[et_pb_section bb_built=”1″ admin_label=”Header – All Pages” transparent_background=”off” background_color=”#1e73be” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” custom_padding=”0px||0px|” next_background_color=”#000000″ custom_padding_tablet=”50px|0|50px|0″ custom_padding_last_edited=”on|desktop” global_module=”1221″][et_pb_row admin_label=”row” global_parent=”1221″ make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” custom_padding=”||5px|” allow_player_pause=”off” parallax=”off” parallax_method=”on” make_equal=”off” parallax_1=”off” parallax_method_1=”off” background_position=”top_left” background_repeat=”repeat” background_size=”initial”][et_pb_column type=”4_4″][et_pb_post_title global_parent=”1221″ title=”on” meta=”off” author=”on” date=”on” categories=”on” comments=”on” featured_image=”off” featured_placement=”below” parallax_effect=”on” parallax_method=”on” text_orientation=”left” text_color=”light” text_background=”off” text_bg_color=”rgba(255,255,255,0.9)” module_bg_color=”rgba(255,255,255,0)” use_border_color=”off” border_color=”#ffffff” border_style=”solid” custom_padding=”10px|||” parallax=”on” background_color=”rgba(255,255,255,0)” /][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” custom_padding=”30px||0px|” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” background_color=”#1e73be” prev_background_color=”#000000″ next_background_color=”#ffffff” custom_padding_tablet=”0px||0px|” global_module=”1228″][et_pb_row global_parent=”1228″ make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” custom_padding=”30px||0px|” allow_player_pause=”off” parallax=”off” parallax_method=”off” make_equal=”off” parallax_1=”off” parallax_method_1=”off” column_padding_mobile=”on” background_position=”top_left” background_repeat=”repeat” background_size=”initial”][et_pb_column type=”4_4″][et_pb_text global_parent=”1228″ background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” background_position=”top_left” background_repeat=”repeat” background_size=”initial”]
[breadcrumb]
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″ custom_padding_tablet=”0px||0px|” custom_padding_last_edited=”on|desktop” prev_background_color=”#1e73be” next_background_color=”#000000″][et_pb_row][et_pb_column type=”4_4″][et_pb_toggle admin_label=”Index” _builder_version=”3.0.98″ open=”off” title=”Index”]
Section 18: Intangible assets other than goodwill 18.1 Introduction. 18.2 Scope of the standard.
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
[/et_pb_toggle][/et_pb_column][/et_pb_row][et_pb_row][et_pb_column type=”3_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color_all=”off” module_alignment=”left” _builder_version=”3.0.106″]
Section 18 – 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
18.8A To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into:
(a) a research phase; and
(b) a development phase.
18.8B If an entity cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the entity treats the expenditure on that project as if it were incurred in the research phase only.
18.8C An entity shall recognise expenditure on the following items as an expense and shall not recognise such expenditure as intangible assets:
(a) Internally generated brands, logos, publishing titles, customer lists and items similar in substance.
(b) 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).
(c) Training activities.
(d) Advertising and promotional activities (unless it meets the definition of inventories held for distribution at no or nominal consideration (see paragraph 13.4A)).
(e) Relocating or reorganising part or all of an entity.
(f) Internally generated goodwill.
18.8D Paragraph 18.8C does not preclude recognising a prepayment as an asset when payment for goods or services has been made in advance of the delivery of the goods or the rendering of the services.
Research phase
18.8E No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred.
18.8F In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits.
18.8G Examples of research activities are:
(a) Activities aimed at obtaining new knowledge.
(b) The search for, evaluation and final selection of, applications of research findings and other knowledge.
(c) The search for alternatives for materials, devices, products, processes, systems or services.
(d) The formulation, design, evaluation and final selection of possible alternatives for new or improved material, devices, projects, processes, systems or services.
Development phase
18.8H An entity may recognise an intangible asset arising from development (or from the development phase of an internal project) if, and only if, an entity can demonstrate all of the following:
(a) The technical feasibility of completing the intangible asset so that it will be available for use or sale.
(b) Its intention to complete the intangible asset and use or sell it.
(c) Its ability to use or sell the intangible asset.
(d) How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
(e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
(f) Its ability to measure reliably the expenditure attributable to the intangible asset during its development.
18.8I In the development phase of an internal project, an entity can, in some instances, identify an intangible asset and demonstrate that the asset will generate probable future economic benefits. This is because the development phase of a project is further advanced than the research phase.
18.8J Examples of development activities are:
(a) The design, construction and testing of pre-production or pre-use prototypes and models.
(b) The design of tools, jigs, moulds and dies involving new technology.
(c) The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production.
(d) The design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.
18.8K Where an entity adopts a policy of capitalising expenditure in the development phase that meets the conditions of paragraph 18.8H, that policy shall be applied consistently to all expenditure that meets the requirements of paragraph 18.8H. Expenditure that does not meet the conditions of paragraph 18.8H is expensed as incurred.
18.10A The cost of an internally generated intangible asset for the purpose of paragraph 18.9 is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria in paragraphs 18.4 and 18.8H.
18.10B The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Examples of directly attributable costs are:
(a) costs of materials and services used or consumed in generating the intangible asset;
(b) costs of employee benefits (as defined in Section 28 Employee Benefits) arising from the generation of the intangible asset;
(c) fees to register a legal right; and
(d) amortisation of patents and licences that are used to generate the intangible asset. Section 25 Borrowing Costs specifies criteria for the recognition of interest as an element of the cost of an internally generated intangible asset.
18.17 Expenditure on an intangible item that was initially recognised as an expense shall not be recognised at a later date as part of the cost of an asset.
