Question 9.10: Amortization Expense IAS 38 Intangible Assets provides illus......
Amortization Expense
IAS 38 Intangible Assets provides illustrative examples regarding the accounting for intangible assets, including the following:
A direct-mail marketing company acquires a customer list and expects that it will be able to derive benefit from the information on the list for at least one year, but no more than three years. The customer list would be amortized over management’s best estimate of its useful life, say 18 months. Although the direct-mail marketing company may intend to add customer names and other information to the list in the future, the expected benefits of the acquired customer list relate only to the customers on that list at the date it was acquired.
In this example, in what ways would management’s decisions and estimates affect the company’s financial statements?
Because the acquired customer list is expected to generate future economic benefits for a period greater than one year, the cost of the list should be capitalized and not expensed. The acquired customer list is determined to not have an indefinite life and must be amortized. Management must estimate the useful life of the customer list and must select an amortization method. In this example, the list appears to have no residual value. Both the amortization method and the estimated useful life affect the amount of the amortization expense in each period. A shorter estimated useful life, compared with a longer estimated useful life, results in a higher amortization expense each year over a shorter period, but the total accumulated amortization expense over the life of the intangible asset is unaffected by the estimate of the useful life. Similarly, the total accumulated amortization expense over the life of the intangible asset is unaffected by the choice of amortization method. The amortization expense per period depends on the amortization method. If the straight-line method is used, the amortization expense is the same for each year of useful life. If an accelerated method is used, the amortization expense will be higher in earlier years.