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Section 13 – Intangible Assets other than Goodwill
Introduction
Section 13 deals the recognition, measurement, amortisation and disclosure for intangible assets other than goodwill and intangibles acquired in a business combination. Section 18.2 defines an intangible asset as an identifiable non-monetary asset without physical substance. To count as identifiable, it must be separable, and must arise from contractual or other legal rights.
Scope of this section
Extract from FRS 105 – Section 13.1 – 13.2
13.1 This section applies to the accounting for all separately acquired intangible assets and internally generated intangible assets, other than intangible assets held by a micro-entity for sale in the ordinary course of business (see Section 10 Inventories and Section 18 Revenue).
13.2 For the accounting of intangible assets acquired as part of a business combination including goodwill see Section 14 Business Combinations and Goodwill.
Extract from FRS 105 – Glossary
An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when:
(a) it is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or
(b) it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
OmniPro comment
Section 13 has a wide scope. The objective of the Section is to set out the accounting treatment of intangible assets that are not dealt with by any other standard. The expenditure on advertising, training, start-up costs and research and development are some of the activities within the standard’s scope.
The distinctions between financial assets and intangible asset can be problematic. The key difference is that financial asset derives its value from a contractual right to receive cash or cash equivalents in the future whereas an intangible derives its value from the rights and privileges granted to entities. Where an entity has no say over the pricing of a product or service but is entitled to receive cash from this, then this is more than likely a financial asset and is not an intangible. Also where an intangible asset has already been recognised and income is derived from this, then this is an intangible asset.
As can be derived from the definition of an intangible asset as stated in the Glossary of FRS 105, even if no legal right exists it is possible for an asset to meet the definition if the right could be sold, transferred, licenced or rented (i.e. through custody) however circumstances in which this will arise is rare. Control is usually obtained from legal title or licences. An entity should not usually recognise its workforce as intangibles as they have no legal right to them.
There is also a requirement that the asset must not lack physical substance, however there can be instances where intangible assets are included in another asset or medium. For example, contracts; in the case of computer software it can be on a physical compact disc. There is no clear guidance on what is defined as lacking substance. Section 13 does not deal with such assets. In this case it may be appropriate to consider IFRS standards i.e. IAS 38. IAS 38.5 provides examples of intangible assets as follows:
- Software embedded in computer controlled equipment that cannot operate without it are an integral part of the related hardware and is treated as property plant and equipment.
- The operating system of a computer is usually integral to the computer and is included in PPE.
- Software which is not integral part of the hardware is treated as an intangible. Research and development expenditure may result in an asset with physical substance e.g. a prototype but as the physical substance is secondary to its intangible component, the related knowledge, it is treated as an intangible asset.
Therefore, from the above it can be seen that where software is separately identifiable then it must be classed as an intangible and not PPE.
Recognition and initial measurement. Measurement after initial recognition
Extract from FRS 105 – Section 13.3 and Sections 13.6– 13.8
13.3 A micro-entity shall recognise all separately acquired intangible assets.
13.6 A micro-entity shall measure a separately acquired intangible asset initially at cost which comprises:
- its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and
- any directly attributable cost of preparing the asset for its intended use.
Exchanges of assets
13.7 An intangible asset may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. A micro-entity shall measure the cost of such an intangible asset at fair value unless:
(a) the exchange transaction lacks commercial substance; or
(b) the fair value of neither the asset received nor the asset given up is reliably measurable. In that case, the asset’s cost is measured at the carrying amount of the asset given up.
3.8 A micro-entity shall measure a separately acquired intangible asset after initial recognition at cost less any accumulated amortisation and any accumulated impairment losses. The requirements for amortisation are set out in paragraphs 13.9 to 13.14.
OmniPro comment
Initial recognition
An entity must recognise all separately acquired intangibles. As stated in Section 14, where an entity enters into a business combination of trade assets and liabilities there is no requirement to separately split out intangibles from goodwill, instead it is all classified as goodwill.
The general rules is that before any intangible is recognised on the balance sheet it must be separately clear that future economic benefits must be probable. Probable means more likely than not in this particular case. Before any asset is recognised it must be probable that future economic benefits will derive from it and the cost can be measured. Website development costs for example would now likely meet the definition of an intangible as opposed to PPE.
