This article focuses on the main differences between the old and the new UK GAAP regime, concerning intangible assets.
Detailed taxation adjustments relevant on transition and arising out of the reporting differences are outside of the scope of this article.
Definition of intangible assetFRS 102 definition of an intangible asset is now more in line with IFRS and expands on what is defined as an intangible asset in comparison to the old UK GAAP.
In the old UK GAAP (FRS 10) intangible assets are defined as ‘Non-financial fixed assets that do not have physical substance but are identifiable and are controlled by the entity through custody or legal rights’.’ For the purposes of the old GAAP, ‘identifiable’ meant ‘being able to be disposed of or transferred separately, without also disposing the business they were part of’. In practice this meant that some intangible assets may not have been recognised, as disposing of them would have meant that the business would have ceased to exist unless it was sold too. In many of these circumstances the value of an intangible asset was subsumed in the value of goodwill.
Under FRS 102 ‘identifiable’ has a much broader sense, and means ‘separable’ or ‘arising from legal or contractual rights’. Consequently, either on transition (where the exemption to retain previous GAAP figures is not used) or on subsequent business combinations, more different categories of intangible assets are likely to be recognised under FRS 102 than would have been recognised under old UK GAAP.
Recognition of intangible assets on transitionFRS 102 offers several options to establish the value at which intangible assets already recognised at the point of transition to FRS 102 can be brought into the new reporting regime. An intangible asset can be shown at the original cost, at fair value as deemed cost or at the most recent revaluation amount before transition, if such a revaluation is possible.
In practice, most intangible assets are most likely to be shown at the original cost, unless a reference to an active market is possible to establish a revalued amount. While it is generally accepted that the existence of an active market in relation to intangibles is rare, some examples of intangibles which could meet the revaluation recognition criteria are licences, for example taxi licences, or quotas.
Goodwill at the point of transition is not to be restated, unless an impairment is required: FRS 102.35.10 (a) Business combinations, including group reconstructions, says that ‘intangible assets subsumed within goodwill shall not be separately recognised’; and ‘no adjustment shall be made to the carrying value of goodwill’.
Useful life of goodwill and other intangible assetsFRS 10 stated that goodwill and intangibles should be amortised over their UEL, not exceeding 20 years, although this is rebuttable. Indefinite life was permitted.
FRS 102 does not allow indefinite life. Intangibles and goodwill are presumed to have a finite life, which can either be reliably estimated based on evidence, or restricted to 10 years.
Software costsUnder FRS 10, software costs which met the definition criteria of an asset were capitalised exclusively as a tangible rather than intangible fixed asset.
FRS 102 does not specify whether capitalised software costs should be presented as tangible or intangible assets. The decision is likely to be based on commercial reality – if software is primarily used to enable an item of IT hardware be used for its intended purpose, it is likely to be considered as a tangible asset. On the other hand, if the software constitutes an asset in its own right, it is likely to be treated as an intangible asset.
Although the classification does not make a significant difference except from a presentation perspective, it is likely to have significant tax impacts:
If software classifies as a tangible fixed asset, it would normally obtain tax relief through the capital allowances regime (unless there is an argument to treat the expenditure as revenue for tax purposes). This treatment allows to relieve the cost of the software upfront as part of the AIA. If AIA is not available, the reducing balance 18% written down allowance would apply.
If software is treated as an intangible fixed asset, the tax relief will be spread at the amortisation rate over the life of the asset in line with the accounting policy.
Development costsThere are no significant differences between the research and development distinction and relevant accounting treatment prescribed by the old and the new UK GAAP. Whilst strict criteria to write off research costs applies in the initial stages of development projects, in case of established development projects of definitive feasibility, FRS 102 offers a choice to either write costs off as they are incurred, or capitalise and amortise them over the useful life of the asset.
This treatment is markedly different from that of IFRS - IAS 38 states that, when the relevant strict asset recognition criteria are met, development costs must be capitalised.
