ACCA Strategic Business Reporting (SBR) Practice Exam

What is the main purpose of amortisation for intangible assets?

1. To increase the value of the asset

2. To allocate the cost of an asset over its useful life

3. To reflect market value changes

4. To prepare for asset disposal

The correct answer is: To allocate the cost of an asset over its useful life

The main purpose of amortisation for intangible assets is to allocate the cost of an asset over its useful life. This systematic approach allows businesses to match the expense of using the intangible asset with the revenue it generates over time. By doing so, companies ensure that their financial statements accurately reflect the consumption of the asset's economic benefits, leading to a clearer picture of financial performance. Amortisation is particularly important for intangible assets, which might not have a physical form but still possess value. This accounting treatment is necessary to comply with financial reporting standards and provides stakeholders with insight into the management and cost of assets over time. This method contrasts with merely increasing the asset's value or reflecting market changes. While these aspects are relevant in other contexts, the central focus of amortisation is on the allocation of historical cost in relation to the value derived over the asset's useful lifespan. Additionally, preparing for asset disposal is not directly related to the process of amortisation but rather pertains to the overall asset management strategy.