When looking at future economic benefits, the requirement that revenue will be generated from the intangible is not the only indicator, an intangible could have been developed which provide substantial cost savings for a company through a reduction in workforce. Such intangible would meet the future economic benefit test for the recognition of an intangible.
Example of intangibles include:
– Contract related intangibles i.e. Licencing agreements, franchises, service contracts, pub licenses, liquor licenses
– Market related intangibles i.e. trademarks, quota’s, market share and non-competition agreements.
– Technological related intangibles i.e. Computer software (see further detail above), patented technology
– Artistic related intangibles i.e. musical works etc.
Exchange transactions would provide evidence of future economic benefits. When assessing future economic benefits, external factors should be given higher importance.
Initial and subsequent measurement
The actual cost of the intangible should reflect its fair value at the date of acquisition which is in effect what was paid for the intangible assuming it was purchased on an arm’s length basis.
Section 13 does not provide examples of directly attributable costs, but examples would include:
– Professional fees arising directly from the acquisition in bringing it to its current condition;
– Cost of employees benefits arising from directly bringing the asset to its working condition;
– Cost of testing functionality of an asset where applicable.
– Costs which would not be seen as directly attributable would be; cost of advertising and promotional activities, costs in relation to staff training and any administrative overheads.
Capitalisation should cease when the asset is ready for use and at that time amortisation should begin.
Once an acquired intangible is initially measured it must subsequently be measured at cost less accumulated amortisation and impairment. There is no option to apply a revaluation policy.
Example 1: Commencement of capitalisation
Company A purchased specialised software from a third party for CU600,000. The company incurred CU20,000 on tailoring to the company’s specific circumstances, CU10,000 in labour costs training staff on the software and depreciation cost of CU2,000 on testing the new software.
In this example the total to be capitalised is the initial cost of CU600,000, the tailoring cost of CU20,000 and the CU2,000 on testing. The other costs are ignored as they are not directly attributable.
Internally generated intangibles including development costs
Extract from FRS 105 – Section 13.4 – 13.5
13.4 An internally generated intangible shall not be recognised as an asset. All expenditure incurred shall be recognised as an expense immediately in profit or loss.
13.5 A micro-entity shall recognise the expenditure on the following items as an expense and shall not recognise such expenditure as intangible assets (the list is not exhaustive):
(a) Expenditure on research and development activities.
(b) Internally generated brands, logos, publishing titles, customer lists and items similar in substance.
(c) Start-up activities (ie start-up costs), which include establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or business (ie pre-opening costs) and expenditure for starting new operations or launching new products or processes (ie pre-operating costs).
(d) Training activities.
(e Advertising and promotional activities.
(f) Relocating or reorganising part or all of a micro-entity.
(g) Internally generated goodwill.
OmniPro comment
It is clear from the standard that any research activities are expensed as incurred and are not capitalised. It is also clear that any development costs incurred internally must be expensed regardless of whether the development involves the application of research findings or technical knowledge and understanding or not. There is no option to capitalise. This differs from FRS 102 and FRSSE/Old GAAP which provides the option to capitalise when certain conditions are met.
It is clear from the excluded costs in Section 13.5 above that only intangibles purchased from a third party can be capitalised, anything other than this must be expensed.
Amortisation over useful life, Amortisation period, amortisation method and residual value
Extract from FRS 105 – Section 13.9 – 13.14
13.9 Intangible assets shall be considered to have a finite useful life. The useful life of an intangible asset that arises from contractual or other legal rights shall not exceed the period of the contractual or other legal rights, but may be shorter depending on the period over which the micro-entity expects to use the asset. If the contractual or other legal rights are conveyed for a limited term that can be renewed, the useful life of the intangible asset shall include the renewal period(s) only if there is evidence to support renewal by the micro-entity without significant cost.
13.10 If, in exceptional cases, a micro-entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall not exceed ten years.
13.11 A micro-entity shall allocate the depreciable amount of an intangible asset on a systematic basis over its useful life. The amortisation charge for each period shall be recognised in profit or loss, unless another section of this FRS requires the cost to be recognised as part of the cost of an asset. For example, the amortisation of an intangible asset may be included in the costs of inventories or property, plant and equipment.