Detailed taxation adjustments relevant on transition and arising out of the reporting differences are outside of the scope of this article.
Definition of intangible assetFRS 102 definition of an intangible asset is now more in line with IFRS and expands on what is defined as an intangible asset in comparison to the old UK GAAP.
In the old UK GAAP (FRS 10) intangible assets are defined as ‘Non-financial fixed assets that do not have physical substance but are identifiable and are controlled by the entity through custody or legal rights’.’ For the purposes of the old GAAP, ‘identifiable’ meant ‘being able to be disposed of or transferred separately, without also disposing the business they were part of’. In practice this meant that some intangible assets may not have been recognised, as disposing of them would have meant that the business would have ceased to exist unless it was sold too. In many of these circumstances the value of an intangible asset was subsumed in the value of goodwill.
Under FRS 102 ‘identifiable’ has a much broader sense, and means ‘separable’ or ‘arising from legal or contractual rights’. Consequently, either on transition (where the exemption to retain previous GAAP figures is not used) or on subsequent business combinations, more different categories of intangible assets are likely to be recognised under FRS 102 than would have been recognised under old UK GAAP.
Recognition of intangible assets on transitionFRS 102 offers several options to establish the value at which intangible assets already recognised at the point of transition to FRS 102 can be brought into the new reporting regime. An intangible asset can be shown at the original cost, at fair value as deemed cost or at the most recent revaluation amount before transition, if such a revaluation is possible.
In practice, most intangible assets are most likely to be shown at the original cost, unless a reference to an active market is possible to establish a revalued amount. While it is generally accepted that the existence of an active market in relation to intangibles is rare, some examples of intangibles which could meet the revaluation recognition criteria are licences, for example taxi licences, or quotas.
Goodwill at the point of transition is not to be restated, unless an impairment is required: FRS 102.35.10 (a) Business combinations, including group reconstructions, says that ‘intangible assets subsumed within goodwill shall not be separately recognised’; and ‘no adjustment shall be made to the carrying value of goodwill’.
Useful life of goodwill and other intangible assetsFRS 10 stated that goodwill and intangibles should be amortised over their UEL, not exceeding 20 years, although this is rebuttable. Indefinite life was permitted.
FRS 102 does not allow indefinite life. Intangibles and goodwill are presumed to have a finite life, which can either be reliably estimated based on evidence, or restricted to 10 years.
Software costsUnder FRS 10, software costs which met the definition criteria of an asset were capitalised exclusively as a tangible rather than intangible fixed asset.
FRS 102 does not specify whether capitalised software costs should be presented as tangible or intangible assets. The decision is likely to be based on commercial reality – if software is primarily used to enable an item of IT hardware be used for its intended purpose, it is likely to be considered as a tangible asset. On the other hand, if the software constitutes an asset in its own right, it is likely to be treated as an intangible asset.
Although the classification does not make a significant difference except from a presentation perspective, it is likely to have significant tax impacts:
If software classifies as a tangible fixed asset, it would normally obtain tax relief through the capital allowances regime (unless there is an argument to treat the expenditure as revenue for tax purposes). This treatment allows to relieve the cost of the software upfront as part of the AIA. If AIA is not available, the reducing balance 18% written down allowance would apply.
If software is treated as an intangible fixed asset, the tax relief will be spread at the amortisation rate over the life of the asset in line with the accounting policy.
Development costsThere are no significant differences between the research and development distinction and relevant accounting treatment prescribed by the old and the new UK GAAP. Whilst strict criteria to write off research costs applies in the initial stages of development projects, in case of established development projects of definitive feasibility, FRS 102 offers a choice to either write costs off as they are incurred, or capitalise and amortise them over the useful life of the asset.
This treatment is markedly different from that of IFRS - IAS 38 states that, when the relevant strict asset recognition criteria are met, development costs must be capitalised.
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