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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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18.8 Amortisation, useful life and residual value
18.8.1 Extract from FRS 102 Section 18.19-18.24
18.19 For the purpose of this FRS, all 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 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 entity without significant cost.
18.20 If, in exceptional cases, an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall not exceed 10 years. Amortisation period and amortisation method
18.21 An 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.
18.22 Amortisation begins when the intangible asset is available for use, i.e. 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 entity shall choose an amortisation method that reflects the pattern in which it expects to consume the asset’s future economic benefits. If the entity cannot determine that pattern reliably, it shall use the straight-line method.
Residual value
18.23 An 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
18.24 Factors such as a change in how an intangible asset is used, technological advancement, and changes in market prices 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, an entity shall review its previous estimates and, if current expectations differ, amend the residual value, amortisation method or useful life. The entity shall account for the change and recognised as an expense unless it is directly intangible cost in residual value, amortisation method useful life as a change in an accounting estimate in accordance with paragraphs 10.15 to 10.18.
18.8.2 OmniPro comment
18.8.2.1 Amortisation
Amortisation should be calculated by allocating the cost or revalued amount of an asset less its estimated residual value if anywhere permitted on a systematic basis over its useful life (Section 18.21 of FRS 102).
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.
Amortisation commences when the asset is available for use even if it is not put into use (i.e. in a location and condition necessary for the intended use by management Section18.22 of FRS 102).
Amortisation ceases when an asset is derecognised.
Section 18.22 of FRS 102 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 17 of this website at 17.2.6.1.5.1.
18.8.2.2 Residual value
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 102 Appendix I).
The residual value is assumed to be zero unless (Section 18.23 of FRS 102);
- 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.
- Example of where the above would apply would be liquor licences, pub licences.
Where there is an active market (e.g. for pub licenses) a residual amount can be included and the difference between the carrying amount and the residual amount is amortised over its useful life.
Section 18.24 of FRS 102, 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 10 Accounting Policies, Estimates and Errors at 10.8.2 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 10 have to be included in the financial statements i.e. the effect of the change on the current and future periods See sample disclosures in example 4 below. Where the residual value decreases such that no further amortisation is required, or it has been over amortisation, 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
In year 1 an asset was purchased for CU100,000. It had an estimated life of 6 years. It’s estimated residual value was estimated to be CU10,000 and the residual value could be used as there was an active market. 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 present value of future residual amount). At the end of year 4, the asset had a carrying amount of as follows:
| Cost | CU100,000 |
| Residual Value | (CU10,000) |
| Depreciable Amount | CU90,000 |
| Depreciation
(CU90,000 / 6 yrs * 4 yrs) |
(CU60,000) |
| Carrying Amount | CU30,000 |
At the start of year 5, the residual amount is CU20,000, therefore the depreciable amount is CU80,000. Deducting amortisation charged to date of CU60,000 leaves CU20,000 to be depreciated over the remaining useful life of 2 years. Therefore, amortisation of CU10,000 is charged in year 5 and year 6. Disclosure of the change in estimate would be required in the financial statements.
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 amortisation is required in year 5 and 6 and any over amortisation is not reversed. Disclosure of the change in estimate would be required in the financial statements detailing the effect on current and future periods. Detailed below is an example of the disclosure requirements for a change in accounting estimate.
Example 4: Change in accounting estimate
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 year. In future years the amortisation charge will be extended whereby the amortisation charge will be lower but will go on for a longer period of time as it is being depreciated over its useful economic life. The reason for the change in amortisation method is that the new policy more correctly reflects the useful economic life of these assets.
18.8.2.3 Useful economic 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. Section 18.19 of FRS 102 makes it clear that intangible assets must have a finite life.
All intangible assets are considered to have a finite life. Section 18.20 of FRS 102 specifies 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 102 has been determined and presumably there was a basis for this as required by old GAAP, it is unlikely that this will have any impact as it will continue to be amortised over the period determined under old GAAP. However, for intangible assets acquired since the date of transition, entities will need to assess the useful life and if it cannot be determined a life of 10 years or less must be chosen. This 10 year life cannot be chosen as a default, instead a good effort has to be made to determine a useful life.
Under 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. This is no longer possible unless the requirements for having a residual value equal to cost/carrying amount as detailed at 18.8.2.2 apply.
18.8.2.3.1 Factors to consider when assessing useful economic life
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.
18.8.2.3.2 Contractual rights, renewal option and useful economic life
Where the intangible asset arises from a contractual right, as per Section 18.19 of FRS 102 it’s 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.
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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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