13.12 Amortisation begins when the intangible asset is available for use, ie when it is in the location and condition necessary for it to be usable in the manner intended by management. Amortisation ceases when the asset is derecognised. The micro-entity shall choose an amortisation method that reflects the pattern in which it expects to consume the asset’s future economic benefits. If the micro-entity cannot determine that pattern reliably, it shall use the straight-line method.
13.13 A micro-entity shall assume that the residual value of an intangible asset is zero unless:
(a) there is a commitment by a third party to purchase the asset at the end of its useful life; or
(b) there is an active market for the asset and:
(i) residual value can be determined by reference to that market; and
(ii )it is probable that such a market will exist at the end of the asset’s useful life.
Review of amortisation period and amortisation method
13.14 Factors may indicate that the residual value or useful life of an intangible asset has changed since the most recent annual reporting date. If such indicators are present, a micro-entity shall review its previous estimates and, if current expectations differ, amend the residual value, amortisation method or useful life. The micro-entity shall account for the change in residual value, amortisation method or useful life as a change in an accounting estimate in accordance with paragraphs 8.11 to 8.13.
OmniPro comment
Amortisation should be calculated by allocating the cost of an asset less its estimated residual value on a systematic basis over its useful life.
The useful life of an asset is either the period over which an asset is expected to be available for use by an entity or the number of units expected to be obtained from the asset by an entity.
The residual value is assumed to be zero unless;
– There is a commitment by a third party to purchase the asset at the end of its life; or
– There is an active market for the asset and:
– Residual value can be determined by reference to that market; and
– It is probable a market will exist at the end of the useful life.
An entity cannot adopt a policy of not amortising in the year of acquisition but amortising in full in the year of disposal as this does not reflect the pattern in which the future economic benefits are expected.
The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated cost of disposal, if the asset were of the age and in the condition expected at the end of its useful life (FRS 105 Appendix I).
Where there’s an active market e.g. for pub licenses, off licences a residual amount can be included assuming it meets the conditions mentioned above and the difference between the carrying amount and the residual amount is amortised over its useful life.
Section 13, requires the residual value to be reassessed when indicators of a possible change are present (i.e. a change in how the asset is used, significant unexpected wear and tear, technological advancement, and changes in market prices) at each reporting date. Where this differs then the adjustment required is posted to the profit and loss prospectively. Section 8 Accounting Policies, Estimates and Errors makes it clear that a change in residual value, amortisation method or useful life is a change in accounting estimate which is adjusted prospectively. The disclosures required by Section 8 have to be included in the financial statements i.e. the effect of the change on the current periods must be disclosed (not applicable to the UK but applicable to ROI entities – see Section 8 for the disclosure requirements). Where the residual value decreases such that no further amortisation is required or it has been over amortisated, the standard requires that the asset be no longer amortised and any over charge is not reversed.
Example 3: Revising residual value of an asset – where an active market to allow a residual value to be assumed under Section 13.13 of FRS 105
In year 1 an intangible asset was purchased for CU100,000. It had an estimated life of 6 years. Its estimated residual value was estimated to be CU10,000. Note it was deemed appropriate to assume a residual value as it met the condition in 13.13 above as there was an active market for this intangible and it was likely it would be there at the end of the useful life of the intangible (e.g. a pub licence or an off-licence). This residual value was assessed for indicators of change at each year end and there were no issues up to the end of year 4. At the start of year 5, due to a change in the market for this type of asset the residual value increased to CU20,000 (being the value of the future residual amount). At the end of year 4, the asset had a carrying amount as follows:
|
|
CU |
|
Cost |
100,000 |
|
Residual Value |
(10,000) |
|
Depreciable Amount |
90,000 |
|
Depreciation (90,000 / 6 yrs * 4 yrs) |
(60,000) |
|
Carrying Amount |
30,000 |
In year 5, the residual amount is CU20,000, therefore the depreciable amount is CU80,000. Deducting depreciation charged to date of CU60,000 leaves CU20,000 to be depreciated over the remaining useful life of 2 years. Therefore, depreciation of CU10,000 is charged in year 5 and year 6.
If we take this example and assume the residual value increases to CU50,000, then the carrying amount in year 5 of CU30,000 is in excess of the residual amount. Therefore no depreciation is required in year 5 and 6 and any over depreciation is not reversed.
