3.3.1.A Recognition of separately acquired intangible assets

Separately acquired intangible rights will normally be recognised as assets, provided that they meet the definition of an intangible asset in Section 18.

The criteria for recognising an intangible asset are set out at 3.3 above. The probability recognition criterion in (a) at 3.3 above is always considered satisfied for intangible assets that are separately acquired. [FRS 102.18.7]. It is assumed that the price paid to acquire an intangible asset separately usually reflects expectations about the probability that the future economic benefits embodied in it will flow to the entity. In other words, the entity always expects there to be a flow of economic benefits, even if it is uncertain about the timing or amount. In addition, the cost of a separately acquired intangible asset can usually be measured reliably, as required in recognition criterion (b) at 3.3 above, especially in the case of a monetary purchase consideration.

However, not all external costs incurred to secure intangible rights automatically qualify for capitalisation as separately acquired assets, because they do not meet the definition of an intangible asset in the first place. An entity that subcontracts the development of intangible assets (e.g. development-and-supply contracts or R&D contracts) to other parties (its suppliers) must exercise judgement in determining whether it is acquiring an intangible asset or whether it is obtaining goods and services that are being used in the development of an intangible asset by the entity itself. For example, if the entity pays a supplier upfront or by milestone payments during the course of a project, it will not necessarily recognise an intangible asset on the basis of those payments. Only those costs that are incurred after it becomes probable that economic benefits are expected to flow to the entity will be part of the cost of an intangible asset. If a supplier is working on an internal project for the entity, costs can only be capitalised after the criteria have been met for recognising an internally developed intangible asset (see 3.3.3 below).

In determining whether a supplier is providing services to develop an internally generated intangible asset, it can be useful to consider the terms of the supply agreement, in particular whether the supplier is bearing a significant proportion of the risks associated with a failure of the project. For example, if the supplier is always compensated under a development-and-supply contract for development services and tool costs irrespective of the project's outcome, the entity on whose behalf the development is undertaken should account for those activities as its own.

3.3.1.B Initial measurement of separately acquired intangible assets

The cost of a separately acquired intangible asset comprises:

1. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and
2. any directly attributable cost of preparing the asset for its intended use. [FRS 102.18.10].

Section 18 does not elaborate on what costs may be directly attributable to preparing a separately acquired intangible asset for its intended use. Examples may include:

• costs of employee benefits arising directly from bringing the asset to its working condition;
• professional fees arising directly from bringing the asset to its working condition; and
• costs of testing whether the asset is functioning properly.

Capitalisation of expenditure should cease when the asset is in the condition necessary for it to be capable of operating in the manner intended by management. This may well be before the date on which it is brought into use.

3.3.2.A Recognition of intangible assets acquired as part of a business combination

The FRC modified the criteria for recognising intangible assets acquired in a business combination following the Triennial review 2017. These changes are mandatory for accounting periods beginning on or after 1 January 2019, with early adoption allowed provided that all of the amendments to FRS 102 are applied at the same time (with exceptions for certain amendments relating to financial instruments and income tax) and that this fact is disclosed. [FRS 102.1.18]. These changes are applied prospectively, i.e. without restating comparative information, and therefore an entity should not subsume intangible assets that previously have been separately recognised within goodwill. [FRS 102.1.19].

Intangible assets that are acquired in a business combination must be recognised separately from goodwill when all of the following three conditions are met:

1. the recognition criteria in paragraph 4 of Section 18 are met (see 3.3 above);
2. the intangible asset arises from contractual or other legal rights; and
3. the intangible asset is separable (i.e. capable of being separated or divided from the entity and sold, transferred, licenced, rented or exchanged either individually or together with a related contract, asset or liability). [FRS 102.18.8].

In addition, an entity can choose to recognise intangible assets separately from goodwill for which the recognition criteria in paragraph 4 of Section 18 are satisfied and only one of condition (b) or (c) above is met. [FRS 102.18.8].

Where an entity chooses to recognise such additional intangible assets, this policy must be applied to all intangible assets in the same class (i.e. having a similar nature, function or use in the business), and must be applied consistently to all business combinations. Section 18 adds that licences are an example of a category of intangible asset that may be treated as a separate class, however, further subdivision may be appropriate, for example, where different types of licences have different functions within the business. [FRS 102.18.8]. When this accounting policy choice is adopted, the acquirer is required to disclose the nature of those additional intangible assets and to explain why they have been separated from goodwill. [FRS 102.18.28A].

