How is the cash acquisition of a software license for € 1,000 (used over a 4-year-period)...

How is the cash acquisition of a software license for € 1,000 (used over a 4-year-period) going to be reflected in the financial statements of the acquiring company at the time of the acquisition and in year 1 of the use of the license ?

Expert Solution

IAS 38 — Intangible Assets

IAS-38 discusses the accounting requirements for intangible assets.
As per para 38.63 of IAS 38, computer software purchased should be recognized and capitalized at its cost of acquisition. Further, the cost of the intangible asset acquired should be amortized over the useful or licensed life of the asset.
As per para 38.74 of IAS 38, subsequent measurement or recognition of the intangible asset should be done at cost less its amortized value.
As per para 38.97 of IAS 38, amortization should reflect the pattern of benefits accrued to the organization.

At the time of acquisition of license:

As discussed above, as per para 38.63 of IAS 38, the license cost of the software should be reported in the balance sheet of the acquiring company at its cost of acquisition of € 1,000.

After 1 year of use of license:

As per IAS 38, the acquisition cost of the intangible asset should be amortized over its useful or agreed contracted life.
In the given case, the useful life of the asset is 4 years. The amortized cost of the asset for each year of utilization is € 250 (1000/4).
Therefore, € 250 should be expensed through reporting in the income statement in the 1st year of use and the unamortized value of € 750 should be reported in the balance sheet.

ekkarill92 answered 2 years ago

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