Today's Technical Tip -Revenue and intangible assets

Issue
Can projected revenue be used to establish an amortisation schedule for intangible assets?
 
Conclusion
In the majority of cases revenue is inappropriate.
 
Discussion
In August 2014 the AASB released AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation.  This Standard applies to annual reporting periods beginning on or after 1 January 2016.  This standard clarifies that the use of revenue-based methods to calculate the depreciation of an asset is generally not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. This presumption can only be rebutted in certain limited circumstances such as:
  1. the intangible asset is expressed as a measure of revenue, as described in paragraph 98C; or
  2. when it can be demonstrated that revenue and the consumption of the economic benefits of the intangible asset are highly correlated.

98C In the circumstance in which the predominant limiting factor that is inherent in an intangible asset is the achievement of a revenue threshold, the revenue to be generated can be an appropriate basis for amortisation.

For example, an entity could acquire a concession to explore and extract gold from a gold mine. The expiry of the contract might be based on a fixed amount of total revenue to be generated from the extraction (for example, a contract may allow the extraction of gold from the mine until total cumulative revenue from the sale of gold reaches CU2 billion) and not be based on time or on the amount of gold extracted.

In another example, the right to operate a toll road could be based on a fixed total amount of revenue to be generated from cumulative tolls charged (for example, a contract could allow operation of the toll road until the cumulative amount of tolls generated from operating the road reaches CU100 million). In the case in which revenue has been established as the predominant limiting factor in the contract for the use of the intangible asset, the revenue that is to be generated might be an appropriate basis for amortising the intangible asset, provided that the contract specifies a fixed total amount of revenue to be generated on which amortisation is to be determined.