The previous version of Section 18 defined intangible assets as separable or arising from contractual or other legal rights, with the only restriction being to prohibit the recognition of intangible assets that are acquired in a business combination and arise from legal or other contractual rights where there is no history or evidence of exchange transactions for the same or similar assets, and otherwise estimating fair value would be dependent on immeasurable variables. By requiring the recognition in a business combination of intangible assets that meet the general recognition criteria and are both separable and arising from contractual or other legal rights, the amended version of the Standard requires fewer intangible assets to be recognised separately from goodwill. However, as noted above, these new requirements must be applied prospectively (i.e. an entity should not restate comparative information), and therefore an entity should not subsume intangible assets that previously have been separately recognised within goodwill. [FRS 102.1.19].

It follows that where an entity chooses to adopt a policy of recognising additional intangible assets separately from goodwill (where the recognition criteria in paragraph 4 of Section 18 are satisfied and only one of conditions (b) or (c) above is met [FRS 102.18.8]), comparatives are not restated to separate from goodwill those intangible assets arising from legal or other contractual rights that had not been recognised due to the restriction in the previous version of the Standard. [FRS 102.1.19].

If an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value at the acquisition date. [FRS 102.18.11]. As the fair value of an intangible asset should reflect expectations about the probability that the future economic benefits embodied in it will flow to the entity, the probability criterion is always assumed to be satisfied for intangible assets acquired as part of a business combination. In other words, the existence of a fair value means that an inflow of economic benefits is considered to be probable, in spite of any uncertainties about timing or amount.

In making its amendments to Section 18, the FRC considered requests for further guidance on which intangible assets are expected to meet the criteria for separate recognition in a business combination. The analysis of technical issues in Part B of the Basis for Conclusions provides examples of intangible assets that would normally satisfy all three criteria for recognition noted above. These include licences, copyrights, trademarks, internet domain names, patented technology and legally protected trade secrets. Examples of intangible assets that would not normally satisfy all three criteria include customer lists, customer relationships and unprotected trade secrets (such as recipes or formulae), as no contractual or legal right exists that would give rise to expected future economic benefits. [FRS 102.BC.B18.10].

The separability criterion of Section 18 requires an acquired intangible asset to be capable of being separated or divided from the acquiree. [FRS 102.18.8(c)]. This is regardless of the intentions of the acquirer. An intangible asset that is not individually separable from the acquiree or combined entity can still be recognised separately from goodwill if it could be separable in combination with a related contract, identifiable asset or liability. [FRS 102.18.8(c)]. For example an acquiree owns a registered trademark and documented but unpatented technical expertise used to manufacture the trademarked product. The entity could not transfer ownership of the trademark without everything else necessary for the new owner to produce an identical product or service. Because the unpatented technical expertise must be transferred if the related trademark is sold, it is separable. In this example, the asset is separable but not contractual, such that the unpatented technical expertise would only be recognised separately from goodwill under FRS 102 where the acquirer applies a policy of recognising intangible assets separately from goodwill for which the recognition criteria in paragraph 4 of Section 18 are satisfied and only one of the conditions (b) or (c) above are met.

The process of identifying intangible assets in a business combination might involve, for example:

• determining whether the entity has chosen to recognise additional intangible assets, or to restrict recognition only to those that meet all three recognition criteria noted above;
• reviewing the list of items that the FRC believes would usually meet the recognition criteria for an intangible asset referred to above;
• examining documents such as those related to the acquisition, other internal documents produced by the entity, public filings, press releases, analysts' reports, and other externally available documents; and
• comparing the acquired business to similar businesses and their intangible assets.

Intangible assets differ considerably between industries and between individual entities. Therefore, considerable expertise and careful judgement is required in determining whether there are intangible assets that need to be recognised and valued separately.

