Carry phase

Choosing an amortisation method

Carry, live question

IAS 38 requires the amortisation method to reflect the pattern in which the asset's future economic benefits are expected to be consumed, and straight-line is used where that pattern cannot be determined reliably IAS 38 §98. Straight-line, units of production and declining balance are all available; a method based on revenue generated is not permitted for an intangible in the general case.

The pattern-of-benefit test

The method is chosen to match how the benefits are consumed, not to smooth the charge or manage earnings. If the benefits are consumed evenly over the life, straight-line reflects that. If they are consumed in proportion to output, a units-of-production method reflects it better. If the pattern genuinely cannot be determined reliably, IAS 38 defaults to straight-line IAS 38 §98.

The methods available

Straight-line: an equal charge each period; the default and the most common.
Units of production: a charge proportional to output or use, keyed here to forecast token consumption.
Declining balance: a front-loaded charge, defensible only where benefits are genuinely consumed faster early in life.

Carrying-value ladderIllustrative example

A declining-balance ladder front-loads the charge. Defensible only where early benefit consumption is real. Illustrative example.

Why not a revenue-based method

A method based on the revenue generated by an activity that includes the use of the asset is not appropriate for amortising an intangible in the general case, because revenue reflects factors other than the consumption of the asset's benefits, such as price and volume from other inputs IAS 38 §98. Tying the charge to token consumption is different: it measures use of the asset, not revenue earned from it.

Making the choice defensible

Whichever method is chosen, the file should record why it reflects the expected pattern of benefit for this asset. Straight-line needs the least justification but is not automatic; a units-of-production choice needs a credible consumption forecast. The method is reviewed each year-end alongside useful life, and a change is prospective IAS 38 §104.