What factors are considered in determining useful life of intangible asset?

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Determining useful life of an intangible asset is not as easy as a tangible asset as most often intangible assets are of such nature that are unique and have no similar asset in the market through which can ascertain its value and useful life. And we cannot ignore determination of useful life aspect of the asset as future amortisation figures and many other aspects of financial reporting depends on it.

However, we are not out of luck and International Accounting Standard (IAS) 38: Intangible Assets provide us detailed guidance on this matter in para 90 and the factors that are considered in determining useful life of an intangible asset includes the following:

  1. the expected usage of the asset by the entity and whether the asset could be managed efficiently by another management team; sometimes estimates can be made regarding useful life but in addition to that we also have to consider whether efficient management is possible or not as this can adversely affect asset’s overall life
  2. typical product life cycles for the asset and public information on estimates of useful lives of similar assets that are used in a similar way; if not completely similar than significantly close alternative can also be considered to measure useful life of the asset but we will have to make sure that such alternative is also under same conditions and circumstances that will be around original asset for which life is being determined
  3. technical, technological, commercial or other types of obsolescence; estimates of such aspects and information is vital as it will help us in determining the amortisation rate and impairments to be recognized if any
  4. the stability of the industry in which the asset operates and changes in the market demand for the products or services output from the asset; most often a particular asset is industry dependent if the respective industry declines or closes down then such intangible asset has no use and thus will have no value and useful life at least at that particular geographical location
  5. expected actions by competitors or potential competitors; if competitor comes up with better technology or such asset that performs better then existing intangible asset’s useful life may decline
  6. the level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entity’s ability and intention to reach such a level; if asset is not maintained that will drastically reduce the useful life of the asset and sometimes maintenance require significant resources
  7. the period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases; assets acquired on contractual basis with limited time of use helps in determining useful life of asset and most often term of contract is considered as useful life of the asset; and
  8. whether the useful life of the asset is dependent on the useful life of other assets of the entity; intangible assets can also be a complimentary goods and require other tangible or intangible assets to work. In such case useful life of intangible asset will depend on such other assets’ useful life, value, performance etc.

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