3.3.2.B Initial measurement of intangible assets acquired as part of a business combination

The cost of an intangible asset acquired in a business combination is its fair value at the acquisition date. [FRS 102.18.11]. Section 18 provides no specific guidance on how to determine the fair value of intangible assets acquired in a business combination. Therefore the guidance in the Appendix to Section 2 – Concepts and Pervasive Principles – should be used. [FRS 102 Appendix I]. The Appendix to Section 2 requires fair value to be determined using the following methodology:

1. the best evidence of fair value is a quoted price for an identical asset (or similar asset) in an active market. This is usually the current bid price.
2. when quoted prices are unavailable, the price in a binding sale agreement or a recent transaction for an identical asset (or similar asset) in an arm's length transaction between knowledgeable, willing parties provides evidence of fair value. However, this price may not be a good estimate of fair value if there has been a significant change in economic circumstances or a significant period of time between the date of the binding sale agreement or the transaction, and the measurement date. If the entity can demonstrate that the last transaction price is not a good estimate of fair value (e.g. because it reflects the amount than an entity would receive or pay in a forced transaction, involuntary liquidation or distress sale), that price is adjusted.
3. if the market for the asset is not active and any binding sale agreements or recent transactions for an identical asset (or similar asset) on their own are not a good estimate of fair value, an entity estimates the fair value by using another valuation technique. The objective of using another valuation technique is to estimate what the transaction price would have been on the measurement date in an arm's length exchange motivated by normal business considerations. [FRS 102.2A.1].

Some intangible assets may be traded in an active market, for example certain licenses, such as taxi licenses. However, the unique nature of many intangible assets means that they are unlikely to have a quoted market price. Similarly, there are unlikely to be recent transactions in identical assets. Therefore fair value will most frequently be determined using valuation techniques. The objective of using a valuation technique is to estimate what the transaction price would have been on the measurement date in an arm's length exchange motivated by normal business considerations. The valuation technique used should make maximum use of market inputs and rely as little as possible on entity-determined inputs. [FRS 102.2A.3]. If there is a valuation technique commonly used by market participants to price the asset and that has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the entity should use that technique. [FRS 102.2A.2].

In practice there are three broad approaches to valuing intangible assets:

1. the market approach, which determines fair value based on observable market prices and comparable market transactions;
2. the cost approach, the premise of which is that an investor would pay no more for an intangible asset than the cost to recreate it; and
3. the income approach, which involves identifying the expected cash flows or economic benefits to be derived from the ownership of the particular intangible asset.

The recognition and initial measurement requirements for intangible assets acquired in a business combination are discussed further in Chapter 17 at 6.3.

3.3.3.A Research

Section 18 gives the following examples of research activities: [FRS 102.18.8G]

1. activities aimed at obtaining new knowledge;
2. the search for, evaluation and final selection of, applications of research findings and other knowledge;
3. the search for alternatives for materials, devices, products, processes, systems or services; and
4. the formulation, design, evaluation and final selection of possible alternatives for new or improved material, devices, projects, processes, systems or services.

An entity cannot recognise an intangible asset arising from research or from the research phase of an internal project. Instead, any expenditure on research or the research phase of an internal project should be expensed as incurred. [FRS 102.18.8E]. In the research phase of an internal project the entity cannot demonstrate that there is an intangible asset that will generate probable future economic benefits. [FRS 102.18.8F].

If an entity cannot distinguish the research phase from the development phase, it should treat the expenditure on that project as if it were incurred in the research phase only and recognise an expense accordingly. [FRS 102.18.8B].

3.3.3.B Development

Section 18 gives the following examples of development activities: [FRS 102.18.8J]

1. the design, construction and testing of pre-production or pre-use prototypes and models;
2. the design of tools, jigs, moulds and dies involving new technology;
3. the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and
4. the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.

In the development phase of an internal project, an entity can, in some instances, identify an intangible asset and demonstrate that the asset will generate probable future economic benefits. This is because the development phase of a project is further advanced than the research phase. [FRS 102.18.8I].

Entities have an accounting policy choice whether or not to capitalise qualifying development expenditure. Entities may either recognise an internally generated intangible asset arising from the development phase of a project (provided that specific recognition criteria are met, see below) or recognise the expenditure in profit or loss as incurred. Where an entity adopts a policy of capitalising expenditure in the development phase, the policy should be applied consistently to all expenditure that meets the recognition criteria set out in Section 18. Expenditure that does not meet the conditions for capitalisation must be expensed as incurred. [FRS 102.18.8K].

An intangible asset arising from development may be recognised if, and only if, the entity can demonstrate all of the following: [FRS 102.18.8H]

1. the technical feasibility of completing the intangible asset so that it will be available for use or sale;
2. its intention to complete the intangible asset and use or sell it;
3. its ability to use or sell the intangible asset;
4. 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;
5. the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
6. its ability to measure reliably the expenditure attributable to the intangible asset during its development.