Example 4: Change in accounting estimate disclosure – ROI only
During the year ended 31 December 201X the company changed its amortisation method for intangible assets to amortise same over 20 years on a straight line basis as opposed to 10 years. The effect of same was to reduce the amortisation charge by CU680,000 for the current yearThe reason for the change in depreciation method is that the new policy more correctly reflects the useful economic life of these assets.
Amortisation ceases when an asset is derecognised.
The standard specifies the method of amortisation used should reflect the way in which the economic benefits are derived. Where this cannot be easily determined the straight line method should be used which writes the asset off over its useful life. An example of the straight line method was given in example 12 in Section 12.
Estimating the useful economic life
All intangible assets are considered to have a finite life. The standard specifies that where a useful life cannot be determined then a useful life should not exceed 10 years. Where intangible assets acquired prior to the transition to FRS 105 has been determined and presumably there was a basis for this as required by old GAAP/FRSSE, it is unlikely that this will have any impact as it will continue to be amortised over the period determined under old GAAP/FRSSE. However, for intangible assets acquired since the date of transition, entities will need to assess the useful economic life and if it cannot be determined a life of 10 years or less must be chosen. This cannot be chosen as a default, instead a good effort has to be made to determine a useful life.
Under old GAAP i.e. FRSSE as opposed to FRS 102 (as FRS 102 is the same as FRS 105), it was possible for intangible assets to have an indefinite useful economic life and as a result no amortisation was charged instead an annual impairment review was performed. On transition to FRS 102 these assets will now have to be assigned a useful economic life and where this cannot be determined then it will have to be assigned a life not exceeding 10 years. This will result in an additional amortisation charge and will also require an adjustment on transition to FRS 105 from FRSSE/old GAAP.
Example 5: Transition adjustments for intangibles previously having limited life
An intangible asset of CU500,000 was recognised under old GAAP/FRSSE (acquired 5 years prior to the date of transition) which was determined to have a finite useful life. On transition, under FRS 105, a useful life of 15 years was determined. Therefore, a transition adjustment is required whereby, if the useful life on the date of transition is 15 years, then the original useful life should have been 20 years when acquired. Therefore, amortisation of CU125,000 (i.e. CU500,000/20 years * 5 years) will need to be posted to retained earnings on transition so as to show the carrying amount at CU375,000 (CU500,000-CU125,000) in the opening balance sheet.
A number of factors should be considered when estimating a useful life for an intangible, these include:
– Expected usage of the asset by the entity, and whether it could be managed efficiently by the management team;
– The typical product life cycles for the asset, and public information about estimates of useful lives of similar assets that are used in a similar way;
– Technical, technological, commercial or other types of obsolescence;
– The stability of the industry in which the asset operates, and changes in the market demand for the products or services from or related to the asset;
– Expected actions by competitors or potential competitors;
– The level of maintenance expenditure required to maintain the asset’s operating capability, and whether management intends to perform that level of maintenance;
– Whether the asset’s useful life is dependent on the useful life of other assets of the entity.
Where the intangible asset arises from a contractual right, its useful life is the longer of the period of the contract or the period over which the entity is expected to use the asset. Where a renewal option exists then the useful life includes the renewal period where it can be renewed without significant cost (when compared to future economic circumstances). The following factors would suggest the ability to renew it at undue cost:
– where there is evidence based on experience that the right will be renewed; and
– the conditions necessary for renewal are present.
Example 6: Intangible with a renewal option
A pub/off licence is required to apply for a renewal of its licence yearly. In determining the useful life this intangible should not be amortised over 1 year instead it should be amortised over the full life of the licence ignoring the renewal assuming the conditions necessary for renewal exist and there is past experience proving that it will be renewed.
Recoverability of the carry amount – impairment losses
Extract from FRS 105 – Section 3.15-13.16
13.15 To determine whether a separately acquired intangible asset is impaired, a micro-entity shall apply Section 22 Impairment of Assets. That section explains when and how a micro-entity reviews the carrying amount of its assets, how it determines the recoverable amount of an asset, and when it recognises or reverses an impairment loss.
Retirements and disposals
13.16 A micro-entity shall derecognise a separately acquired intangible asset, and shall recognise a gain or loss in profit or loss:
(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal.
OmniPro comment
An intangible asset should be derecognised either when the asset is disposed of when no future economic benefits are expected and the gain/loss recognised in the profit and loss.
