Section 13 – Intangible Assets other than Goodwill 

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Section 13 – Overview

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Section 13 – Analysis Part 1

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Section 13 – Intangible Assets other then Goodwill
Summary

Section 13 deals the recognition, measurement, amortisation and disclosure for intangible assets other than goodwill. Section 13 defines an intangible asset as an identifiable non-monetary asset without physical substance. To count as identifiable, it must be separable, or must arise from contractual or other legal rights.

What is new when compared to previous GAAPs (applicable to all)- General?

Section 13 does not permit a revaluation policy for intangibles, instead intangibles must be carried at cost less accumulated amortisation and impairment. This compares to old GAAP/FRSSE/FRS 102 where there was an option to adopt a revaluation policy where an active market existed.

Section 13 does not permit development costs to be capitalised regardless of the circumstances. This compares to FRS 102/old GAAP/FRSSE which provides a choice to entities to either adopt a policy of capitalising development costs (certain internally developed intangibles) providing they meet certain conditions or expensing those costs.

What is new when compared to FRSSE/old GAAP?

Section 13 requires computer software which is not an integral part of the related hardware, to be treated as an intangible asset. This contrasts with the treatment under old GAAP/FRSSE (SSAP 13), where software was classified as property plant and equipment. Under old GAAP/FRSSE, website development costs were classed as property, plant and equipment whereas under FRS 102 they will now be classed as intangible assets.

Under Section 13, the residual value is assumed to be zero unless certain conditions are met whereas under old GAAP a residual value could be assigned if it could be measured reliably with the exception of goodwill which was considered to be nil. That said under Section 13 a residual value can be used where there is a commitment by a third party to purchase the intangible at the end of its useful 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 that such a market will exist at the end of the asset’s useful life.

Only disclosures required relate to any commitment, guarantees or contingencies relating to intangibles not recognised in the balance sheet. This compares to previous GAAP’s where significant disclosures were required.

What is different when compared to FRSSE/old GAAP?

All intangible assets are considered to have a finite life (section 13.9). If an entity is unable to make a reliable measurement, the useful life should not exceed 10 years. This compares to old GAAP/FRSSE, where the presumed useful life should not exceed 20 years and intangible assets could have indefinite lives subject to annual impairment (therefore were not amortised). This will result in increased amortisation for companies and consideration required as to the life of previously determined intangible assets with indefinite lives.

Under Section 13, an intangible asset is recognised if they arise from either; a) contractual or legal rights or b) from being separable. This contrasts with old GAAP/FRSSE (FRS 10) where both of these conditions must be met before an intangible can be recognised.

Section 13.7 specifically deals with intangible assets acquired in exchange for a non-monetary asset. Such items need to be measured at fair value unless it lacks commercial substance or if neither the asset received nor the asset given up can be reliably measured (then should be measured at assets cost). Old GAAP/FRSSE made no reference to exchange of assets. Differences are not expected on transition here, as usually it would have been common practice to measure those assets in the same way as outlined in Section 13.

Under Section 14, positive goodwill should be amortised on a systematic basis over the useful life, which cannot be indefinite. If there is no basis of estimation the default estimate of useful life is 10 years. This compares to old GAAP/FRSSE where the rebuttable presumption was 20 years and in some cases could be considered indefinite. Where under old GAAP a definite useful life was determined then it is likely there will be no change as this would still be applicable. So in practice it should only impact intangibles which were previously considered indefinite.

Section 13.12 requires that amortisation commences on development expenditure when an intangible asset is available for use which contrasts to old GAAP/FRSSE where amortisation only commenced when the commercial production or application of the item commenced. This may result in earlier recognition of amortisation.

What is different when compared to previous GAAPs (applicable to all)- General?

FRS 105 does not permit consolidated financial statements to be prepared, therefore FRS 105 only provides guidance on business combinations which are in the form of the acquisition of trade assets and liabilities. Section 14 makes it clear that in such business combinations, intangibles cannot be separated from goodwill. Any excess of the net fair value of assets acquired compared to the amount paid is automatically goodwill.

Section 13 requires very little disclosures which is in the spirit of FRS 105. See Section 6 for details of the disclosures that are required.

Other standard affecting Intangible assets where differences arise:

Section 22 – Impairment of assets – Intangible assets are only reviewed for impairment if there are indicators that the asset may be impaired (hence no requirement for a first year impairment review of an intangible asset). This contrasts with old GAAP (FRS 10)/FRSSE whereby an impairment review is required at the end of the first full year after acquisition with an amortisation period of 20 years or less and afterwards where indicators are present. This difference is not applicable to entities transitioning from FRS 102 as the rules are the same as FRS 105 in this regard.

Old GAAP/FRSSE also requires annual impairments for an amortisation period exceeding 20 years or with an indefinite life whereas Section 13 does not allow intangibles to have an indefinite useful life nor does it require an impairment review if the UEL is greater than 20 years instead it is carried out only when an impairment indicator is present. This difference is not applicable to entities transitioning from FRS 102 as the rules are the same as FRS 105 in this regard.

Section 28 – Transition to FRS 105 – Goodwill previously recognised under business combinations entered into pre the date of transition does not have to be restated to the rules in Section 14 of FRS 105 where the entity claims the exemption in Section 28.10 not to restate business combinations entered into before this date. Note however deferred tax would have to be derecognised in the unlikely event that it is applicable. This means where as part of a business combination of trade assets and liabilities entered into pre transition, an intangible was recognised separately from goodwill it will not have to be consumed within goodwill in line with FRS 105 rules, instead it will stay at the amount recognised under previous GAAP and be amortised over its useful life as was being done under previous GAAP.

