Useful Life of Intangible Assets

Useful Life of Intangible Assets

Intangible Assets in accounting are long-term non-monetary assets with no physical form. Usually, they are legal rights. Some intangible assets have finite useful lives while other intangible assets have indefinite useful lives. An intangible asset with a finite useful life means an asset that has a fixed or known useful life whereas an asset with an indefinite useful life means an asset that does not have a known or fixed useful life.

For example, a trade license is issued for a certain time period and expires after the date. Therefore, it’s an intangible asset with a finite life. On the other hand, the useful life of goodwill of a company is not known and it will only expire at the disposal of the company. Hence, a tangible asset with an indefinite useful life. Here is a detailed list of some intangible assets.

The Concept of Useful Life

Useful life in terms of intangible assets can be defined as the time period for which an asset is expected to contribute to the company’s operations. Simply put, it is the lifespan of an intangible asset. For example, the trade license in the above example gives the company the opportunity to trade and generate cash flows throughout its validity period and that period is its useful life.

Intangible Asset with a Finite Useful Life

After the acquisition, an intangible asset with a finite useful life is amortized on a systematic basis over its useful life. The amortization method should reflect the pattern of the benefits expected from the asset. That means if an asset is expected to generate higher benefits/cash flows in its early period, then much of the amortization should be charged in the early stage and vice versa.

However, if the company is unable to determine the pattern reliably then the straight-line method should be used. In addition, revenue-based amortization cannot be normally used for intangible assets but there are some circumstances under which it can be used. They are:

• If the intangible asset is expressed as a measure of revenue.
• If the revenue and consumption of economic benefits of the intangible asset are highly correlated [IAS 38 Para 98. A]

The amortization charge is recognized in the statement of profit or loss unless another IFRS requires that it should be charged to another asset. The amortization period should at least be reviewed annually as per IAS 38.

Key Points

• An intangible asset with a finite useful life is amortized on a systematic basis over its useful life. The amortization should reflect the pattern of benefits expected from the asset. If the company is unable to determine the pattern, then the straight-line method is used.
• Generally, a company cannot use revenue-based amortization but if an intangible asset is expressed as a measure of revenue or the consumption of economic benefits expected from the asset is highly correlated to revenue, then revenue-based amortization can be used.

Intangible Asset with an Indefinite Useful Life

An intangible asset with an indefinite useful life should not be amortized but its useful life should be reviewed annually to determine whether events and circumstances continue to support an indefinite useful life assessment for that particular asset.

If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate. (IAS 38.109) In addition, the asset should be assessed for impairment.

Expenditures on intangible assets with indefinite useful lives will generally be expensed to the statement of profit or loss as they rarely meet the criteria to be recognized in the carrying amount of the asset.

References
IntangibleCapital.org