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Section 18: Intangible assets other than goodwill
Introduction
Section 18 deals the recognition, measurement, amortisation and disclosure for intangible assets other than goodwill. 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 the standard
Extract from FRS 102 Section 18.1 to 18.3
18.1 This section applies to accounting for all intangible assets other than goodwill (see Section 19 Business Combinations and Goodwill) and intangible assets held by an entity for sale in the ordinary course of business (see Section 13 Inventories and Section 23 Revenue).
18.1A This section does not apply to the accounting for deferred acquisition costs and intangible assets arising from contracts in the scope of FRS 103 Insurance Contracts, except for the disclosure requirements in this section which apply to intangible assets arising from contracts in the scope of FRS 103.
18.2 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.
18.3 This section does not apply to the following:
(a) financial assets (see Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues);
(b) heritage assets (see Section 34 Specialised Activities); or
(c) mineral rights and mineral reserves, such as oil, natural gas and similar non-regenerative resources (see Section 34).
OmniPro comment
Section 18 has a wider scope than old GAAP. 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 assets 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 Section 18.2, 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 disc or drive. There is no clear guidance on what is defined as lacking substance. Section 18 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.
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