After an intangible asset is recognised, the entity must decide how to carry it, and how fast to write it off. Two questions drive the answer. Can fair value be found in an active market? And does the asset have a finite life?
This topic covers the cost and revaluation models, amortisation of assets with finite lives, assets with indefinite lives, disposals, the disclosures, and the schedule of movement that exams ask for. The next topics cover impairment of assets.
The schedule of movement in intangibles was examined in November Diet, 2021, Question 6(b), for 6 marks, covering development costs, software licences and goodwill. In May Diet, 2022, part of Question 2 asked for statement of financial position extracts and notes for a software licence that is amortised and then reviewed for impairment. Read recognising intangible assets and internally generated costs first.
In 30 seconds
Intangible assets are carried at cost less accumulated amortisation and impairment (the cost model), or at a revalued amount, which is allowed only where fair value can be found in an active market, which is rare.
An intangible with a finite life is amortised on a systematic basis from when it is available for use, usually straight line with nil residual value. Its period and method are reviewed at least each year end. An intangible with an indefinite life, and goodwill from a business combination, is not amortised but is tested for impairment at least annually.
Disposal gives a gain or loss of net proceeds less carrying amount. The notes include a schedule of movement by class: opening cost, additions, disposals, business combinations, closing cost, then the same for amortisation and impairment, and the carrying amounts.
The two models
International Accounting Standard (IAS) 38 allows one of two models for each class of intangible assets, applied to all assets in the class. A class is a grouping of assets of a similar nature and use, for example brand names, mastheads and publishing titles, computer software, licences and franchises, copyrights and patents, recipes and designs, and intangible assets under development.
- Cost model: cost less accumulated amortisation and accumulated impairment losses.
- Revaluation model: fair value at the revaluation date less later accumulated amortisation and impairment losses. It is allowed only if fair value can be determined by reference to an active market: a market in which the items traded are homogeneous, willing buyers and sellers can normally be found at any time, and prices are available to the public. Active markets for intangibles are rare, so very few entities use the revaluation model.
This is the main difference from the IAS 16 revaluation rules for property, plant and equipment, which have no active market condition.
How revaluation works
The accounting follows the same rules as for property, plant and equipment: an increase goes to other comprehensive income and the revaluation surplus, unless it reverses an earlier loss on the same asset; a decrease goes to profit or loss, unless it reverses an earlier surplus on the same asset.
Revaluations must be made often enough that the carrying amount does not differ materially from fair value at the reporting date, and the frequency depends on volatility. Accumulated amortisation at the revaluation date is dealt with in one of the two ways described for IAS 16. After revaluation, amortisation is based on the revalued amount.
The difference between amortisation on the revalued amount and on historical cost is excess amortisation, which the entity may transfer each year from the revaluation surplus to retained earnings. The whole surplus may be transferred when the asset is realised.
If the active market later disappears, the asset’s carrying amount is its last revalued amount less later amortisation and impairment.
Amortisation
Amortisation is the equivalent of depreciation for intangible assets. The entity first assesses whether the useful life is finite or indefinite. An intangible has an indefinite life when, on all relevant factors, there is no foreseeable limit to the period over which it is expected to generate net cash inflows.
Finite life
- The depreciable amount is allocated on a systematic basis over the useful life.
- Amortisation begins when the asset is available for use, in the location and condition to operate as management intends.
- Amortisation ends at the earlier of the date the asset is classified as held for sale and the date it is derecognised.
- The method must reflect the pattern in which the benefits are consumed. If that pattern cannot be determined reliably, the straight-line method must be used.
- The residual value is assumed to be zero, unless a third party has committed to buy the asset at the end of its life, or there is an active market from which the residual value can be found and it is probable that such a market will exist at that date.
- The period and method are reviewed at least at each year end. A change in useful life or method is a change in accounting estimate, applied from the date of change, with the carrying amount written off over the revised remaining life.
