Question

How is the useful life of an intangible asset determined?

Answer 1

An intangible asset is an asset that lacks physical substance; in contrast to physical assets, such as machinery and buildings, and financial assets such as government securities. An intangible asset is usually very hard to evaluate. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names. The general interpretation also includes software and other intangible computer based assets; these are all examples of intangible assets.

An intangible asset is an asset that is not physical in nature, such as a patent, brand, trademark, or copyright.Businesses can create or acquire intangible assets.An intangible asset can be considered indefinite (a brand name, for example) or definite, like a legal agreement or contract.Intangible assets created by a company do not appear on the balance sheet and have no recorded book value.

An intangible asset may have an indefinite useful life. If so, do not initially amortize it, but review the asset at regular intervals to see if a useful life can then be determined. If so, test the asset for impairment and begin amortizing it. The reverse can also occur, where an asset with a useful life is judged to now have an indefinite useful life; if so, stop amortizing the asset and test it for impairment. Examples of intangible assets that have indefinite useful lives are taxicab licenses, broadcasting rights, and trademarks.

Every intangible asset must have a deemed period of its useful life. This can either be finite or indefinite. The judgment between those two is something that is done by the management based on their industry-wide knowledge, experience in the company and any other future perspectives that need to be considered. This is a management estimate and usually there cannot be a right or wrong answer. However, every estimate must be reasonable and reasoned.

There are a few things that ought to be considered when determining the period:

1) Expected usage of the asset by the entity;
2) Public information on estimates of useful lives of similar assets;
3) Stability of the market and changes within;
4)Period of control over the asset and legal or similar limits to use the asset;
5)Whether the asset is dependent on other assets, etc.

When the period is determined, the acquisition cost of the asset is amortized to expense over the determined useful life.Still certain standared says thet Maximum amortisation for intangible asst is for 15 years. and for goodwill it is 10 years.