Example 7: Derecognition
Company A has an intangible asset which has a useful life of 20 years. In year 10, there is a risk that the asset is no longer required, as technology has changed and it is likely there will no longer be demand from the market. Management expect this to be the case. If this is the case the company believe that it will have no further use and therefore would have a nil scrap value. In year 11, managements belief is confirmed. It is in year 10 that the asset should be derecognised as at that point there is a reasonable expectation that there will be no further economic benefits.
If in the above example, the future economic benefits were reduced but not expected to be eliminated an impairment would have been required.
An impairment review is only required where an impairment indicator is present. The impairment review should be carried out in line with Section 22 – Impairment of assets.
Disclosure in the notes
Extract from FRS 105 – Section 3.17 – 3.18
13.17 A micro-entity shall determine the amount of any financial commitments, guarantees and contingencies not recognised in the statement of financial position for the acquisition of separately acquired intangible assets and disclose that amount within the total amount of financial commitments, guarantees and contingencies (see paragraph 6A.2).
13.18 A micro-entity shall disclose an indication of the nature and form of any intangible assets given as security in respect of its commitments, guarantees and contingencies (see paragraph 6A.3).
OmniPro comment
See example disclosures below:
Example 8: Disclosures
The company entered into a call option with a third party to purchase certain intangibles for CUXXX at 31 December 201X. This option expires on XX.
The company has provided the customer list/intangible asset as security on a loan received from ABC Bank.
In addition to the above ROI entities are required to include the accounting policy for intangibles. See Section 6 for an example of an accounting policy for ROI entities (UK entities do not require this). In addition ROI entities are required to disclose any impairment or reversal of impairment on intangibles. See example below:
An impairment of CUXXX (2014: CUnil) was recognised in the profit and loss account on intangible fixed assets included within the fixed assets section in the balance sheet.
A previous impairment of CUXXX was reversed to the profit and loss account in the current year (2014:CUXX) on intangible fixed assets included within the fixed assets section in the balance sheet.
Transition exemptions
Section 28 does not provide any transition exemption on first time adoption of Section 13.
Principal transition adjustments
The main adjustments expected on transition are detailed below:
1) Intangible asset with an indefinite useful life under old GAAP (applicable to entities transitioning from FRSSE/old GAAP only – not applicable to FRS 102 adopters)
Under FRSSE/old GAAP it was possible for intangible assets to have an indefinite useful economic life and as a result no amortisation was charged instead an annual impairment review was performed. On transition to FRS 105 these assets will now have to be assigned a useful economic life and where this cannot be determined then it will have to be assigned a life not exceeding 10 years. This will result in an additional amortisation charge and will also require an adjustment on transition to FRS 105. In example 9 below we have assumed a useful life could be determined of 20 years however where an entity cannot determine a useful life then the default useful life of 10 years should be utilised. It we assume for instance in example 9 below, that the default life of 10 years had to be used, then the carrying amount to be shown in the opening balance sheet on transition would be CU250,000 (CU500,000/10 years*5 years of life remaining).
If the capital allowances were available on these intangibles and the allowances were given in line with the amortisation charged, then a corporation tax asset would need to be booked at transition and this would be deductible over a 5 year period assuming the tax authorities’ guidance states that it is over 5 years.
As Section 24 of FRS 105 does not permit deferred tax to be recognised there is no need to consider deferred tax instead any deferred tax on the balance sheet on the date of transition or in the comparative years P&L is stripped out on transition. See section 24 for further details.
Example 9: Intangible asset with an indefinite useful life under old GAAP/FRSSE (not applicable for entities that applied FRS 102 prior to transition)
An intangible asset of CU500,000 was recognised under old GAAP (acquired 5 years prior to the date of transition) which was determined to have a infinite useful life. Assume on transition, under FRS 105, a useful life of 15 years was determined. Therefore, a transition adjustment is required whereby, if the useful life on the date of transition is 15 years, then the original useful life should have been 20 years when acquired. Therefore, amortisation of CU125,000 (i.e. CU500,000/20 years * 5 years) will need to be posted to retained earnings on transition so as to show the carrying amount at CU375,000 in the opening balance sheet. Assume the date of transition is 1 January 2015. The journals required are:
1 January 2015
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
125,000 |
|
|
Cr Intangible Asset |
|
125,000 |
Being journal to recognise amortisation charge for the period from acquisition to the date of transition i.e. 1 January 2015 for a company with a December year end. Then in future years an amortisation charge of CU25,000 (CU500k/20yrs) should be posted.
