Amortisation of intangible assets

[Yakub02]

Amortisation of intangible assets

The depreciable amount of an intangible asset with a finite useful life is allocated on a systematic basis over its useful life.

Where the useful life is assessed as indefinite:

 the intangible asset should not be amortised; but

 impairment reviews should be carried out annually (and even more frequently if there are any indications of impairment).

The useful life of an intangible asset that is not being amortised must be reviewed each period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset.

Application of this standard requires different judgements and estimates to be made which would have an impact on figures reported in the financial statements.

These include the following:

 Whether an internally generated asset meets the recognition criteria;

 Allocation of consideration in a business combination (i.e. the recognition of intangibles acquired);  Future cash flows and discount rates for impairment tests; and  Amortisation periods.

Provisions: Liabilities of uncertain timing or amount. Liability: A present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Obligating event: An event that creates a legal or constructive obligation that results in an enterprise having no realistic alternative to settling that obligation.

 

[Yakub02]

Provisions differ from other liabilities because there is uncertainty about the timing or amount of the future cash flows required to settle the liability. Recognition criteria for provisions

A provision should be recognised when:

 a company has a present obligation (legal or constructive) as a result of a past event;

 it is probable that an outflow of economic benefits will be required to settle the obligation; and  a reliable estimate can be made of the amount of the obligation. If one of these conditions is not met, then a provision cannot be recognised.

The amount recognised as a provision must be the best estimate, as at the end of the reporting period, of the future expenditure required to settle the obligation.

(This is amount that the company would have to pay a third party to take the obligation off its hands

 

[Yakub02]

Where the effect of the time value of money is material, a provision is measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

Each provision must be reviewed at the end of each reporting period. This might result in derecognition of a provision that no longer meets the recognition criteria

or in the re-measurement of a provision. An increase in a provision would result in the recognition of a further expense or a reduction in expense as the previously recognised provision is reduced through a credit to profit or loss.

 

[Yakub02]

Reimbursements An asset for an amount recoverable from a third party in respect of an obligation (e.g. insurance) is only recognised when receipt is virtually certain.

Any such asset is recognised separately from the provision (no netting off) at an amount no greater than that of the provision. 4.3 Using provisions A provision is set up to recognise an expense (usually) that exists at the reporting date.

(A provision for a liability to decommission an asset might be recognised as part of the coat of that asset). A provision may be used only for expenditures for which the provision was originally recognised.