It may be challenging to demonstrate each of the above conditions because:

• condition (b) relies on management intent; and
• conditions (c), (e) and (f) are entity-specific, i.e. whether development expenditure meets any of these conditions depends both on the nature of the development activity itself and the financial position of the entity.

Evidence may be available in the form of:

• a business plan showing the technical, financial and other resources needed and the entity's ability to secure those resources;
• a lender's indication of its willingness to fund the plan confirming the availability of external finance; and
• detailed project information demonstrating that an entity's costing systems can measure reliably the cost of generating an intangible asset internally, such as salary and other expenditure incurred in securing copyrights or licences or developing computer software.

In any case, an entity should maintain books and records in sufficient detail that allow it to prove whether it meets the conditions set out in (a) to (f) above. Certain types of product (e.g. pharmaceuticals, aircraft and electrical equipment) require regulatory approval before they can be sold. Regulatory approval is not one of the criteria for recognition and therefore entities are not prohibited from capitalising development costs in advance of approval. However, in some industries regulatory approval is vital to commercial success and its absence indicates significant uncertainty around the possible future economic benefits. This is the case in the pharmaceuticals industry, where it is rarely possible to determine whether a new drug will secure regulatory approval until it is actually granted. Accordingly it is common practice in this industry for costs to be expensed until such approval is obtained.

3.3.3.C Measurement of internally generated intangible assets

The cost of an internally generated intangible asset is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria in Section 18 set out at 3.3 above and the conditions for capitalising development costs set out at 3.3.3.B above. [FRS 102.18.10A].

Costs incurred before these criteria are met are expensed and cannot be reinstated retrospectively. [FRS 102.18.17].

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Examples of directly attributable costs are: [FRS 102.18.10B]

1. costs of materials and services used or consumed in generating the intangible asset;
2. costs of employee benefits arising from the generation of the intangible asset;
3. fees to register a legal right; and
4. amortisation of patents and licences that are used to generate the intangible asset.

Borrowing costs eligible for capitalisation under Section 25 – Borrowing Costs – may be recognised as an element of the cost of an internally generated intangible asset, provided the entity adopts an accounting policy of capitalising eligible borrowing costs. See Chapter 22.

Indirect costs and general overheads, even if they can be allocated on a reasonable and consistent basis to the development project, should not be recognised as part of the cost of any intangible asset.

3.3.3.D Expenditure that does not qualify for recognition as an internally generated intangible asset

Expenditure on the following items must be recognised as an expense and should not be recognised as intangible assets: [FRS 102.18.8C]

1. internally generated brands, logos, publishing titles, customer lists and items similar in substance;
2. start-up activities (i.e. start-up costs), which include establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or business (i.e. pre-opening costs) and expenditure for starting new operations or launching new products or processes (i.e. pre-operating costs);
3. training activities;
4. advertising and promotional activities (unless it meets the definition of inventories held for distribution at no or nominal consideration. See 3.3.3.E below);
5. relocating or reorganising part or all of an entity; and
6. internally generated goodwill.

For these purposes no distinction is made between costs that are incurred directly by the entity and those that relate to services provided by third parties. However, Section 18 does not prevent an entity from recording a prepayment as an asset if it pays for the delivery of goods before obtaining a right to access those goods. Similarly, a prepayment can be recognised when payment is made before services are received. [FRS 102.18.8D].

3.3.3.E Advertising and promotional expenditure

As set out at 3.3.3.D above, FRS 102 generally requires expenditure on advertising and promotional activities to be recognised as an expense as incurred. However, Section 18 gives an exception for advertising and promotional activities that meet the definition of inventories held for distribution at no or nominal consideration. [FRS 102.18.8C(d)].

Items covered by this definition may include stocks of brochures and other marketing material. Advertising and promotional expenditure that meets the definition of inventories held for distribution at no or nominal consideration should be included within inventories. This is discussed further in Chapter 11 at 3.3.11.

3.4.2.A Revaluation is allowed only if there is an active market

An entity can only elect to apply the revaluation model if the fair value can be determined by reference to an active market for the intangible asset. [FRS 102.18.18B]. An active market is a market in which all the following conditions exist: [FRS 102 Appendix I]

1. the items traded in the market are homogeneous;
2. willing buyers and sellers can normally be found at any time; and
3. prices are available to the public.

