Section 18 – Intangible Assets other than Goodwill
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.
What is new?
Section 18, through the use of the hierarchy detailed in Section 10 makes it clear that computer software which is not an integral part of the related hardware, is treated as an intangible asset. This contrasts with the treatment under SSAP 13, where software was classified as property plant and equipment. Under old GAAP, website development costs were classed as property, plant and equipment whereas under FRS 102 they will now be classed as intangible assets.
Under Section 18, the residual value is assumed to be zero 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.
What is different?
All intangible assets are considered to have a finite life (section 18.19). If an entity is unable to make a reliable measurement, the useful life should not exceed 10 years (currently 5 years for Ireland however subject to the enactment of the EU directive 2013/34 which is expected shortly this will increase to 10 years). This compares to old GAAP, 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 18, 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 (FRS 10) where both of these conditions must be met before an intangible can be recognised.
Section 18.8 deals with intangible assets acquired in a business combination. An intangible should not be recognised separately from goodwill if fair value cannot be measured reliably, otherwise, recognised at fair value at the date of acquisition. This compares with old GAAP (FRS 10) where it not only requires reliable measurement but also subject to the constraint that, unless the asset had a readily ascertainable market value, the value was limited to an amount that did not create or increase any negative goodwill arising on acquisition. This will mean that it is likely more intangibles will be created on acquisition.
Section 18.13 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 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 18.
Section 18.19 requires that amortisation commences on development expenditure when an intangible asset is available for use which contrasts to old GAAP where amortisation only commenced when the commercial production or application of the item commenced. This may result in earlier recognition of amortisation.
Section 18 requires more disclosures than what was required under old GAAP. These include disclosures of:
- the existence and carrying amount of intangibles where there is restricted title or are pledged as security;
- the amount of contractual commitments for the intangible assets; and
- a description, carrying amount and remaining amortisation period for any intangible asset that is material.
Other standard affecting Intangible assets where differences arise:
Section 27 – 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 FRS 10 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.
FRS 10 also requires annual impairments for an amortisation period exceeding 20 years or with an indefinite life whereas Section 18 does not allow intangibles to have an indefinite useful life.
Section 35 – Transition to FRS 102 – Intangible subsumed within goodwill prior to transition date does not have to be separately recognised and the carrying value of goodwill does not have to be adjusted assuming Section 19 is not applied retrospectively.
Section 29 – Income tax – Deferred tax should be recognised on any revaluation (where this option is chosen) and set against the revaluation reserve.
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, and must arise from contractual or other legal rights.
Section 18.4 states that 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.
Choice for internally generated intangibles that meet the criteria in Section 18.8H to either expense or capitalise.
For internally generated intangible cost incurred in the research phase must be expensed.
For internally generated intangible there is a choice with regard to the cost incurred in the development stage; either to expense or capitalise assuming the capitalisation criteria in Section 18.18H are satisfied.
An intangible should be measured initially at cost and subsequently at either cost less impairment or at fair value at the date of revaluation less any subsequent accumulated amortisation or impairments provided the fair value can be determined to reference to an active market. With respect to acquisition of intangibles through a business combination they should initially be measured at fair value.
Where the revaluation model is taken, revaluations need to be carried out with sufficient regularity to ensure the carrying amount at each reporting period equates to the fair value and needs to be done for similar assets of the same class.
Movements as a result adopting the revaluation model should be posted to the OCI and any decrease in value below cost is posted to the profit and loss.
Internally generated brands, logos, customer lists cannot be capitalised (Section 18.8C).
Impairment review only to be carried out if indicators of impairment exist as detailed in Section 27.
More intangibles to be recognised on business combinations.
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.
What do accountants need to do?
Be aware of the differences between Section 18 and old GAAP.
Review the client portfolio for companies that hold intangibles and incur development expenditure. Advise companies of the exemptions under Section 35 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 i.e. 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.
Review the likely impact of the need to restate on transition, software from tangible fixed assets to intangible fixed assets.
For clients who have had acquisitions since the date of transition, companies will need to review whether additional intangibles need to be recognised and goodwill reduced based on the new guidance.
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.
Advise clients of the choice in accounting policy to capitalise development costs or expense these. However, need to consider whether capitalisation will affect the entity’s ability to claim audit exemption and the ability to qualify as a small entity as this may result in the gross assets being pushed over the small entity threshold.
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 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.
Quantify the impact of the need to restate, on transition, software from tangible fixed assets to intangible fixed assets.
For business combinations since the date of transition companies will need to review whether additional intangibles need to be recognised and goodwill reduced accordingly.
Consider whether work-loads can be reduced given the new requirement for impairment reviews to only be performed once impairment indicators exist.
Where intangible assets qualify for capital allowances there may be opportunity to get accelerated tax deductions as a result of the increased amortisation charge.
Assess whether it is in the best interest of the entity to adopt a policy of capitalisation or expensing of development expenditure. As part of this decision assess whether this impacts the ability to claim the exemptions available to small companies under the Companies Act.