Indefinite life
An asset with an indefinite life is not amortised, but it is tested for impairment every year, and more often if there is an indication of impairment. Each period the entity reviews whether events still support an indefinite life. If not, the change to a finite life is a change in estimate, and the carrying amount at that date is amortised over the estimated life from then on.
Goodwill
Goodwill bought in a business combination is not amortised. It is tested for impairment at least annually, and an impairment loss is recorded in the schedule alongside amortisation.
Disposal
Derecognition follows the rules for property, plant and equipment: the gain or loss on disposal is net disposal proceeds less the carrying amount at that date, recognised in profit or loss.
Disclosure
Disclosures are made for each class of intangible assets, and within each class, separately for internally generated and other intangibles. Most are the same as for IAS 16. The additional ones are:
- whether useful lives are finite or indefinite;
- for finite lives, the lives or the amortisation rates;
- for indefinite lives, the carrying amount and the reasons supporting that assessment;
- for each individually material intangible asset, a description, its carrying amount and its remaining amortisation period; and
- the total research and development expenditure expensed in the period.
The accounting policy note covers the amortisation policy (lives, nil residual value and the straight-line method), development expenditure, intangibles acquired in business combinations and any assets with indefinite lives.
A typical note says that development costs are capitalised when the six conditions are met and amortised over their useful lives, patents over 25 to 30 years, licences over 5 to 15 years and software over three years, with nil residual values, and that maintenance costs of software are expensed.
Schedule of movement in intangible assets
The note reconciles the opening and closing amounts for each class. The standard layout has one column per class and a total, and three blocks: cost, accumulated amortisation and impairment, and carrying amounts.
| ₦ million | Development costs | Patents | Goodwill | Total |
|---|---|---|---|---|
| Cost | ||||
| Opening | 1,200 | 500 | 3,000 | 4,700 |
| Additions | 250 | 80 | – | 330 |
| Disposals | – | (50) | – | (50) |
| Business combination | – | – | 120 | 120 |
| Closing cost | 1,450 | 530 | 3,120 | 5,100 |
| Accumulated amortisation and impairment | ||||
| Opening | 360 | 200 | 400 | 960 |
| Amortisation for the year | 140 | 38 | – | 178 |
| Impairment loss | – | – | 90 | 90 |
| On disposals | – | (40) | – | (40) |
| Closing | 500 | 198 | 490 | 1,188 |
| Carrying amount, closing | 950 | 332 | 2,630 | 3,912 |
| Carrying amount, opening | 840 | 300 | 2,600 | 3,740 |
The marks come from correct sub-headings for each class, the total column, the right signs on disposals, and the carrying amounts at both dates. In a past diet the official schedule charged the annual amortisation rate on the cost held at the year end, because no dates were given for additions and disposals. Where a question gives dates, time-apportion instead.
The ideas in more depth
Why an active market is required
Fair value for a property can be estimated from similar buildings. Most intangibles are unique, so a revalued figure would rest on estimates that a reader cannot check. Requiring an active market, where prices are public and items are alike, keeps the revaluation model for assets such as tradable licences.
Why goodwill is not amortised
Goodwill has no determinable life, and amortising it over an arbitrary period would be a guess. An annual impairment test is intended to show when the value has fallen.
Sources and references
- IAS 38 Intangible Assets: measurement after recognition, the revaluation model, amortisation, useful lives, derecognition and disclosure.
- IAS 16 Property, Plant and Equipment for the revaluation mechanics, IAS 36 Impairment of Assets, and International Financial Reporting Standard (IFRS) 3 Business Combinations for goodwill.
These points are stated as at 5 November 2026.
Worked examples
Example 1: amortisation. A licence costs ₦900,000 and is available for use on 1 April 20X5. Its life is six years with nil residual value, the year end is 31 December, and the straight-line method is used with time apportionment. Required: the charge and carrying amount for 20X5 and 20X6.
- Annual charge.