18.6.2 OmniPro Comment
18.6.2.1 Research
It is clear from section 18.8E of FRS102 that any research activities must be expensed as incurred and cannot be capitalised. Where the distinction between development and research is not clear then it is assumed to be research and therefore should be expensed (Section 18.8B FRS102). Section 18.8E to 18.8G of FRS102 provides the rules with regard to research costs. If a prepayment for research activity has been made an asset can be created for the prepayment so that it is charged when the product is received, or the service is provided (Section 18.8D of FRS102). The one exception where research activity may be capitalised is where it is acquired through a business combination as it may meet the future economic benefits test.
18.6.2.1.1 Research Defined
Research is defined in Appendix 1 of FRS 102, as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge or understanding. Examples of research activities are detailed in Section 18.8G of FRS 102.
18.6.2.2 Developments Costs – Defined & Examples
Development is defined as the application of research findings or technical knowledge and understanding. Examples of development activities are detailed in Section 18.8J of FRS102 are:
(a) costs of materials and services used or consumed in generating the intangible asset;
(b) costs of employee benefits (as defined in Section 28 Employee Benefits) arising from the generation of the intangible asset;
(c) fees to register a legal right; and
(d) amortisation of patents and licences that are used to generate the intangible asset. Section 25 Borrowing Costs specifies criteria for the recognition of interest as an element of the cost of an internally generated intangible asset.
18.6.2.2.1 Policy Choice to capitalise or expense development costs
Section 18.8H of FRS102 gives an entity a choice as to whether they want to capitalise or expense development expenditure even where it meets the definition for capitalisation in Section 18.8H of FRS102. The policy chosen should be applied consistently to all development expenditure (Section 18.8K of FRS102). Where a policy of capitalisation exists, the costs can only be capitalised if they meet the criteria in Section 18.8H of FRS102 which is outlined above.
18.6.2.2.2 Conditions for capitalisation of development costs
It is clear that the only internally developed intangibles that can be recognised and capitalised is development expenditure which meet the definition in Section 18.8H of FRS102. Therefore, internally generated goodwill, internal brands, logos, publishing titles, customer lists cannot be capitalised (Section 18.8C(a) FRS102). More specifically Section 18.8H of FRS102 states that development costs can easily be capitalised if all of the following conditions are meet
(a) The technical feasibility of completing the intangible asset so that it will be available for use or sale.
(b) Its intention to complete the intangible asset and use or sell it.
(c) Its ability to use or sell the intangible asset.
(d) How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
(e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
(f) Its ability to measure reliably the expenditure attributable to the intangible asset during its development.
18.6.2.2.3 Timing of capitalisation of development costs if conditions are met
Once the conditions for capitalisation are met, it is at that point that all costs are capitalised. Costs which have been expensed prior to this date cannot be recognised in the cost of the asset at that time (Section 18.7 of FRS102).
18.6.2.2.4 What development costs are permitted to be capitalised?
The cost of an internally generated intangible which can be capitalised are all directly attributable costs to create, produce and prepare the assets to be capable of operating in the manor intended. Examples of such costs as detailed in Section 18.10B of FRS are;
- Costs of material and services used or consumed in generating the intangible assets.
- Employees costs incurred in developing the intangible
- Fees to register legal rights
- Amortisation of licences or intangibles used to generate the intangible assets
- Borrowing costs directly incurred in generating the intangible. See Section 25 of FRS 102 for further details.
The purchase costs to be included are all directly attributable costs. Certain costs specifically excluded are detailed in Section 18.8C of FRS 102 which includes, start-up costs, training activities, advertising and promotion activities, relocation and reorganising part or all of an entity internally generated brands, logos, publishing, titles and customer lists. Other costs excluded would include;
- selling and administrative and other general overhead costs,
- inefficiencies and initial operating losses incurred before reaching planned performance.
Example 2: Allowable costs for capitalisation
Company A has developed specific software for onward sale, it has carried out extensive advertising and promotion to attract customers as well as incurring operating losses during the start-up period. Under Section 18 none of these costs can be capitalised as advertising costs are not allowed and the operating losses are just start-up costs, the intangible itself is ready to use, it is just that customers now need to be found, so the operating losses are expensed.
18.6.2.2.5 Documentation to evidence that development costs met the criteria for capitalised.
The conditions in Section 18.8H of FRS 102 are very onerous. Management should ensure that they maintain detailed memos and records of how they have determined that they met each of the criteria mentioned in Section 18.8H (a) to (f) of FRS 102. Type of evidence that can be used to support the criteria are:
- Business plan showing the technical feasibility, financial and other resources needed and the entities ability to secure those resources;
- Detail project information demonstrating that the entity’s costing system can measure reliably the cost of generating the intangible asset;
- Letter of offer from a bank to show that it will provide funding for the project.
If is evident that regulatory approval is not specifically required, it is possible to capitalise before this is obtained. However, for some industries e.g. drug manufacturers, commercial success of a product cannot be guaranteed until it passes regulatory approval so for these types of entities, it is usual for capitalisation to start only when approval has been obtained.
18.6.2.2.6 When to cease capitalisation?
The capitalisation costs stop once the asset is ready for use even if not put into use. See example 2 at 18.6.2.2.4 of when capitalisation should cease.
[/et_pb_text][/et_pb_column][et_pb_column type=”1_4″][et_pb_toggle _builder_version=”3.0.106″ title=”Practical Examples” open=”off”]
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.
[/et_pb_toggle][/et_pb_column][/et_pb_row][/et_pb_section]