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In q1 there is a fee paid to athlete to endorse . what is the risk associated with this ?
Should it be capitalised and amortised over 2 years ?
The risk of misstatement is that expense/profit will be understated if the $1m is expensed in full when the campaign is for two years. I think it should be treated as an advance payment (i.e. recognised a prepayment and time-apportion) rather than as an intangible asset which is subsequently amortised.
Thank you Kim.
can we use the word amortise instead of saying it should be spread over the period. its the same meaning right. ?
Not really – amortisation is to intangible assets what depreciation is to PPE – that is, the financial statements recognise a non-current asset and amortisation/depreciation is a systematic allocation of cost (or fair value) less residual value over its useful life. And this would not necessarily be straight-line.
Also, the $1m payment does not create an intangible asset which, by definition is non-monetary. If the athlete were to breach the agreement, he would be liable to repay it (at least in part), making it a monetary asset.
Although IAS 38 requires costs that do not meet the recognition criteria for asset recognition to be expensed when incurred, it goes on to state that this does not preclude the recognition of prepayments for goods or services.
That makes it a lot more clear. one more question , why do we use the term ” amortised cost method” for financial instruments though ? is it different from amortisation concept re intangibles ?
“To amortise” is to “deaden” – that is gradually reduce. It originates from the Latin “ad” (to) + “mort” (death).
So the accounting terms “amortisation” and “amortised cost” both have the same sense of reduction – but are completely different.
Under IFRS:
Amortised cost (of a financial asset or liability) = Amount initially recognition – principal repayments + interest (using effective interest rate method)For financial assets, this would also be adjusted for any loss allowance (“impairment”).
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