Category: UK GAAP

Intangible assets are non-physical assets that are identifiable and have a useful life that extends beyond one year. Examples of intangible assets include trademarks, copyrights, patents, and customer relationships. FRS 102, the financial reporting standard that applies in the United Kingdom, includes detailed guidance on the accounting treatment of intangible assets.

According to FRS 102, intangible assets are initially recognized in the financial statements at their cost, which is the amount paid to acquire the assets, plus any directly attributable costs of bringing the assets to their present location and condition. The cost of an intangible asset may include various components, such as the purchase price, any legal or professional fees, and any directly attributable costs of development or registration.

Once assets are recognized, FRS 102 requires entities to apply the amortization method to allocate their cost over their useful lives. Amortization is the systematic allocation of the amortizable amount of an intangible asset over its useful life. The useful life of an intangible asset is the period over which it is expected to generate economic benefits for the entity. The amortizable amount of an intangible asset is its initial cost, less its residual value.

The residual value of an intangible asset is the estimated amount that the entity expects to receive from the sale or disposal of the asset at the end of its useful life. FRS 102 requires entities to review the assumptions used to determine the useful lives and residual values of their intangible assets on an annual basis, and to make any necessary adjustments. For example, if an entity expects a patent to have a useful life of 10 years, but it is only granted protection for 8 years, the entity would need to adjust the useful life and residual value of the asset.

The maximum permitted useful life of intangibles is generally 10 years.

FRS 102 also includes guidance on the disclosure of intangible assets in the financial statements. Entities are required to disclose the carrying amount of their intangible assets, as well as the methods and assumptions used in determining their useful lives and residual values. They are also required to disclose any impairments of their intangible assets, and any changes in the methods or assumptions used to determine their useful lives and residual values.

In addition, FRS 102 includes specific guidance on the accounting treatment of internally generated intangible assets. These are intangible assets that are developed or acquired by an entity through its own efforts, rather than through a purchase or acquisition. Examples of internally generated intangible assets include software developed in-house, and customer lists developed through marketing activities.

FRS 102 requires entities to recognize internally generated intangible assets only if they meet the same recognition criteria as other intangible assets. This means that the intangible asset must be expected to provide future economic benefits, must be controlled by the entity, and must have a cost that can be measured reliably. In addition, the entity must be able to demonstrate that it has incurred eligible development costs, and that it has a plan to complete the development and use the intangible asset.

The key criteria for recognising internal development as an asset if an entity can demonstrate all of the following:
(a) The technical feasibility of completing the intangible asset so that it will be available for use or sale.
(b) Its intention to complete the intangible asset and use or sell it.
(c) Its ability to use or sell the intangible asset.
(d) How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
(e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
(f) Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Property, plant, and equipment (PP&E) are long-term assets that are used in the production or supply of goods and services. They include a wide range of assets, such as land and buildings, machinery and equipment, and vehicles and other vehicles. FRS 102, the financial reporting standard that applies in the United Kingdom, includes detailed guidance on the accounting treatment of PP&E.

According to FRS 102, PP&E are initially recognized in the financial statements at their historical cost, which is the amount paid to acquire the assets, plus any directly attributable costs of bringing the assets to their present location and condition. Historical cost is generally determined using the cost model, which values assets at their original purchase price, less any accumulated depreciation and impairment losses.

The cost of an asset may include various components, such as the purchase price, any import duties or taxes, and any directly attributable costs of installation or modification. FRS 102 requires entities to recognize any directly attributable costs as part of the initial cost of the assets. For example, if a company purchases a new machine and incurs costs to install it, these costs would be recognized as part of the initial cost of the machine.

Once assets are recognized, FRS 102 requires entities to apply the depreciation method to allocate their cost over their useful lives. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The useful life of an asset is the period over which it is expected to generate economic benefits for the entity. The depreciable amount of an asset is its initial cost, less its residual value.

The residual value of an asset is the estimated amount that the entity expects to receive from the sale or disposal of the asset at the end of its useful life. FRS 102 requires entities to review the assumptions used to determine the useful lives and residual values of their PP&E on an annual basis, and to make any necessary adjustments. For example, if an entity expects a machine to have a useful life of 10 years, but it becomes obsolete after 8 years, the entity would need to adjust the useful life and residual value of the asset.

FRS 102 also includes guidance on the disclosure of PP&E in the financial statements. Entities are required to disclose the carrying amount of their PP&E, as well as the methods and assumptions used in determining their useful lives and residual values. They are also required to disclose any impairments of their PP&E, and any changes in the methods or assumptions used to determine their useful lives and residual values.

Overall, the guidance on PP&E in FRS 102 provides a comprehensive and transparent framework for the recognition, measurement, and disclosure of these assets in the financial statements. It helps to ensure that the financial statements of entities accurately reflect the value of their PP&E, and provide useful information to users of the financial statements.

Inventory is a term used in accounting to refer to the raw materials, unfinished goods, and finished goods that a business holds for sale or use in the production of other goods. FRS 102, the financial reporting standard that applies in the United Kingdom, includes guidance on the accounting treatment of inventory.

According to FRS 102, inventory is measured at the lower of cost and net realizable value. Cost is defined as the expenditure incurred in bringing the inventory to its present location and condition, and includes such items as direct materials, direct labor, and overhead. Net realizable value is the estimated selling price of the inventory, less the estimated costs of completion and the estimated costs necessary to make the sale.

Inventory is recorded in the balance sheet at the lower of cost and net realizable value. If inventory is valued at cost, it is typically determined using the weighted average cost method, which takes into account the quantities and costs of all units of inventory on hand. If inventory is valued at net realizable value, any excess of cost over net realizable value is recognized as a loss in the income statement.

FRS 102 also includes guidance on the disclosure of inventory in the financial statements. Entities are required to disclose the carrying amount of inventory, as well as the methods and assumptions used in valuing inventory. They are also required to disclose any write-downs of inventory, and any changes in the methods or assumptions used to value inventory.

Overall, the guidance on inventory in FRS 102 provides a consistent and transparent framework for the measurement and disclosure of inventory in the financial statements. It helps to ensure that the financial statements of entities accurately reflect the value of the inventory they hold.