entity z acquires a 5 year licence to manufacture a product for a cost of pound 1 22 612374

Output-based versus revenue-based amortisation

Entity Z acquires a 5 year licence to manufacture a product for a cost of £1,220,000. It is expected that the production line used for making the product has a capacity of 100,000 units per year. The entity plans to produce at full capacity each year. However, it expects the price per unit to be £10 in year 1 and increase by 10% each year thereafter. On this basis, the profile of amortisation on a unit of production basis (UoP) and on a revenue basis would be as follows:

Despite an expected constant level of consumption of the asset in the example above, the revenue-based method results in amortisation being delayed until the later periods of the asset”s use. This distortion is caused by the increase in price rather than any factor related to the use of the intangible asset. The IASB tentatively agreed in April 2012 to amend the guidance in IAS 38 and IAS 16 in the Annual Improvements to IFRSs 2011-2013 cycle to clarify that a revenue-based approach is not appropriate.

The amortisation charge for each period should be recognised in profit or loss unless IFRS specifically permits or requires it to be capitalised as part of the carrying amount of another asset (e.g. inventory or work in progress). [IAS 38.97, 99].