Amortising intangible assets, or not
Which of a client's intangible assets are amortised under IAS 38 and which are tested for impairment each year instead, with policy and entry guidance.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Small companies rarely hold many intangible assets, but the ones they hold tend to be handled inconsistently. A website rebuild is written off one year and capitalised the next. A franchise fee sits on the balance sheet unchanged for a decade. A trademark bought with a business is amortised by one preparer and left untouched by the next.
The deciding question under IAS 38 is the useful life: finite or indefinite. That single judgement decides whether the asset is amortised or tested for impairment every year instead.
What counts as an intangible asset
IAS 38 defines an intangible asset as an identifiable non-monetary asset without physical substance. It is identifiable when it is separable, or when it arises from contractual or other legal rights. The examples IAS 38 gives include computer software, licences, trademarks, patents, films, copyrights and import quotas.
The definition rules some items out before amortisation is even discussed. Home-grown "brand value" that cannot be separated from the business and rests on no legal right is not an intangible asset under the standard, however real it feels to the owner.
Cost less accumulated amortisation
Under IAS 38, intangible assets are measured initially at cost. After that, an entity usually measures an intangible asset at cost less accumulated amortisation. The standard allows fair value only in rare cases where fair value can be determined by reference to an active market, which seldom applies to the licences and software a small company holds.
So the usual picture is simple: cost, less a charge that spreads that cost over the asset's life, less any impairment.
Finite lives: amortise, and test when indicated
Under IAS 38, an intangible asset with a finite useful life is amortised and is subject to impairment testing. IAS 36 adds that, for most assets, the recoverable amount is assessed only when there is an indication that the asset may be impaired.
Typical finite-life items in a small company:
- a software licence for a fixed term;
- a franchise right with an end date;
- a customer list bought with a business, whose value fades as customers drift away;
- a booking system or website that will be replaced as technology moves on.
Where a right has an expiry date, start the useful-life estimate from that date and then ask whether the client expects to stop using the asset sooner.
Indefinite lives: no amortisation, an annual test
Under IAS 38, an intangible asset with an indefinite useful life is not amortised but is tested annually for impairment. IAS 36 confirms that the recoverable amount of intangible assets with indefinite useful lives, of intangible assets not yet available for use, and of goodwill acquired in a business combination must be assessed each year.
"Indefinite" is a strong label. It suits an asset with no foreseeable end to its usefulness, such as a registered trademark the client keeps renewing and using, and the file should explain why no limit can be foreseen.
The practical price of the label is the annual test. Choosing "indefinite" to avoid an amortisation charge commits the firm to an impairment test every year, with a recoverable amount the client must be able to support. The impairment side is covered in impairment of assets under IAS 36.
Licences, trademarks and software in small companies
| Item | The question to ask | Likely treatment |
|---|---|---|
| Accounting or design software licence | Is there a term, or will it be replaced? | Finite life, amortised |
| Trademark registered and renewed | Is there any foreseeable end to its use? | Possibly indefinite, tested yearly |
| Franchise right | When does the agreement end, and is renewal assured? | Usually finite |
| Website development | Does it meet the recognition criteria, and when will it be replaced? | Finite, if capitalised at all |
| Goodwill from buying a business | Goodwill rather than a separate intangible | Tested yearly |
Costs of software a client builds for itself raise questions of their own, discussed in software development costs.
Policy wording and the amortisation entry
In Achekam's Financials Studio, the standard policy wording is based on IFRS for SMEs and labelled for review before issue. Check that the intangible assets policy matches the framework the client actually reports under and the lives it actually uses; where it does not, staff can write the client's own policy. Notes take their figures from the mapped trial balance, and anything the trial balance does not hold, such as the useful lives applied, is left as "[to be completed]".
The Studio does not calculate depreciation. It shows what the trial balance holds, flags a depreciation charge that disagrees with the movement in accumulated depreciation, and allows a year-end adjusting entry. Handle amortisation the same way in practice: the charge comes from the client's register or from the firm's own working kept on file, and a missing or wrong charge is put right with an adjusting entry. If an entry turns out to be wrong, it is reversed with a record of who reversed it and why, never deleted.
The IFRS Foundation's summary of IAS 38 sets out the criteria for recognising and measuring intangible assets and the disclosures required about them.
The question for every year end
For each intangible asset on the list, ask the client one thing: what would make this stop being useful, and when? A clear date means a finite life and an amortisation charge. No foreseeable end means an indefinite life and an annual impairment test, with evidence. "We haven't thought about it" means the preparer has more work to do before the statements are ready.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