Section 24 – Income tax – Derecognition of deferred tax recognised on any revaluation under FRS 102 (where this option is chosen) and set against the revaluation reserve as deferred for is not permitted to be recognised under FRS 105.

What are the key points?

An intangible asset is an identifiable non-monetary asset without physical substance. To count as identifiable, it must be separable, or must arise from contractual or other legal rights.

An intangible asset is only recognised if it is probable that its expected future economic benefits will flow to the owner, and if its cost or value can be measured reliably.

Development expenses must be expensed (no option to capitalise development costs/internally generated intangibles).

Research costs must be expensed.

An intangible should be carried at cost less accumulated amortisation and impairment. An entity cannot adopt a policy of revaluation.

Internally generated brands, logos, customer lists cannot be capitalised (nothing can be capitalised).

Impairment review only to be carried out if indicators of impairment exist as detailed in Section 22. 

Section 13 only relates to acquired intangibles where the intangibles were acquired separately. Where intangibles are acquired as part of a business combination (which is only in relation to the acquisition of trade assets and liabilities and not the acquisition of shares), no intangibles can be recognised separately from goodwill instead everything must be allocated to goodwill in line with Section 14 guidance.

Amortisation presumed to be a max of 10 years if an estimate cannot be reliably measured.

A need to review useful lives of intangibles and goodwill to ensure they are still appropriate and no indicators of change has occurred at the end of each reporting period.

Residual value assumed to be nil unless:

What do accountants need to do?

Be aware of the differences between Section 13 and old GAAP/FRSSE/FRS 102.

Review the client portfolio for companies that hold intangibles and incur development expenditure. Advise companies of the exemptions under Section 28 as well as the differences.

Work with clients to ensure they review intangibles previously considered to have an indefinite life; and assess whether a life can be determined, otherwise inform clients of the consequences of depreciating this over 10 years and the impact on profits and distributable reserves. A transition adjustment will be required for such intangibles e.g. where on the date of transition, the entity determines the useful life to be 15 years, and the intangible was acquired 5 years prior to this, then a transition adjustment will be required to recognise the amortisation from year 1 to year 5 so that the correct carrying amount is shown at transition (applicable to entities transitioning from FRSSE/old GAAP only).

Review clients which have previously utilised a default life of 20 years and assess if the carrying amount at the date of transition can be supported. If not the default life of 10 years should be applied whether that be from the original date of acquisition or not (applicable to entities transitioning from FRSSE/old GAAP only).

Review the likely impact of the need to restate on transition, software from tangible fixed assets to intangible fixed assets (applicable to entities transitioning from FRSSE/old GAAP only).

For clients who have had acquisitions of trade assets and liabilities since the date of transition, companies will need to review and assess if any intangibles were recognised and if so derecognise these intangibles and instead absorb this within goodwill (i.e. transfer from intangible asset to goodwill).

Advise clients of the possible advantages of the requirement to amortise intangibles if they are allowable for tax purposes as a deduction can be accelerated (applicable for entities transitioning from FRSSE/old GAAP).

Advise clients of the inability to capitalise development costs under Section 13. This factor can have a significant impact for some entities in start-up that want to create an asset on the balance sheet for the intangible it is creating.

Advise clients who wish to transition to FRS 105 of the fact that where an entity previously capitalised development costs, then an adjustment will be required on transition to derecognise these cost to P&L reserves and an adjustment to reverse amortisation on the development costs in the comparative year.

Advise clients of the inability to carry intangibles at revalued amount and where this has been applied in the past, the impact of restating the intangible to cost less amortisation will have.

Advise clients who are considering paying a dividend that before any dividend is paid or declared in the year in which the first set of financial statements are prepared under FRS 105 and subsequently; that they must look at the distributable reserves under the new GAAP as opposed to the reserves under previous GAAP when determining whether the dividend is permitted (e.g. assume 31 December 2016 is the first year FRS 105 financial statements are being prepared, then when considering whether there is distributable reserves to permit a dividend, the entity should review the results and reserves under FRS 105 as opposed to previous GAAP).

What do companies need to do?

Get to grips with the standard and see what exemptions are available on transition to ensure an easier transition process.

Consider for intangibles previously determined to have an indefinite life, whether a life can be determined. Otherwise, this will need to be depreciated over a life not exceeding 10 years which will impact the profits reported and reduce the distributable reserves. In any event additional amortisation will need to be posted to the profit and loss for the determined life of these assets as previously these were not amortised (applicable for entities transitioning from FRSSE/old GAAP only).

Review clients which have previously utilised a default life of 20 years and assess if the carrying amount at the date of transition can be supported. If not the default life of no more than 10 years should be applied whether that be from the original date of acquisition or not (applicable to entities transitioning from FRSSE/old GAAP only).

Quantify the impact of the need to restate, on transition, software from tangible fixed assets to intangible fixed assets (applicable to entities transitioning from FRSSE/old GAAP only).

For business combinations (by way of acquisition of trade assets and liabilities as the acquisition of shares is not applicable as consolidated financial statements cannot be prepared under FRS 105) since the date of transition companies will need to review whether intangibles need to be derecognised and goodwill increased accordingly.

Consider whether work-loads can be reduced given the new requirement for impairment reviews to only be performed once impairment indicators exist (applicable for entities transitioning from the FRSSE/old GAAP only).

Where intangible assets qualify for capital allowances there may be opportunity to get accelerated tax deductions as a result of the increased amortisation charge (applicable for entities transitioning from the FRSSE/old GAAP only).

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