The journals required for 31 December 2015 assuming the above journals are posted to reserves:
|
|
CU |
CU |
|
Dr Amortisation in the P&L (CU500,000/20yrs) |
25,000 |
|
|
Cr Accumulated Amortisation |
|
25,000 |
Being journal to reflect amortisation for the 2015 year as intangible was not previously amortised.
The same journal as above will be required to be posted for the 2016 year assuming the above journals are posted to reserves.
If we assume capital allowances are allowed as a deduction at the same rate as the amortisation then a corporation tax asset will need to be recognised. The journals required are:
On 1 January 2015
|
|
CU |
CU |
|
Dr Corporation Tax Asset (CU125,000*10%) |
12,500 |
|
|
Cr Profit and Loss Reserves |
|
12,500 |
Being journal to reflect corporation tax asset for capital allowance not previously allowed under old GAAP in the tax comp at date of transition
In the 31/12/15 i.e. the comparative year for FRS 105, a journal adjustment would be required to account for the corporation tax impact as follows (assuming the opening adjustments above are carried forward):
|
|
CU |
CU |
|
Dr Corporation Tax Asset (CU25,000*10%) |
2,500 |
|
|
Cr Corporation Tax in P&L |
|
2,500 |
Being journal to reflect corporation tax asset for capital allowance not previously allowed under old GAAP in the tax comp in the 2015 year.
In the 31/12/16 i.e. the current year for FRS 105, a journal adjustment would be required to account for the corporation tax impact as follows (assuming the opening adjustments above are carried forward):
|
|
CU |
CU |
|
Dr Corporation Tax in P&L (CU15,000/5yrs) |
3,000 |
|
|
Cr Corporation Tax Asset |
|
3,000 |
Being journal to reflect the additional deduction for 1/5th of the capital allowances not previously claimed up to 31/12/15 which has therefore fallen out under FRS 105. Note this assumes that the tax journal posted will include the transition tax adjustment for the CU3,000 in tax terms when it is finally recognised. If there was no corporation tax in 2016, then the CU3,000 would still be released as a credit to the P&L as it would be no longer refundable from the tax authorities. As no deferred tax can be recognised under FRS 105 it cannot be held as a deferred tax asset on the balance sheet as a timing difference. The remaining CU12,000 (CU15,000-CU3,000) will still be included as a corporation tax asset at the year end in the corporation tax nominal and released over the remaining 4 yrs.
2 ) Transfer of software and website costs to intangibles
Where software and website development costs have previously been included within PPE, on transition an adjustment may be required to transfer these to intangibles where they are not an integral part of the hardware/asset. If this is the case, it will merely be a balance sheet reclassification from PPE to intangibles as the useful life etc. should remain the same.
Example 10: Transfer of software and website costs to intangibles (only applicable to entities transitioning from FRSSE/old GAAP)
Under old GAAP, Company A classified website development costs and software costs which are not an integral part of the asset as property, plant and equipment. Under FRS 105, these should be classified as intangible assets. The NBV of these assets on transition was CU100,000. Assume the useful life of the asset will remain unchanged. The journal required on transition is therefore:
On 1 January 2015
|
|
CU |
CU |
|
Dr Intangible Assets |
100,000 |
|
|
Cr PPE |
|
100,000 |
For the year ended 31 December 2015 and 2016 a similar adjustment will be required for the NBV at that date assuming the above journal is not brought forward year on year.
3) Default 20 years used to amortise intangibles under old GAAP/FRSSE where a reliable estimate could not be determined (not applicable to FRS 102 as the rule is the same).
All intangible assets are considered to have a finite life under FRS 105. The standard specifies that where a useful life cannot be determined then a useful life should not exceed 10 years. Under old GAAP/FRSSE where a useful life could not be reliably determined a default rate of 20 years was mandated. Where intangible assets acquired prior to the transition to FRS 105 has been determined and presumably there was a basis for this as required by old GAAP/FRSSE, it is unlikely that this will have any impact as it will continue to be amortised over the period determined under old GAAP/FRSSE.
