An intangible asset must meet the definition of an asset to be recorded on the balance sheet. The FRS 102 Glossary defines an ‘asset’ as follows: “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.” The word “own” and the notion of “ownership” are not mentioned in the definition. Instead, the term “control” is illustrated in the concept.
Two categories of assets – tangible and intangible – can be used to divide the assets. An identifiable non-financial asset without physical substance is described as an intangible asset in paragraph 18.2 of FRS 102. Goodwill, brand equity, intellectual property such as patents, research and development, and licencing are the most common types of intangible assets.
According to FRS 102:18.8, if each of the three requirements listed below is met, intangible assets acquired through a business combination will be recognised:
- Given that the asset’s cost or value can be accurately determined, and the recognition criteria are satisfied, it is likely that the entity will receive the anticipated future economic benefits attributable to the asset;
- The intangible asset is derived from contractual or other legal rights, and;
- It is separable if it can be sold, transferred, licenced, rented, or exchanged either separately or in combination with a related contract, asset or liability.
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Unless the item meets the definition of an intangible asset, there is a reasonable expectation of future economic benefits from the asset and the cost of the asset can be reliably measured, expenditure for an intangible item is recognised as an expense. Intangible assets are classified into two types: purchased and internally generated. Intangible assets purchased are treated in an accounting sense similarly to tangible assets, with the purchase price being capitalised. However, accounting for assets created internally needs more consideration.
Research and Development expenses are classified as internally generated intangible assets, and as such, they must meet certain criteria for recognition under both the UK and international standards. It is not possible to capitalise on research expenses, this is due to the entity’s inability to demonstrate the existence of an intangible asset that will most likely produce future economic benefits during the research phase of the project. As a result, all research expenses are written off in the profit and loss account as they are incurred.
If the following requirements are satisfied instead, it is possible to postpone the development expenditure and carry it forward as an intangible asset under SSAP 13: the project is technically feasible, commercially viable and has a clearly defined scope. It is also expected that its expected revenue will exceed its estimated cost and that it has the necessary resources to be completed. After development costs have been capitalised, the asset should be amortised throughout its finite life per the accruals concept. Amortisation cannot begin until commercial production has started. At the end of each accounting period, each development project must be reviewed to ensure that the recognition criteria are still met. If the criteria are no longer met, the previously capitalised costs must be immediately written off in the profit and loss statement.
In terms of amortisation, no intangible asset may have an indefinite useful life under FRS 102. When an intangible asset is created as a result of a contract or another legal right, the useful life of that asset cannot exceed the duration of those rights. However, it may be shorter if the entity intends to use the intangible asset for a shorter period. In exceptional circumstances, FRS 102 limits amortisation to ten years. Suppose management can provide evidence to support their estimate of an intangible asset’s useful life, which could reasonably have a lifespan of more than ten years. In that case, intangible assets may be amortised over that period.
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Camilla Formicola
