcast. The finance director proposes amortising the licence over six years. Write a judgement memo on the useful life of the licence.L4
• Thermique Escaut acquires the brand of a range of oil-fired boilers that is firmly established in its market. Regulation already adopted will ban the sale of these boilers in 7 years. The brand is closely associated with this technology and the entity has neither the intention nor the ability to use it for other products; no cash flows are expected from it after the ban. Its legal protection is renewable without limit at a low cost. What conclusion should be reached on the brand's useful life?L4
• Eaux de Sorbiers acquires a mineral water brand that has been marketed for more than a century. Its legal protection, for a term of 10 years, is renewable without limit for a small fee, and the entity has always renewed its other brands. Market studies show stable demand, the product is not exposed to technological obsolescence and the advertising expenditure needed to maintain the brand is moderate and budgeted. The entity intends to exploit the brand with no time limit. What treatment should be applied?L4
• An entity acquires a licence to exploit a patent for a contractual term of 6 years, not renewable. It plans to use the technology for only 4 years, then replace it with an internally developed solution. What useful life should be used?L2
• An entity acquires a right to operate a motorway catering concession for 5 years, renewable once for 5 years. Renewal is granted only on payment of a new entry fee close to the initial price. The entity expects to run the business for at least 10 years. What useful life should be used?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
• Boulangeries Ferrand acquire a franchise for 5 years. The contract provides for a possible renewal for 5 years, at the sole discretion of the franchisor, who last year refused to renew several franchisees in the region. Ferrand would like to operate the outlet for 10 years. What useful life should be used for the franchise?L3
• 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
• Fréjanel holds a 10-year operating licence for a port terminal, renewable once for 10 years with the approval of the port authority, for a small administrative fee. Management intends to apply for renewal. Under what condition may Fréjanel use a useful life of 20 years?L3
• Arvenor acquires for 200,000 a 4-year licence to operate a mineral water spring. The licence can be renewed for a further 4 years, but renewal requires the payment of a fee of 180,000, which is significant compared with the benefits expected from the renewal. Arvenor intends to renew. Which useful life should be used and how should the renewal fee be analysed?L3