₦900,000 ÷ 6 = ₦150,000. - 20X5.
Nine months: ₦150,000 × 9/12 = ₦112,500.
Carrying amount ₦787,500. - 20X6. A full year: ₦150,000. Carrying amount ₦637,500.
Example 2: a change in life. Software costing ₦600,000 was amortised straight line over five years. After two years the total life is revised to eight years. Required: the charge for year 3.
- Carrying amount after two years.
₦600,000 − 2 × ₦120,000 = ₦360,000. - Remaining life.
8 − 2 = 6 years. - Charge.
₦360,000 ÷ 6 = ₦60,000, applied from the date of change without restating earlier years.
Example 3: a revalued licence. Licences cost ₦2,000,000, have a 10-year life with nil residual value and are available from 1 January 20X6. There is an active market, and the revaluation model is used. At 31 December 20X6 fair value is ₦2,700,000. At 31 December 20X8 it is ₦1,500,000. The excess amortisation is transferred to retained earnings each year. Required: the entries and balances.
- 20X6.
Amortisation ₦2,000,000 ÷ 10 = ₦200,000, so the carrying amount before revaluation is ₦1,800,000.
Surplus = ₦2,700,000 − ₦1,800,000 = ₦900,000 to OCI. - 20X7.
Amortisation on the revalued amount: ₦2,700,000 ÷ 9 = ₦300,000, against ₦200,000 on cost.
Excess = ₦100,000 transferred from the surplus to retained earnings.
Carrying amount ₦2,400,000.
Surplus ₦800,000. - 20X8, before revaluation. Amortisation ₦300,000 gives a carrying amount of ₦2,100,000. After the 20X8 transfer of ₦100,000 the surplus is ₦700,000.
- 20X8 revaluation. Fair value ₦1,500,000 is below ₦2,100,000, a deficit of ₦600,000. It is covered by the surplus of ₦700,000, so it is debited to OCI and nothing goes to profit or loss. Surplus left: ₦100,000.
How to answer in the exam
- Discuss the models. Describe cost and revaluation, then the active market condition. A 4-mark answer needs the difference from property, plant and equipment.
- Calculate amortisation. Write the formula and the time apportionment. State that residual value is nil unless the two exceptions apply.
- Prepare the schedule. Draw the columns first, fill cost, then amortisation and impairment, then the two carrying amounts. Check that the total column cross-adds and that closing cost less closing amortisation equals the carrying amount.
- Indefinite lives and goodwill. Say no amortisation, annual impairment test.
Common mistakes in the exam
- Amortising goodwill.
- Revaluing an intangible asset with no active market.
- Assuming a residual value for an intangible asset.
- Putting amortisation of goodwill, or leaving out its impairment, in the schedule.
- Forgetting that accumulated amortisation on disposals reduces the accumulated figure, not the cost.
- Restating earlier years for a change in useful life.
Quick revision
- Models: cost, or revaluation only with an active market.
- Finite life: amortise from availability, straight line if pattern unknown, nil residual, review each year end.
- Indefinite life and goodwill: no amortisation; impairment test at least annually.
- Changes in life or method: estimate, prospective.
- Disposal: net proceeds less carrying amount.
- Schedule: cost block, amortisation and impairment block, carrying amounts at both dates.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. The revaluation model for intangible assets is allowed only if:
- The cost of the asset is high
- Fair value can be determined by reference to an active market
- Management wishes to use it
- The asset is a patent
Show the answer
B. Active markets for intangibles are rare.
Question 2. An intangible asset with an indefinite useful life is:
- Not amortised but tested for impairment at least annually
- Amortised over 20 years
- Amortised over 10 years
- Never tested for impairment
Show the answer
A. It is reviewed each year for impairment and for whether the life is still indefinite.
Question 3. The residual value of an intangible asset is normally taken to be:
