Valuation basis (see
BIM46940) may be used if the facts show
that a tape has a useful economic life of two years or less. The
useful economic life is not necessarily the same as the physical
life of the tape. Useful economic life depends on the demand for
and popularity of the tape and typically will be less than the
physical life of the tape. While it is likely that the large
majority of tapes will have a useful economic life of less than two
years the trader should be able to provide facts or evidence to
support a claim that such is the case.
Normally it can be accepted that the trader on the valuation
basis can write down on a straight line basis the difference
between the cost of a tape and the anticipated proceeds when it is
likely to be sold.
The facts of the particular case may show that an alternative
method of write down is appropriate as below.
A trader buys a batch of newly released ’AA
blockbuster' tapes of a similar nature and a batch of second hand
and classic film videos, again of a consistent nature, on the first
day of a 12 month accounting period. The anticipated economic
useful life of the tapes is just under two years. The tapes are to
be disposed of after two years by being scrapped or sold.
The trader’s records may show that, perhaps, 75% of the
rentals arise in the first 12 months after acquisition with 24% in
the next six months and only 1% arising thereafter. In such a case
it may be accepted that at the end of the first year the `AA
blockbuster' videos may be valued at 25% of the cost less the
ultimate sale proceeds or scrap value it is estimated will be
received. At the end of the second period the tapes would be valued
at the estimated disposal proceeds.
Claims should be critically examined to identify cases for
write downs which would result in the tapes being written off at an
earlier point than that used in the accounts, see
BIM34010 onwards.
