How do you determine the useful life of an intangible asset for amortisation?

Full Explanation

Useful life determination directly impacts amortisation expense and therefore reported earnings. Under IAS 38, an intangible asset has either a finite or indefinite useful life. Finite-life assets are amortised over the period of expected economic benefit. Key factors for determining useful life include: contractual or legal life (a patent lasting 15 years sets an upper bound), historical attrition data (if customer relationships show 15% annual attrition, the implied weighted-average life is approximately 6-7 years), technology replacement cycles (enterprise software may have a 5-7 year cycle before replacement), competitive dynamics (a brand in a fast-moving market may have shorter useful life than one in a stable industry), and management's intended use period. For customer relationships, the most common approach is to model expected attrition using historical churn data and determine the period over which the majority (typically 80-90%) of the asset's value is consumed. For technology, useful life often aligns with the product roadmap or next-generation development cycle. Indefinite-life classification (no foreseeable limit to the period of benefit) is reserved for assets like certain brands, trademarks, and perpetual licences that have no legal or contractual expiration. Indefinite-life intangibles are not amortised but are tested annually for impairment. The useful life determination must be documented and supported by evidence, as auditors and tax authorities regularly challenge assessments that appear aggressive.

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