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April 09, 2007 That's Life!
What is the life of an asset? Is it something that the SEC and FASB says it is for the preparation of financial statements? Is it something the IRS says it is for the preparation of a corporate tax return? Or is it the amount of time before an asset actually has no remaining value (i.e., reality)? While each of these definitions has their place, investors, the users of financial statements, should be most interested in reality. And that is where the divergence begins.
At a late-March 2007 meeting, the Financial Accounting Standards Board (FASB) added a project to provide guidance on determination of the useful life of renewable intangible assets. These are assets that a marketplace participant, typically another business, would anticipate renewal of based on historical experience or common knowledge.
Examples include gaming licenses, taxicab medallions, cable franchises, airline route authorities, contracts to manage investments of mutual funds, and FCC licenses. Most of these either renew
automatically or require minimal requirements for renewal. There has been conflicting and vague guidance by various FASB pronouncements on how this useful life is determined for valuation purposes and subsequent amortization after the asset is recognized on the balance sheet.
It seems to me that if financial statements are to reflect reality, then an asset has value as long as an entity continues to derive benefits from it and that amortization, when required, should reflect that reality. In their attempt to create strict rules and guidance on this (and other) issues, the financial reporting rule setters often lose sight of what should be apparent based on the facts and
circumstances of the asset in questions.
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