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.
