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Section 18: Intangible assets other than goodwill
18.2.1 Extract from FRS 102 Section 18.1 to 18.3.
18.2.2 OmniPro comment – Scope.
18.3.1 Extract from FRS 102 Section 18.4-18.7.
18.3.2.2 Examples of intangible assets:
18.3.2.3 Four situations where intangible assets arise.
18.4 Acquisition as part of a business combination – recognition, initial measurement.
18.4.1 Extract from FRS 102 Section 18.8 and 18.11.
18.4.2.1 Process for identifying intangibles in business contributions.
18.5 Separately acquired intangible assets – recognition, and initial measurement.
18.5.1 Extract from FRS 102 Section 18.10.
18.5.2.1 Examples of directly attributable costs.
18.6 Internally generated intangible assets – recognition and initial measurement.
18.6.1 Extract from FRS 102 Section 18.8A-18.8K, 18.17 and 18.10A-18.10B.
18.6.2.2 Developments Costs – Defined & Examples.
18.6.2.2.1 Policy Choice to capitalise or expense development costs.
18.6.2.2.2 Conditions for capitalisation of development costs.
18.6.2.2.3 Timing of capitalisation of development costs if conditions are met.
18.6.2.2.4 What development costs are permitted to be capitalised?.
18.6.2.2.5 Documentation to evidence that development costs met the criteria for capitalised.
18.6.2.2.6 When to cease capitalisation?.
18.7 Measurement after initial recognition.
18.7.1 Extract from FRS 102 Section 18.18-18.18H..
18.7.2.1 Accounting policy choice.
18.7.2.1.2.1 Why can the revelation model be applied?.
18.7.2.1.2.2 Frequency of revaluations.
18.7.2.1.2.3 Revaluation model applied – subsequently unable to determine fair value.
18.7.2.1.2.4 Revaluations and deferred tax.
18.8 Amortisation, useful life and residual value.
18.8.1 Extract from FRS 102 Section 18.19-18.24.
18.8.2.3 Useful economic life.
18.8.2.3.1 Factors to consider when assessing useful economic life.
18.8.2.3.2 Contractual rights, renewal option and useful economic life.
18.9 Impairments, retirements and disposals.
18.9.1 Extract from FRS 102 Section 18.25 and 18.26.
18.10.1 Extract from FRS 102 Section 18.27 and 18.29A..
18.10.2.1 Accounting policy extract.
18.10.2.1.1 Intangible asset accounting policy.
18.10.2.1.2 Goodwill accounting policy.
18.10.2.1.3 Research and development accounting policy.
18.10.2.2.1 Intangible fixed asset note
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18.4 Acquisition as part of a business combination – recognition, initial measurement
18.4.1 Extract from FRS 102 Section 18.8 and 18.11
18.8 Intangible assets acquired in a business combination shall be recognised separately from goodwill when all the following three conditions are satisfied:
(a) the recognition criteria set out in paragraph 18.4 are met;
(b) the intangible asset arises from contractual or other legal rights; and
(c) the intangible asset is separable (ie 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).
An entity may additionally choose to recognise intangible assets separately from goodwill from which condition (a) and only one of (b) or (c) above is met. When an entity chooses to recognise such additional intangible assets, this policy shall be applied to all intangible assets in the same class (ie having a similar nature, function or use in the business), and must be applied consistently to all business combinations. Licences are an example of a category of intangible asset that may be treated as a separate class, however, further subdivision may be appropriate, for example, where different types of licences have different functions within the business.
18.11 If an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value at the acquisition date.
18.4.2 OmniPro comment
Section 18.8 of FRS 102 provides the rules for recognising intangibles in business combinations and makes it clear that there is a requirement for there to be a history or evidence of exchange of transactions for similar assets even where it arises from legal or other contractual rights. Therefore, even though an intangible asset may have legal or contractual rights attached, it cannot be recognised if there is no history or evidence of exchange of similar assets in the market. Where this condition is met then the intangible is recognised separately from goodwill and the useful life determined, if not they stay consumed in goodwill.
For example, customer and subscriber lists are frequently licenced and therefore would meet the requirement of them having a history of exchange of similar assets and therefore it is likely that these will nearly always be separately identified if the reliable estimate can be determined. However, where there is a confidentiality clause etc. from selling customer information then this does not give the entity a legal right; hence they should not be recognised separately as intangibles.
18.4.2.1 Process for identifying intangibles in business contributions
The processes involved in identifying intangibles in a business combination are usually:
- Reviewing the list of items that meet the intangible definition to include; customer lists, trade names, internet domain names, non-contractual customer relationships, databases, franchise agreements and unpatented technology;
- Reviewing documents related to the acquisition and other internal documents produced to include press releases, analyst reports;
- Comparing the acquired business to similar businesses and their intangible assets.
18.4.2.2 Valuation Guidance
When recognising and measuring an intangible arising from a business combination, an entity should recognise this at fair value at the date of acquisition assuming the criteria for recognition has been met. There is no further guidance provided in Section 18, therefore an entity should go to Section 11 Basic Financial Instruments in determining the meaning of fair value. Section 11.27 of FRS102 details how fair value should be determined, the hierarchy detailed in Section 11.27 is as detailed below:
(a) The best evidence of fair value is a quoted price for an identical asset in an active market. Quoted in an active market in this context means quoted prices are readily and regularly available and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted price is usually the current bid price.
(b) When quoted prices are unavailable, the price of a recent transaction for an identical asset provides evidence of fair value as long as there has not been a significant change in economic circumstances or a significant lapse of time since the transaction took place. If the entity can demonstrate that the last transaction price is not a good estimate of fair value (e.g. because it reflects the amount that an entity would receive or pay in a forced transaction, involuntary liquidation or distress sale), that price is adjusted.
(c) If the market for the asset is not active and recent transactions of an identical asset on their own are not a good estimate of fair value, an entity estimates the fair value by using a valuation technique. The objective of using a valuation technique is to estimate what the transaction price would have been on the measurement date in an arm’s length exchange motivated by normal business considerations.
Given that most intangibles will not have an active market and there is unlikely to be recent transaction, it is likely a lot of intangibles will fall into the valuation technique method. This valuation technique should make maximum use of market inputs and rely as little on entity determined inputs. The valuation techniques used in practice are:
- Determining the costs the entity has saved by acquiring the intangible and therefore not needing; to pay another entity licence fees or to recreate or replace this.
- Determining the future cash flows that can be derived from the asset.
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Examples
Example 1: Commencement of capitalisation.
Example 2: Allowable costs for capitalisation.
Example 3: Revising residual value of an asset.
Example 4: Change in accounting estimate.
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