Few intangible assets will be eligible for revaluation as such an active market would be uncommon. By their very nature most intangible assets are unique or entity-specific. Intangible assets such as brands, newspaper mastheads, music and film publishing rights, patents or trademarks are ineligible for revaluation because each such asset is unique. The existence of a previous sale and purchase transaction is not sufficient evidence for the market to be regarded as active because of the requirement in the definition for a sufficient frequency and volume of transactions to allow the provision of ongoing pricing information. In addition, if prices are not available to the public, this is evidence that an active market does not exist.

If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for that particular asset, the asset should be carried at its cost less any accumulated amortisation and impairment losses. [FRS 102.18.18].

If the fair value of a previously revalued intangible asset can no longer be determined by reference to an active market, the valuation is ‘frozen’ at the date of the last revaluation by reference to the active market. The carrying amount of the asset is reduced thereafter by subsequent accumulated amortisation and any subsequent accumulated impairment losses. [FRS 102.18.18E].

3.4.2.B Frequency of revaluations

If there is an active market, Section 18 requires revaluation to be performed ‘with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period’. [FRS 102.18.18D]. Section 18 lets entities judge for themselves the frequency of revaluations depending on the volatility of the fair values of the underlying intangible assets. Significant and volatile movements in quoted prices may necessitate annual revaluation, whereas a less frequent update would be required for intangibles whose price is subject only to insignificant movements. Nevertheless, since an entity can only revalue assets for which a price is quoted in an active market, there should be no impediment to updating that valuation at each reporting date. As noted at 3.4.2 above, where the revaluation model is applied, assets in the same class should be revalued at the same time.

3.4.2.C Accounting for gains and losses on revaluations

Increases in an intangible asset's carrying amount as a result of a revaluation should be recognised in other comprehensive income and accumulated in equity, except to the extent that the revaluation reverses previous revaluation decreases of the same asset that were recognised in profit or loss. In this case, the increases should be recognised in profit or loss. [FRS 102.18.18G]. Conversely, decreases in an intangible asset's carrying amount as a result of a revaluation should be recognised in other comprehensive income to the extent of any previous revaluation increases of the same asset that are accumulated in equity. Any excess revaluation loss should be recognised in profit or loss. [FRS 102.18.18H].

For UK entities, the Regulations require that revaluation surpluses, net of provisions for amortisation or impairment, must be shown in the balance sheet within a separate reserve (the revaluation reserve) and not within retained earnings. [1 Sch 35].

3.4.3.A Assessing the useful life of an intangible asset

The useful life of an intangible asset is: [FRS 102 Appendix I]

1. the period over which an asset is expected to be available for use by an entity; or
2. the number of production or similar units expected to be obtained from the asset by an entity.

Thus, if appropriate, the useful life of an intangible asset should be expressed as a number of production or similar units rather than a period of time.

For the purposes of FRS 102, all intangible assets including those under the revaluation model, should be considered to have a finite useful life. [FRS 102.18.19].

Where an intangible asset arises from contractual or other legal rights, its useful life is the shorter of:

• the period of the contractual or other legal rights; and
• the period over which the entity expects to use the asset. [FRS 102.18.19].

If the contractual or other legal rights can be renewed, the useful life of the intangible asset should include the renewal period only if there is evidence to support renewal by the entity without significant cost. [FRS 102.18.19]. An entity needs to exercise judgement in assessing what it regards as a significant cost. The following factors may indicate that an entity is able to renew the contractual or other legal rights without significant cost:

1. there is evidence, possibly based on experience, that the contractual or other legal rights will be renewed. If renewal is contingent upon the consent of a third party, this includes evidence that the third party will give its consent;
2. there is evidence that any conditions necessary to obtain renewal will be satisfied; and
3. the cost to the entity of renewal is not significant when compared with the future economic benefits expected to flow to the entity from renewal.

If there is no evidence to support renewal of the contractual or legal rights by the entity without significant cost, then the useful life of the intangible asset must not include the renewal period. In this case, the original asset's useful life ends at the contractual renewal date. If the rights are then renewed at the renewal date, we would expect the renewal cost to be treated as the cost to acquire a new intangible asset.

