Intangible assets are identifiable non-monetary assets without physical substance that a business controls and that are expected to provide future economic benefits. They include items such as goodwill, patents, trademarks, software, and licences.
Under FRS 102 (Section 18) and the Companies Act 2006, intangible assets are recognised on the balance sheet only when specific recognition criteria are met, and they are written off over their useful life through amortisation.
Types of Intangible Assets
| Intangible Asset | Description | Typical Source |
|---|---|---|
| Goodwill | The excess of the purchase price over the fair value of net assets acquired in a business combination | Acquisition of another business |
| Patents | Legal rights protecting inventions or processes | Purchased or developed internally |
| Trademarks and brand names | Registered marks identifying goods or services | Purchased or developed internally |
| Copyright | Legal rights protecting literary, artistic, or musical works | Purchased or created |
| Software | Computer programs and related documentation | Purchased or developed internally |
| Licences and franchises | Rights to operate, use, or sell under specific terms | Purchased from a licensor |
| Customer lists and relationships | Information about customers and established relationships | Acquired in a business combination |
| Development costs | Costs of developing new products or processes (when criteria are met) | Internal development activity |
Recognition Criteria
An intangible asset is recognised on the balance sheet when:
- It is identifiable – either separable (can be sold, transferred, or licensed separately) or arises from contractual or legal rights
- The entity has control over the asset – the ability to obtain future economic benefits and restrict others’ access
- Future economic benefits are probable
- The cost can be measured reliably
Purchased Intangible Assets
Intangible assets acquired separately (for example, buying a patent or a software licence) are always recognised at cost, because the purchase price demonstrates both the existence of future economic benefits and a reliably measurable cost.
Intangible Assets Acquired in a Business Combination
When a business is acquired, the identifiable intangible assets of the acquired entity are recognised separately from goodwill at their fair value at the acquisition date. Common examples include customer lists, order backlogs, and brand names.
Internally Generated Intangible Assets
FRS 102 draws a strict distinction between the research phase and the development phase of an internal project:
| Phase | Treatment Under FRS 102 |
|---|---|
| Research | Always expensed as incurred – never capitalised |
| Development | May be capitalised if all the following conditions are met |
The conditions for capitalising development costs are:
- The technical feasibility of completing the asset
- The intention to complete and use or sell it
- The ability to use or sell it
- How the asset will generate probable future economic benefits
- The availability of adequate resources to complete the development
- The ability to measure the expenditure reliably
If any condition is not met, the development expenditure is expensed.
Internally generated goodwill, brands, mastheads, customer lists, and similar items are never recognised as intangible assets under FRS 102 because their cost cannot be measured reliably.
Initial Measurement
| Source | Measurement Basis |
|---|---|
| Separately acquired | Purchase price plus directly attributable costs (legal fees, testing) |
| Acquired in business combination | Fair value at acquisition date |
| Internally developed (where capitalisation criteria met) | Directly attributable development costs from the date the criteria are first met |
Amortisation
Intangible assets with a finite useful life are amortised over that life on a systematic basis, typically straight-line. The amortisation charge is recognised in the income statement.
Useful Life
Under FRS 102, if a reliable estimate of useful life cannot be made, the useful life is presumed to be 10 years (with annual impairment reviews). In practice, companies estimate useful lives based on:
| Factor | Consideration |
|---|---|
| Legal or contractual term | A patent lasting 20 years sets a maximum useful life |
| Expected period of revenue generation | Software may become obsolete in 3-5 years |
| Industry practice | Typical amortisation periods used by comparable businesses |
| Rate of technological change | Fast-moving sectors warrant shorter lives |
Common Amortisation Periods
| Asset | Typical Useful Life |
|---|---|
| Goodwill | 5-10 years (FRS 102 presumes max 10 if not reliably estimable) |
| Patents | Remaining term of the patent |
| Software | 3-5 years |
| Customer relationships | 5-15 years |
| Development costs | 3-5 years |
| Licences | Term of the licence agreement |
Goodwill
Goodwill arises only on a business combination and represents the difference between the purchase price and the fair value of the identifiable net assets acquired. It is not separately identifiable and cannot exist independently of the business.
| Component | £ |
|---|---|
| Purchase consideration | 500,000 |
| Fair value of identifiable net assets acquired | (380,000) |
| Goodwill | 120,000 |
Under FRS 102, goodwill is amortised over its estimated useful life, subject to annual impairment review. If the useful life cannot be reliably estimated, a maximum of 10 years is applied.
Impairment
If indicators suggest that an intangible asset’s carrying amount may not be recoverable, an impairment review is required. For goodwill and intangible assets with an indefinite useful life (rare under FRS 102), impairment reviews must be conducted annually.
An impairment loss is recognised when the asset’s carrying amount exceeds its recoverable amount (the higher of fair value less costs to sell and value in use). The loss is charged to the income statement.
Intangible Assets on the Balance Sheet
Intangible fixed assets are presented above tangible fixed assets in the non-current assets section of the balance sheet:
| Intangible Fixed Assets | Cost (£) | Accumulated Amortisation (£) | NBV (£) |
|---|---|---|---|
| Goodwill | 120,000 | (48,000) | 72,000 |
| Software | 45,000 | (27,000) | 18,000 |
| Patents | 30,000 | (6,000) | 24,000 |
| Development costs | 60,000 | (20,000) | 40,000 |
| Total | 255,000 | (101,000) | 154,000 |
The notes must include a reconciliation of the carrying amount at the start and end of the period, showing additions, disposals, amortisation, and impairment for each class of intangible asset.
Disclosure Requirements
FRS 102 and the Companies Act require disclosure of:
- The accounting policy for each class of intangible asset
- The useful lives or amortisation rates used
- The amortisation method applied
- The gross carrying amount and accumulated amortisation at the start and end of the period
- Any restrictions on title or assets pledged as security
- Commitments to acquire intangible assets
- For development costs: the total amount capitalised and the period over which it is being amortised
Intangible Assets and Tax
For corporation tax, amortisation of intangible assets may or may not be tax-deductible, depending on the nature and date of acquisition:
- Goodwill and customer-related intangibles acquired on or after 1 July 2020: tax relief is available at a fixed rate of 6.5% per year on a straight-line basis
- Other acquired intangibles: relief broadly follows the accounting amortisation charge
- Internally generated intangible assets: development expenditure qualifying for R&D tax relief may attract enhanced deductions
The interaction between accounting amortisation and tax relief creates timing differences that may give rise to deferred tax.