Restricting the use of revenue-based amortisation

Restricting the use of revenue-based amortisation

New test creates high hurdle to use revenue-based amortisation for intangible assets.


KPMG in the UK


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KPMG IFRS breaking news image: microphone in front of audience. | Restricting the use of revenue-based amortisation | New test creates high hurdle to use revenue-based amortisation for intangible assets.

A high correlation between revenue and consumption of economic benefits is now required

Intangible assets are sometimes amortised using methods based on the revenue that they generate. Amendments to IAS 38 Intangible Assets clarify when such revenue-based depreciation or amortisation methods are permitted.

The amendments respond to situations where expense recognition is accelerated when revenue-based amortisation is used. For example, films and video games often generate higher revenues in the earlier years of their life, so media companies often amortise the associated intangible assets in line with the pattern of these revenues.


“The amendments introduce severe restrictions on the use of revenue-based amortisation for intangible assets. We are likely to see a number of companies changing their accounting policy as a result.”


New restrictive test for intangible assets

While the IASB has not placed an outright ban on revenue-based amortisation, the amendments create a high hurdle for when revenue-based methods of amortisation may be used for intangible assets.

The amendments introduce a rebuttable presumption that the use of revenue-based amortisation methods for intangible assets is inappropriate. This presumption can be overcome only when:

  • revenue and the consumption of the economic benefits of the intangible asset are ‘highly correlated’; or
  • the intangible asset is expressed as a measure of revenue – e.g. the right to operate a toll road until the operator has collected a sum of 10 million.

The phrase ‘highly correlated’ is a new term that is not used in other IFRSs. As explained in the information box below, it means that a company will need to demonstrate that there is more than just some element of relationship between revenue generation and the consumption of benefits.

Why introduce the 'highly correlated' hurdle?

It was introduced to limit the use of revenue-based amortisation, because revenue is affected by other inputs and processes, selling activities and changes in sales volumes and prices, which are not directly linked to the consumption of the economic benefits embodied in the intangible asset.

Implications will vary for intangible assets

The potential impact of not applying revenue-based methods of amortisation will depend on the correlation between revenue generation and an alternative amortisation method based on consumption.

Assuming a change in accounting policy to adopt straight-line amortisation, media companies are likely to recognise less amortisation – and therefore higher profits – in earlier years. However, additional impairment charges may arise when there is a significant decline in future cash flows after the early years of an asset’s useful life.

Revenue-based depreciation banned for property, plant and equipment

The amendments to IAS 16 Property, Plant and Equipment explicitly state that revenue-based methods of depreciation cannot be used for property, plant and equipment. This is because such methods reflect factors other than the consumption of economic benefits embodied in the asset – e.g. changes in sales volumes and prices.

In our experience, this ban will not have a significant impact on current practice.

Effective date and next steps

The amendments are effective for annual periods beginning on or after 1 January 2016, and are to be applied prospectively. Early application is permitted.

If you are likely to be affected by the amendments – because you use or are thinking of using revenue-based amortisation methods – you will need to consider the impacts for your business.

© 2017 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved. KPMG IFRG Limited, registered in England No 5253019. Registered office: 8 Salisbury Square, London, EC4Y 8BB

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