Where under old GAAP/FRSSE the default rate of 20 years was used as the useful life could not be determined and the carrying amount cannot be supported, then a transition adjustment will be required such that the default life of 10 years should be used. Note we would not expect many adjustments as a result of this change as there should have been support for the carrying amount of intangible asset under FRSSE.
If the capital allowances were available on these intangibles and the allowances were given in line with the amortisation charged, then a corporation tax asset would need to be booked at transition and this would be deductible over a 5 year period assuming the tax authorities’ guidance states that it is over 5 years.
As Section 24 of FRS 105 does not permit deferred tax to be recognised there is no need to consider deferred tax instead any deferred tax on the balance sheet on the date of transition or in the comparative years P&L is stripped out on transition. See section 24 for further details.
Example 11: Intangible asset that used a default useful life of 20 years under old GAAP/FRSSE (not applicable for entities transitioning from FRS 102)
An intangible asset of CU500,000 was recognised under old GAAP (acquired 5 years prior to the date of transition). Under old GAAP the default life of 20 years was chosen so the carrying amount in old GAAP books was CU375,000. Assume the date of transition is 1 January 2015 and the useful life cannot be determined under FRS 105 either, hence the default rate of 10 years should be used. Therefore, a transition adjustment is required. As the default rate is 10 years under FRS 105, at the date of transition using this default rate a remaining useful life of 5 years exists. Therefore, the carrying amount required on transition for is CU250,000 (CU500,000/10 years*5 years remaining at the date of transition). Assume a corporation tax rate of 10%.
The journals required on 1 January 2015 are:
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU375,000 carrying amount under old GAAP-CU250,000 required under FRS 105) |
125,000 |
|
|
Cr Intangible Asset |
|
125,000 |
The journals required for 31 December 2015 assuming the above journals are posted to reserves:
|
|
CU |
CU |
|
Dr Amortisation in the P&L ((CU500,000/10 yrs under FRS 105) – (CU500,000/20yrs under old GAAP)) |
25,000 |
|
|
Cr Accumulated Amortisation |
|
25,000 |
Being journal tor reflect additional amortisation for the 2015 year for the fact that this is being written off over 10 years as opposed to 20 years under old GAAP.
The same journal as above will be required to be posted for the 2016 year assuming the above journals are posted to reserves.
If we assume capital allowances are allowed as a deduction at the same rate as the amortisation then a corporation tax asset will need to be recognised for the fact that this will be tax deductible in the future. The journals required are:
On 1 January 2015
|
|
CU |
CU |
|
Dr Corporation Tax asset (CU125,000*10%) |
12,500 |
|
|
Cr Profit and Loss Reserves |
|
12,500 |
Being journal to reflect corporation tax asset for capital allowance not previously allowed under old GAAP in the tax comp at date of transition
In the 31/12/15 i.e. the comparative year for FRS 105, a journal adjustment would be required to account for the corporation tax impact as follows (assuming the opening adjustments above are carried forward):
|
|
CU |
CU |
|
Dr Corporation Tax Asset (CU25,000*10%) |
2,500 |
|
|
Cr Corporation Tax in P&L |
|
2,500 |
Being journal to reflect corporation tax asset for capital allowance not previously allowed under old GAAP in the tax comp in the 2015 year.
In the 31/12/16 i.e. the current year for FRS 105, a journal adjustment would be required to account for the corporation tax impact as follows (assuming the opening adjustments above are carried forward):
|
|
CU |
CU |
|
Dr Corporation Tax in P&L (CU15,000/5yrs) |
3,000 |
|
|
Cr Corporation Tax Asset |
|
3,000 |
Being journal to reflect the additional deduction for 1/5th of the capital allowances not previously claimed up to 31/12/15 which has therefore fallen out under FRS 105. Note this assumes that the tax journal posted will include the transition tax adjustment for the CU3,000 in tax terms when it is finally recognised. If there was no corporation tax in 2016, then the CU3,000 would still be released as a credit to the P&L as it would be no longer refundable from the tax authorities. As no deferred tax can be recognised under FRS 105 it cannot be held as a deferred tax asset on the balance sheet as a timing difference. The remaining CU12,000 (CU15,000-CU3,000) will still be included as a corporation tax asset at the year end in the corporation tax nominal and released over the remaining 4 yrs.
