How is the useful life of an intangible asset determined?

Full Explanation

Under IAS 38, an intangible asset has either a finite or indefinite useful life. Finite-life assets are amortised; indefinite-life assets are tested annually for impairment. The determination depends on multiple factors. Legal and contractual life: patents have a legal life (typically 20 years), licences have contract terms, and franchise agreements have defined periods. However, the useful life may be shorter than the legal life if economic benefits are expected to diminish. Customer relationships: useful life is typically based on historical attrition analysis. If a company loses 15% of customers annually, the customer relationship asset has an implied average life of approximately 6-7 years. Technology assets: useful life reflects the expected period before the technology is superseded — typically 3-7 years depending on the industry's innovation pace. Brands: many brands have indefinite useful lives if there is no foreseeable limit on their economic benefit period, particularly well-established consumer brands. However, brands in fast-moving sectors may have finite lives. In practice, useful life estimation requires judgment and should be supported by evidence: customer attrition data, technology roadmaps, industry benchmarking, and management representations. The chosen useful life directly affects annual amortisation expense and therefore reported earnings.

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