In this week's blog, we look at intangible assets which are becoming more and more prevalent in accounting due to the nature of the online world we are living in. 

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An intangible asset is an asset that is a non-monetary asset without physical substance that is identifiable by an entity, which is controlled and expected to generate future economic benefits for the company.

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An intangible asset is identifiable when it is separable from the company or arises from legal/contractual rights. Items that are separable such as licences, patents or brand names are categorised as intangible assets as they are acquired by an entity through rights from another entity. Intangible assets which arise from legal/contractual rights is when an entity is acquiring controlling shares in another company with many long-term contracts with major customers.  These contracts are categorised as intangible assets in the consolidated accounts as key assets acquired with the subsidiary.

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An intangible asset is a non-monetary which means it is difficult to determine the exact value of an asset without the judgements from the company. Bank accounts and long-term investments are not identified as intangible assets as they have fixed amounts to be received. These are the same with trade and loan receivables as they have fixed amounts, even though they do not have physical substance and will be accounted according to IFRS 9 Financial Instrument instead of IAS 38 Intangible Asset.

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An intangible asset doesn’t have any physical substance meaning the items cannot be touched and are often technology based. This includes brand names, patents, goodwill, capitalised development costs related to research and development and other similar assets where a company holds legal documents without having a physical item.

Recognition criteria

An intangible asset is initially recognised when it meets the definition of an asset which are:

1. It is probable that the expected future economic benefits will flow to the entity
2. Cost can be measured reliably

An intangible asset that is purchased through an acquisition will be recognised initially at cost, whereas an internally generated asset will only be recognised as an intangible asset if the cost can be measured reliably. This only applies to development costs that an entity incurred during the research and development phase to develop a new product line or production method that are capitalised if certain criteria are met. These criteria include:

1. Probable economic benefits flow to the entity
2. Entity has intention to complete the project
3. Availability of resources to complete the project
4. Ability to use or sell the items
5. Technologically feasible
6. Identifiable expenses are measured reliability

Subsequently, an intangible asset is recognised using a cost model or revaluation model. Under the cost model, an intangible asset must be amortised over its useful life. Under FRS 102, all intangible assets are assumed to have a finite life and must be amortised. This includes goodwill arising from business combinations. The useful life is assumed to be ten years or less if no reliable estimate can be made on the useful life of the intangible asset.

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An intangible asset can only be subsequently recognised using the revaluation model when there is an active market in place. This is proven to be difficult as most intangible assets are unique in nature and deemed to be unrealistic in practice. Most of the entity will recognise the intangible assets using the cost model.

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Under FRS 102 provides a choice for an entity to either write off development costs as expenses in the profit and loss, or to capitalise as part of the cost of an asset and amortised over the useful life of the asset. These are applicable to an entity if the accounting policy is consistently applied from one period to another.

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Under FRS 102 also does not specify whether capitalised software costs should be presented as tangible or intangible assets. These will not make a significant difference in the presentation of financial statements; however, it will have an impact on tax purposes.

Conclusion

Even though nowadays the definition of FRS 102’s intangible asset is more in line with the international standard of IAS 38, there are still slight differences between the standards. A company needs to make sure that they apply the accounting policy correctly as per the standard has stated.

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Reach out to our team of experts for more information at info@cooneycarey.ie.