TT236: FRS102 Intangible Assets

Patent Box Regime

Intangible fixed assets

Intangible fixed assets broadly divide into two categories – goodwill (i.e., the asset which arises from the acquisition of a business, measured as the excess of the amount paid over the measurable assets and liabilities being acquired, which represents the value which exists in the business above and beyond its balance sheet); and other intangible assets (such as patents, trademarks, etc.).

There are two major areas of significance arising from a transition to FRS102; these are the changes to the way in which intangible assets initially recognised and to their amortisation.

Initial recognition

Under FRS102, the criteria to recognise intangible assets acquired as part of the acquisition of a business have changed.

Such assets should be recognised if:

– It is probable that it will give rise to future economic benefits which will flow to the owner; and

– The fair value of the asset can be measured reliably.

Previously, assets acquired on the acquisition of a business could only be separately recognised if they were also capable of being disposed of / settled separately. The new definition is therefore substantially broader.

It should be noted that this change applies not only to intangibles, but to all assets of a business being acquired.

The effect of this is therefore likely to be that more of the assets of a business being acquired will need to be separately recognised in the acquirer’s group accounts. Previously, these amounts would have been accounted for as part of goodwill, and hence this change will result in a corresponding fall in the amount of goodwill recognised on acquisition.

Amortisation

Previously, UK companies were required to assess the useful life of intangible assets (including goodwill) and amortise them over this period. A presumption existed that this useful life could not exceed 20 years; however, it was possible to rebut this presumption, where it could be justified, and amortise over a longer period or not at all. (However, doing so also required annual impairment reviews to be carried out.)

Under FRS102, as previously, a reliable estimate of the useful life of intangible assets should still be made, and the assets amortised over this period. However, the following major changes have occurred:

– Intangible assets can no longer be treated as having an indefinite life (i.e. it is no longer permitted not to amortise);

– The rebuttable presumption of a maximum life of 20 years is removed;

– However, if it is not possible to make a reliable estimate of the asset’s useful life, it must be amortised over a period of no more than 10 years.

What does this mean in practical terms?

Where the useful life of an intangible asset has been reliably estimated (which is expected to be the case in the vast majority of cases), the transition will have no effect. Intangible assets will continue to be amortised over the same periods which had been originally assessed (whether or not this exceeds 10 years).

However, in the case of existing intangible assets for which no reliable estimate is possible which were previously being amortised over more than 10 years – or which were being treated as having an indefinite life – there may be much more amortisation in the accounts.

In common with other adjustments relating to FRS102, this begins from the “date of transition”. For example, for FRS102 accounts for the year to 31 December 2015, the transition date is 1 January 2014. This is to allow the new accounting standards to apply for the whole of the year ending on 31 December 2015, as well as the whole of the previous year (whose comparative results are also shown in those accounts).

In most cases, it is expected that intangible assets will already have had their useful life reliably estimated and will be being amortised accordingly; hence this change will have no effect.

If you have any concerns regarding how your business will be affected by the above, please contact your Barnes Roffe partner.

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