- 10% of cost
- Fair value
- Cost
- Zero, unless a third party has committed to buy it or an active market exists
Show the answer
D. Those are the two exceptions.
Question 4. Amortisation of a finite-life intangible begins when:
- The contract is signed
- The first payment is made
- The asset is available for use
- The financial year begins
Show the answer
C. It begins when the asset is in the condition to operate as management intends.
Question 5. If the pattern of benefits cannot be determined reliably, the amortisation method is:
- Reducing balance
- Straight line
- Units of production
- None
Show the answer
B. Straight line is required in that case.
Question 6. A change in the estimated useful life of an intangible asset is:
- A change in estimate, applied from the date of the change
- A prior period error
- A change in policy
- Applied by restating earlier years
Show the answer
A. The carrying amount is written off over the remaining life.
Question 7. Goodwill acquired in a business combination is:
- Amortised over five years
- Amortised over ten years
- Charged to profit or loss immediately
- Not amortised but tested for impairment at least annually
Show the answer
D. Impairment is tested at least once a year.
Question 8. Which of the following is a class of intangible asset?
- Inventory
- Land
- Computer software
- Receivables
Show the answer
C. Software, licences, patents and brands are classes of intangible assets.
Question 9. Excess amortisation after a revaluation may be transferred from the revaluation surplus to:
- Profit or loss
- Retained earnings
- Share capital
- Cost
Show the answer
B. The transfer is allowed but not required.
Question 10. The gain or loss on disposal of an intangible asset is:
- Net disposal proceeds less the carrying amount
- Proceeds less cost
- Fair value less proceeds
- The amortisation for the year
Show the answer
A. It is recognised in profit or loss.
Section B style: written questions
Question 11 (10 marks). (a) Distinguish an intangible asset with a finite life from one with an indefinite life, and state the accounting for each. (4 marks) (b) State FOUR rules on amortisation of a finite-life intangible asset. (4 marks) (c) State TWO additional disclosures IAS 38 requires. (2 marks)
Question 12 (15 marks). Port Harcourt Media holds licences that cost ₦4,000,000, have a 10-year life with nil residual value and are available from 1 January 20X6. An active market exists and it uses the revaluation model. At 31 December 20X6 fair value is ₦5,400,000, and at 31 December 20X7 it is ₦3,600,000. It transfers excess amortisation to retained earnings each year. (a) Calculate the 20X6 amortisation and the revaluation surplus at 31 December 20X6.
(4 marks) (b) Calculate the 20X7 amortisation, the excess amortisation and the carrying amount before the 20X7 revaluation. (4 marks) (c) Show how the 20X7 revaluation is accounted for and the surplus balance left. (4 marks) (d) Explain why IAS 38 requires an active market for revaluation. (3 marks)
A further written question
Question 13 (20 marks). Kano Systems has these balances at 1 January:
- development costs at cost ₦2,000 million and accumulated amortisation ₦500 million
- software licences at cost ₦600 million and accumulated amortisation ₦240 million
- goodwill at cost ₦1,500 million and accumulated impairment ₦200 million
During the year:
- additions of ₦400 million to development costs and ₦150 million to software licences
- disposals of development costs at cost ₦200 million (accumulated amortisation ₦60 million) and licences at cost ₦100 million (accumulated amortisation ₦70 million)
- goodwill of ₦80 million from a business combination
- a goodwill impairment of ₦50 million
Development costs have a life of 8 years and licences 5 years, with the annual charge based on the cost held at the year end and no residual values.
(a) Calculate the amortisation for the year. (4 marks)
(b) Prepare the schedule of movement in intangible assets for the year, with columns for development costs, software licences, goodwill and the total. (16 marks)
Model answers
Show the model answer to Question 11
(a) A finite-life asset has a foreseeable limit to the period over which it generates net cash inflows. (1) It is amortised over its useful life. (1) An indefinite-life asset has no foreseeable limit. (1) It is not amortised but is tested for impairment at least annually, and the indefinite-life assessment is reviewed each period. (1)
(b) (1 mark each, any four) The depreciable amount is allocated systematically over the useful life; amortisation begins when the asset is available for use; it ends at the earlier of classification as held for sale and derecognition; the method reflects the pattern of benefits.