In our view, a number of factors may be considered in estimating the useful life of an intangible asset, including:

1. the expected usage of the asset by the entity and whether the asset could be managed efficiently by another management team;
2. typical product life cycles for the asset and public information on estimates of useful lives of similar assets that are used in a similar way;
3. technical, technological, commercial or other types of obsolescence;
4. the stability of the industry in which the asset operates and changes in the market demand for the products or services output from the asset;
5. expected actions by competitors or potential competitors;
6. the level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entity's ability and intention to reach such a level;
7. the period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases; and
8. whether the useful life of the asset is dependent on the useful life of other assets of the entity.

If an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life should not exceed ten years. [FRS 102.18.20]. However, this should not be considered an automatic default. Entities should not underestimate the useful life of an intangible asset on the basis of this requirement. Similarly, it should not be used to justify a useful life of ten years for an intangible asset for which a shorter useful life may be appropriate. Section 18 explicitly states that an entity is only expected to be unable to make a reliable estimate of the useful life of an intangible asset ‘in exceptional cases’. [FRS 102.18.20].

3.4.3.B Amortisation method

An entity should choose an amortisation method that reflects the pattern in which it expects to consume the asset's future economic benefits. If the entity cannot determine that pattern reliably, it should use the straight-line method. [FRS 102.18.22]. A variety of amortisation methods may be used to depreciate an intangible asset on a systematic basis over its useful life. The straight-line method is most commonly seen in practice. The unit of production method or reducing balance method are also sometimes seen. Whilst an amortisation method based on estimated total output (a unit of production method) may be appropriate, an amortisation method based on the pattern of expected revenues is not. This is because a revenue-based method reflects a pattern of generation of economic benefits from operating the business (of which the asset is a part), rather than the consumption of the economic benefits embodied in the asset itself. The difference is more obvious when unit prices are expected to increase over time.

Amortisation should begin when the intangible asset is available for use, i.e. when it is in the location and condition necessary for it to be usable in the manner intended by management. Therefore, even if an entity is not using the asset, it should still be amortised if it is available for use. Amortisation should cease when the asset is derecognised. (See 3.4.6 below). [FRS 102.18.22].

3.4.3.C Residual value

Section 18 requires entities to assume a residual value of zero for an intangible asset, unless there is a commitment by a third party to purchase the asset at the end of its useful life or there is an active market for the asset from which to determine its residual value and it is probable that such a market will exist at the end of the asset's useful life. [FRS 102.18.23].

Given the definition of ‘active market’ (see 3.4.2.A above) it seems highly unlikely that – in the absence of a commitment by a third party to buy the asset – an entity will ever be able to prove that the residual value of an intangible asset is other than zero.

3.4.3.D Amortisation of intangible assets with a residual value

The Note on Legal Requirements to FRS 102 provides guidance on the amortisation of intangible assets which have a residual value. When an intangible asset has a residual value, it is the depreciable amount that is amortised. [FRS 102 Appendix III.37A]. See 3.4.3 above. As noted at 3.4.3.C above, the FRC believes that it is uncommon for an intangible asset to have a residual value and FRS 102 requires an entity to assume that the residual value is zero unless there is a commitment by a third party to purchase the asset at the end of its useful life or there is an active market for the asset from which to determine its residual value and it is probable that such a market will exist at the end of the asset's useful life. [FRS 102.18.23].

However, in those cases where an intangible asset does have a residual value that is not zero, the amortisation of the depreciable amount of the asset over its useful economic life is a departure from the requirements of paragraph 22 of Schedule 1 to the Regulations (and its equivalents in Schedules 2 and 3 to the Regulations and to the LLP Regulations respectively) since the regulations require intangible assets to be written off over their useful economic lives. In those circumstances, the FRC states that entities must invoke a true and fair override and make the disclosures required by paragraph 10(2) of Schedule 1 to the Regulations for the use of a true and fair override. [FRS 102 Appendix III.37A].

3.4.3.E Review of amortisation period and amortisation method

Factors such as a change in how an intangible asset is used, technological advancement, or changes in market prices may indicate that the residual value or useful life of an intangible asset has changed since the most recent annual reporting date. If such indicators are present, management should review previous estimates and, if current expectations differ, amend the residual value, amortisation method or useful life to reflect current expectations. [FRS 102.18.24].

Changes in residual value, amortisation method or useful life should be accounted for prospectively as a change in accounting estimate in accordance with Section 10 of FRS 102. [FRS 102.18.24].

If the residual value of an intangible asset increases to an amount greater than the asset's carrying amount, the asset's amortisation charge would be zero until its residual value decreases to an amount below the asset's carrying amount.