Financial Reporting

Accounting for Non Current Assets:

Intangible Assets (FRS 138)

LEARNING OUTCOMES
At the end of the lesson students should be
able to:
Describe the definition of Intangible Assets and the
various examples categorised under Intangible Assets.
Describe the accounting treatment recommended by FRS
138 Intangible Assets.
Discuss the nature of research and development
expenditure.
Explain how this should be accounted for in accordance
with accounting conventions.
Describe the accounting treatment recommended by FRS
138 Accounting for Research and Development (R&D).
BM057-3.5-2 Financial Reporting

Accounting for Non Current Assets: Intangible Assets (FRS 138)

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Intangible Asset
Definition of assets
An asset is a resource controlled by the enterprise as a result of past
events and from which future economics benefits are expected to flow to
the enterprise.

Definition of Intangible assets:

An intangible asset is an
identifiable non-monetary asset
without physical substance.
Identifiability:
Separable, or
Contractual /legal rights
regardless whether separable

BM057-3.5-2 Financial Reporting

Recognition Criteria:
High probability that
future economic benefit
will accrue.
can be measured
reliably

Accounting for Non Current Assets: Intangible Assets (FRS 138)

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Intangible Asset
Intangible assets are business assets that have no
physical form cannot be seen or touch. Unlike a tangible
asset, such as a computer.
There are two types of intangible assets: those that are
acquired externally (e.g through purchase) and those
that are internally generated.
Example of intangible assets patent and goodwill.

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Other examples of Intangible Assets

based
Contract
Marketing
Licensing, royalty agreement
Service or supply contract
Construction permits
Employees contracts (CFO)
Use rights (drilling oil)
Marketing-related
Trademarks and trade name
Internet Domain Name
Technology-based
Technology (patented,
unpatented)
Trade secrets
Databases
Computer software

BM057-3.5-2 Financial Reporting

Customer-related
Customer list
Customer contracts & related
relationships
Non-contractual relationships
Order/production backlog
Artistic related
Books, magazines
Musical works
(compositions, song lyrics)
Video and audiovisual
materials.

Accounting for Non Current Assets: Intangible Assets (FRS 138)

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Intangible Asset - Contd

The accounting treatment of externally
acquired intangibles (purchased intangibles) is
relatively straightforward in that the purchase
price is capitalised in the same way as for a
tangible asset.

Oil Exploration
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Intangible Asset - Contd

Accounting for internally-generated assets,
however, requires more thought. R&D costs fall
into the category of internally-generated
intangible assets;
Therefore, subject to specific recognition criteria
under both the UK and international standards.

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Accounting for Non Current Assets: Intangible Assets (FRS 138)

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R&D DEFINITIONS
Research is original and planned investigation,
undertaken with the prospect of gaining fresh
beginnings new scientific or technical knowledge
and understanding.

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R&D - Contd
An example of research could be a
company in the pharmaceuticals industry
undertaking activities or tests aimed at
obtaining new knowledge to develop a
new vaccine.

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R&D - Contd
The company is researching the unknown,
and therefore, at this early stage, no future
economic benefit can be expected to flow
to the entity.

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R&D - Contd
Development is the application of research
findings or other knowledge to a plan or design
for the production of new or substantially
improved
materials,
devices,
products,
processes, systems, or services, before the start
of commercial production or use.
An example of development is a car manufacturer
undertaking the design, construction, and testing
of a pre-production model
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Accounting for Non Current Assets: Intangible Assets (FRS 138)

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Accounting for Research and

Development

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Accounting for Non Current Assets: Intangible Assets (FRS 138)

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Recognition
Research
FRS138 states that expenditure on research
does not directly lead to future economic
benefits, and capitalising such costs does not
comply with the accruals concept.
Therefore, the accounting treatment for all
research expenditure is to write it off to the
profit and loss account as incurred.
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Recognition - Contd
Development
As a basic rule, expenditure on
development costs should be written
off to the profit and loss account as
incurred, as with the expenditure on
research.

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Recognition - Contd
However, under FRS 138, there is an option to
defer the development expenditure and carry it
forward as an intangible asset if the following
criteria are met:
there is a clearly defined project
expenditure is separately identifiable
the project is commercially viable
the project is technically feasible
project income is expected to outweigh cost
resources are available to complete the project.
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Recognition - Contd
If these criteria are met, the entity may choose to
either capitalise the costs, bringing them on
balance sheet; or
maintain the policy to write the costs off to the
profit and loss account.
Note:If an accounting policy of capitalisation is adopted it
should be applied consistently to all development projects
that meet that criteria.
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Treatment of capitalised
development costs
FRS 138 requires that development costs are
recognised as an asset.
The asset should be amortised over the periods
expected to benefit from them.

Amortisation should begin only once

commercial production has started or when the
developed product or service comes into use

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Treatment - Contd
Every capitalised project should be reviewed at the end
of every accounting period to ensure that the recognition
criteria are still met.
Where the conditions no longer exist or are doubtful, the
capitalised costs should be written off to the profit and
loss account immediately.

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Intangible Asset (IA)

Not an
intangible asset

No

No

3. Capable of
generating future
economic benefits?

Yes

Meet definition of
Intangible Assets

Yes

2. Controlled?

4. Probable that future economic

benefits will be generated?

No
Yes
No

1. Identifiable?
(separable or legal
rights)
Yes

Intangible Resource?
(Start here)

BM057-3.5-2 Financial Reporting

No

Yes

5. Cost reliably
measured?
Yes

Not
recognised

Intangible Assets
to be recognised

Accounting for Non Current Assets: Intangible Assets (FRS 138)

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EXAMPLE
A company incurs research costs, during one
year, amounting to $125,000, and development
costs of $490,000. The accountant informs you
that the recognition criteria (as prescribed by
FRS 38) have been met.
What effect will the above transactions have on
the financial statements when following MASB
Accounting Standards?

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Question and Answer Session

Q&A
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What we will cover next

Revenue Recognition (FRS 3)

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Accounting for Non Current Assets: Intangible Assets (FRS 138)

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THANK YOU

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