Straight line is used if that cannot be determined; the residual value is nil unless a third party commitment or active market exists; the period and method are reviewed at least each year end.
(c) (1 mark each, any two) Whether useful lives are finite or indefinite; the lives or amortisation rates; for indefinite lives, the carrying amount and the reasons; for each individually material asset, a description, its carrying amount and the remaining amortisation period; the total research and development expensed.
Show the model answer to Question 12
(a)
- Amortisation 20X6: ₦4,000,000 ÷ 10 = ₦400,000 (1).
- Carrying amount before revaluation: ₦3,600,000 (1).
- Surplus.
₦5,400,000 − ₦3,600,000 = ₦1,800,000, credited to OCI (2).
(b)
- Amortisation 20X7: ₦5,400,000 ÷ 9 = ₦600,000 (1).
- Amortisation on cost ₦400,000, so excess ₦200,000 (1), transferred from the surplus to retained earnings, leaving a surplus of ₦1,600,000 (1).
- Carrying amount before revaluation.
₦5,400,000 − ₦600,000 = ₦4,800,000 (1).
(c)
- Fair value ₦3,600,000 against carrying amount ₦4,800,000 gives a deficit of ₦1,200,000 (1).
- It is covered by the surplus of ₦1,600,000, so it is debited to OCI and nothing goes to profit or loss (2).
- The surplus left is ₦1,600,000 − ₦1,200,000 = ₦400,000 (1).
(d) Most intangibles are unique, so an estimated fair value cannot be checked (1). An active market has homogeneous items, willing buyers and sellers at any time and public prices (1), which makes fair value reliable and verifiable (1).
Show the model answer to Question 13
(a)
- Development costs.
closing cost ₦2,000 + ₦400 − ₦200 = ₦2,200 million, ÷ 8 = ₦275 million (2). - Licences.
closing cost ₦600 + ₦150 − ₦100 = ₦650 million, ÷ 5 = ₦130 million (2).
(b) Cost (₦ million; development / licences / goodwill / total): opening 2,000 / 600 / 1,500 / 4,100; additions 400 / 150 / – / 550; disposals (200) / (100) / – / (300); business combination – / – / 80 / 80; closing 2,200 / 650 / 1,580 / 4,430 (7 marks for the block). Accumulated amortisation and impairment: opening 500 / 240 / 200 / 940; amortisation 275 / 130 / – / 405; impairment – / – / 50 / 50; on disposals (60) / (70) / – / (130); closing 715 / 300 / 250 / 1,265 (6 marks). Carrying amount: closing 1,485 / 350 / 1,330 / 3,165; opening 1,500 / 360 / 1,300 / 3,160 (3 marks).
Pathfinder on IAS 38 (ii): measurement after recognition, amortisation and disclosure
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Part (b) asks for a schedule of movement in intangible assets for development costs, software licences and goodwill, with costs, amortisation and impairment, and carrying amounts (6 marks). Part (a) belongs to the recognition topic.
Revise first: Schedule of movement in intangible assets
Part (c) (9 marks) asks for statement of financial position extracts and notes for property, plant and equipment and intangible assets, including a software licence that is amortised and then reviewed for impairment. The impairment calculation belongs to the impairment topic.
Revise first: Amortisation
Part (a) asks for the two measurement models for intangible assets (3 marks). Part (b) uses licences carried under the revaluation model, with the carrying amount and revaluation surplus at three dates and the treatment of the application costs (12 marks).
Revise first: The two models
Source: ICAN Pathfinder, Financial Reporting. Diets covered: Every diet in the Pathfinder, from November Diet, 2021 to May Diet, 2026, was reviewed here. The diets listed above test this topic or include it within a longer question..
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