No other adjustment is required as the amortisation on the intangible in the current year i.e. 31/12/16 will be allowable for tax purposes in that year.
4) Revaluation policy previously applied to an Intangible asset now restated to historic cost less accumulated amortisation and impairment under FRS 105 (applicable to FRS 102 and FRSSE adopters).
Under FRSSE/old GAAP and FRS 102 there was a choice to hold intangible assets at either cost less accumulated amortisation and impairment or revalued amount less accumulated amortisation with movements in valuation recognised in the STRGL(FRSSE) or OCI (FRS 102)/revaluation unless it was considered permanent in which case it was recognised in the STRGL/revaluation reserve (under FRSSE) and Other comprehensive income/revaluation reserve (under FRS 102) where a previous upward revaluation was held and then to the P&L (revaluation policy). Where a revaluation policy was adopted no deferred tax was required to be recognised under FRSSE however it was required to be considered under FRS 102.
FRS 102 (Section 35) also gave entities the possibility to treat a revalued amount or fair value as deemed cost on transition to FRS 102 for the first time.
FRS 105 does not permit any assets to be held at revalued amount/fair value or deemed cost instead intangible assets must be stated at original/historic cost less accumulated amortisation and impairment.
Therefore on transition where a revaluation policy was applied under previous GAAP/FRSSE/FRS 102 or in the case of FRS 102, the entity applied the exemption under Section 35 in FRS 102 to have the revalued amount or fair value as deemed cost, a transition adjustment will be required to derecognise the revaluation and restate the assets to cost less amortisation and impairment.
Where the revalued amount is below original cost less related accumulated depreciation, no adjustment will be required as FRS 105 would have required an impairment to be booked so as to state the PPE at no higher than the recoverable amount. However if deferred tax asset was recognised on the downward valuation this would need to be derecognised – only applicable for adopters from FRS 102.
See examples 21 and 22 in Section 12 of this website for the transition journals required where intangibles have been carried at deemed cost or revalued amount under previous GAAP. Although these examples refer to property, plant and equipment the same journals apply.
5) Development costs previously capitalised applicable to entities transitioning from FRSSE/FRS102
Under previous GAAP the company applied a policy of capitalising development costs once the conditions required by that particular GAAP had been met.
FRS 105 does not permit development costs to be capitalised instead all of these costs must be expensed.
The total NBV of development costs capitalised at 31 December 2014, 2015 and 2016 was CU6,500, CU6,050 and CU5,600 respectively with the movement each year reflecting the amortisation.
Therefore on transition to FRS 105 an adjustment is required to derecognise the intangible assets relating to development expenditure at each year end and reverse the amortisation previously charged in the comparative and current year. Assume there are no tax consequences as a result of this as the development costs did not qualify for capital allowance purposes.
On 1 January 2015
|
|
CU |
CU |
|
Dr profit and loss reserves |
6,500 |
|
|
Cr intangible assets |
|
6,500 |
Being journal to reflect derecognition of the development costs from the balance sheet
In the year ended 31 December 2015:
|
|
CU |
CU |
|
Dr profit and loss reserves |
6,500 |
|
|
Cr intangible assets |
|
6,500 |
Being journal to reflect derecognition of the development costs from the balance sheet at the date of transition
|
Dr intangible assets |
450 |
|
|
Cr amortisation/administrative expenses -2015 |
|
450 |
Being journal to reflect reversal of amortisation on the capitalised development costs recognised in the FRSSE/old GAAP 2015 P&L
In the year ended 31 December 2016:
|
|
CU |
CU |
|
Dr profit and loss reserves |
6,500 |
|
|
Cr intangible assets |
|
6,500 |
Being journal to reflect derecognition of the development costs from the balance sheet at the date of transition
|
Dr intangible assets |
450 |
|
|
Cr profit and loss reserves – 2015 amortisation |
|
450 |
Being journal to reflect reversal of amortisation on the capitalised development costs recognised in the FRSSE/old GAAP 2015 P&L
|
|
CU |
CU |
|
Dr intangible assets |
450 |
|
|
Cr amortisation/administrative expenses 2016 |
|
450 |
Being journal to reflect reversal of amortisation on the capitalised development costs recognised in the FRSSE/old GAAP 2016 P&L
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