Intangible useful lives: the contract term can be longer than the useful life
A company buys a licence that lasts ten years but expects to replace the licensed product after six. Spreading its cost over the contract term would leave an asset on the books after the expected benefits have ended. For an already recognised intangible under UK-adopted full IFRS, the legal right sets a ceiling. Evidence about economic use can set a shorter life.
Decide how long the benefits will last
IAS 38 requires a finite or indefinite useful-life assessment. Indefinite means the relevant evidence reveals no foreseeable limit to the period of expected net cash inflows. Difficulty estimating a life does not by itself make the life indefinite.
For a contractual right, useful life cannot exceed the legal term and may be shorter. Assess expected use, technical or commercial obsolescence and dependence on other assets. Include renewal periods only when evidence supports renewal without significant cost. The shorter economic or legal limit determines the useful life.
This article concerns an acquired, already recognised finite-life licence measured at cost. It does not decide whether development expenditure or cloud software setup costs qualify as an intangible asset.
Start when it is available for use
Under paragraphs 97 and 98, amortisation starts when the asset is in the location and condition needed to operate as management intends. That date can precede the first customer sale. Record the readiness evidence rather than treating the sales launch as the automatic start.
Allocate the depreciable amount over useful life using the pattern in which benefits are consumed. Use straight-line amortisation if that pattern cannot be determined reliably. The charge normally enters expense, although another asset may include it where appropriate.
Sources and context, checked :
A six-year life for a ten-year licence
All amounts and dates in this example are hypothetical. A purchased licence costs £120,000, gives a ten-year right from 1 October and is available for intended use that day. Product replacement plans support six years of economic benefits. Assume nil residual value, straight-line consumption and no tax, impairment or revaluation.
The useful life is six years. Annual amortisation is £120,000 / 6 = £20,000. The October-to-December charge is £20,000 × 3/12 = £5,000, leaving £115,000 at 31 December. Record Dr amortisation expense £5,000 and Cr accumulated amortisation £5,000.
Using ten years would produce a three-month charge of £3,000 and leave the asset £2,000 too high on these facts. Starting in November because sales began then would also miss a month of use-ready amortisation. Neither six years nor the October start is a rule for other licences.
Review the estimate each year
IAS 38 assumes a zero residual value unless its specified third-party commitment or active-market exceptions apply. Review the useful life and amortisation method at least at each financial year-end. A revised expectation is an accounting estimate change.
An indefinite-life intangible has no amortisation charge, but requires annual impairment testing and testing when impairment indicators exist. Review the indefinite conclusion each period. A change to finite life is both an estimate change and an impairment indicator.
For the next register review, gather the following evidence. This is a suggested control, not an IFRS-prescribed form.
- Contract expiry and evidence supporting any renewal period.
- Replacement plans, obsolescence and dependencies on other assets.
- The date the asset could operate as intended.
- Residual value, consumption pattern and the year-end life review.
- A separate impairment assessment.