Broadcast licences

How are broadcast licences measured when acquired?

A licence bought from a regulator, for example at an auction, is measured at cost: the price plus directly attributable costs such as legal fees. If payment is deferred beyond normal credit terms, the cost is the cash price equivalent, the present value of the payments, and the difference is interest. A licence acquired as part of buying a broadcaster is recognised separately from goodwill at its fair value. Telecom operators face similar questions with mobile spectrum. See spectrum licences.

When do broadcast licences have an indefinite useful life?

IAS 38 includes renewal periods in a licence's useful life only if there is evidence the company will renew without significant cost. The standard's own illustrative examples use a broadcast licence: where the licence can be renewed every ten years at little cost, has been renewed before, and the broadcaster intends and is able to keep renewing it, and the technology is not expected to be replaced, the licence is expected to generate cash flows indefinitely and is treated as having an indefinite useful life. Where the regulator has decided to auction the licence again when it expires, the life ends at expiry and the licence is amortised over the remaining term. See IAS 38 intangibles.

Broadcast licences: renewed or re-auctioned

A radio group buys a regional licence for US$ 20 million with 8 years of its current term left. Consider two cases. In the first, the regulator renews licences for further 8-year terms for a small administrative fee, the group's licences have always been renewed and it intends to keep broadcasting. In the second, the regulator has announced that the frequencies will be auctioned when the current term ends.

In the first case, there is no foreseeable end to the period over which the licence will generate cash flows, so it has an indefinite useful life: it stays at 20 million, unless impaired, and is tested for impairment every year. In the second case, the licence ends after 8 years, so the group amortises it at 2.5 million a year to nil, and any payment in a future auction will buy a new asset. The life is reassessed every period: if the regulator later announces an auction, the first licence becomes finite-lived, is tested for impairment and is amortised over its remaining term.

How are broadcast licences tested for impairment?

A licence with an indefinite life is tested at least once a year, and any licence is tested when there are indications of impairment, such as falling advertising revenue in a market or audiences moving to streaming and podcasts. Because a licence does not generate cash on its own, it is often tested as part of the station or group of stations that uses it. Where its fair value can be measured, broadcasters often use a start-up approach, also called the Greenfield method: the value of a hypothetical new station that begins with only the licence and must build its audience and revenue from scratch. Under IFRS, impairments of licences can be reversed if the estimates change. See IAS 36 impairment.

How are licences received free or for a nominal sum treated?

Some broadcasters receive licences from the government free of charge or for a nominal amount, for example when frequencies are reallocated. IAS 38 allows such an intangible asset acquired by way of a government grant to be recognised either at fair value, with a matching grant under IAS 20, or at the nominal amount paid plus directly attributable costs. Most companies use the nominal amount, which keeps the asset off the balance sheet at little or no value. See government grants.

What about licence obligations?

Licences often come with obligations, such as coverage targets, quotas for local or news content and fees based on revenue. The costs of meeting them are generally expensed as incurred, as part of running the station. Annual fees based on revenue are expensed as the revenue is earned, and penalties for missing obligations are provided for under IAS 37 when the broadcaster has a present obligation to pay them. See IAS 37 provisions.

How does US GAAP differ?

Under ASC 350, broadcast licences issued by the Federal Communications Commission are commonly treated as indefinite-lived intangible assets, because renewals are routinely granted at little cost. They are tested for impairment at least annually, with an option to start with a qualitative assessment, and licences in the same market that are operated together can be combined as a single unit for the test. Impairment losses cannot be reversed, which matters because some US radio groups have recorded large licence write-downs during advertising downturns. See media accounting.

This guide is general information. It is not tax or legal advice for your situation.