However, if a revaluation surplus is a reversal of a revaluation decrease that was previously charged against income, the increase can be recognised as income.
Where the carrying amount of an intangible asset is revalued downwards, the amount of the downward revaluation should be charged as an expense against income, unless the asset has previously been revalued upwards. A revaluation decrease should be first charged against any previous revaluation surplus in respect of that asset.
Question
Downward valuation
An intangible asset is measured by a company at fair value. The asset was revalued by $400 in 20X3, and there is a revaluation surplus of $400 in the statement of financial position. At the end of 20X4, the asset is valued again, and a downward valuation of $500 is required.
Required
State the accounting treatment for the downward revaluation.
Answer
In this example, the downward valuation of $500 can first be set against the revaluation surplus of $400. The revaluation surplus will be reduced to 0 and a charge of $100 made as an expense in 20X4.
When the revaluation model is used, and an intangible asset is revalued upwards, the cumulative
revaluation surplus may be transferred to retained earnings when the surplus is eventually realised. The surplus would be realised when the asset is disposed of. However, the surplus may also be realised over time as the asset is used by the entity. The amount of the surplus realised each year is the difference between the amortisation charge for the asset based on the revalued amount of the asset, and the
amortisation that would be charged on the basis of the asset's historical cost. The realised surplus in such case should be transferred from revaluation surplus directly to retained earnings, and should not be taken through profit or loss for the year.
5.10 Useful life
An entity should assess the useful life of an intangible asset, which may be finite or infinite. An intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
Many factors are considered in determining the useful life of an intangible asset, including: expected usage; typical product life cycles; technical, technological, commercial or other types of obsolescence; the stability of the industry; expected actions by competitors; the level of maintenance expenditure required; and legal or similar limits on the use of the asset, such as the expiry dates of related leases. Computer software and many other intangible assets normally have short lives because they are susceptible to technological obsolescence. However, uncertainty does not justify choosing a life that is unrealistically short.
The useful life of an intangible asset that arises from contractual or other legal rights should not exceed the period of the rights, but may be shorter depending on the period over which the entity expects to use the asset.
5.11 Amortisation period and amortisation method
An intangible asset with a finite useful life should be amortised over its expected useful life. (a) Amortisation should start when the asset is available for use.
(b) Amortisation should cease at the earlier of the date that the asset is classified as held for sale in accordance with IFRS 5 Non-current assets held for sale and discontinuedoperations and the date that the asset is derecognised.
(c) The amortisation method used should reflect the pattern in which the asset's future economic benefits are consumed. If such a pattern cannot be predicted reliably, the straight-line method should be used.
(d) The amortisation charge for each period should normally be recognised in profit or loss.
The residual value of an intangible asset with a finite useful life is assumed to be zero unless a third party is committed to buying the intangible asset at the end of its useful life or unless there is an active market for that type of asset (so that its expected residual value can be measured) and it is probable that there will be a market for the asset at the end of its useful life.
The amortisation period and the amortisation method used for an intangible asset with a finite useful life should be reviewed at each financial year-end.
5.12 Intangible assets with indefinite useful lives
An intangible asset with an indefinite useful life should not be amortised. (IAS 36 requires that such an asset is tested for impairment at least annually.)
The useful life of an intangible asset that is not being amortised should be reviewed each year to
determine whether it is still appropriate to assess its useful life as indefinite. Reassessing the useful life of an intangible asset as finite rather than indefinite is an indicator that the asset may be impaired and therefore it should be tested for impairment.
Question
Useful life
It may be difficult to establish the useful life of an intangible asset, and judgement will be needed.
Consider how to determine the useful life of a purchased brand name and how to provide evidence that its useful life might in fact exceed 20 years.
Answer
Factors to consider would include the following:
(a) Legal protection of the brand name and the control of the entity over the (illegal) use by others of the brand name (ie control over pirating)
(b) Age of the brand name
(c) Status or position of the brand in its particular market
(d) Ability of the management of the entity to manage the brand name and to measure activities that support the brand name (eg advertising and PR activities)
(e) Stability and geographical spread of the market in which the branded products are sold (f) Pattern of benefits that the brand name is expected to generate over time
(g) Intention of the entity to use and promote the brand name over time (as evidenced perhaps by a business plan in which there will be substantial expenditure to promote the brand name)
5.13 Disposals/retirements of intangible assets
An intangible asset should be eliminated from the statement of financial position when it is disposed of or when there is no further expected economic benefit from its future use. On disposal the gain or loss arising from the difference between the net disposal proceeds and the carrying amount of the asset should be taken to the profit or loss for the year as a gain or loss on disposal (ie treated as income or expense).
5.14 Disclosure requirements
The standard has fairly extensive disclosure requirements for intangible assets. The financial statements should disclose the accounting policies for intangible assets that have been adopted.
For each class of intangible assets, disclosure is required of the following:
The method of amortisation used
The useful life of the assets or the amortisation rate used
The gross carrying amount, the accumulated amortisation and the accumulated impairment losses
as at the beginning and the end of the period
A reconciliation of the carrying amount as at the beginning and at the end of the period (additions, retirements/disposals, revaluations, impairment losses, impairment losses reversed, amortisation charge for the period, net exchange differences, other movements)
The carrying amount of internally-generated intangible assets
The financial statements should also disclose the following:
In the case of intangible assets that are assessed as having a indefinite useful life, the carrying amounts and the reasons supporting that assessment
For intangible assets acquired by way of a government grant and initially recognised at fair value, the fair value initially recognised,the carrying amount, and whether they are carried under the
benchmark or the allowed alternative treatment for subsequent remeasurements
The carrying amount, nature and remaining amortisation period of any intangible asset that is
material to the financial statements of the entity as a whole
The existence (if any) and amounts of intangible assets whose title is restricted and of intangible assets that have been pledged as security for liabilities
The amount of any commitments for the future acquisition of intangible assets
Where intangible assets are accounted for at revalued amounts, disclosure is required of the following: The effective date of the revaluation (by class of intangible assets)
The carrying amount of revalued intangible assets
The carrying amount that would have been shown (by class of assets) if the cost model had been
used, and the amount of amortisation that would have been charged
The amount of any revaluation surplus on intangible assets, as at the beginning and end of the period, and movements in the surplus during the year (and any restrictions on the distribution of the balance to shareholders)
The financial statements should also disclose the amount of research and development expenditure that have been charged as expenses of the period.
5.15 Section summary
An intangible asset should be recognised if, and only if, it is probable that future economic benefits will flow to the entity and the cost of the asset can be measured reliably.
An asset is initially recognised at cost and subsequently carried either at cost or revalued amount.
Costs that do not meet the recognition criteria should be expensed as incurred.
An intangible asset with a finite useful life should be amortised over its useful life. An intangible asset with an indefinite useful life should not be amortised.