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FRS 102: Intangible assets in business combinations

Sally Baker of the Financial Reporting Faculty discusses the recent changes to accounting for intangible assets in business combinations.

In March 2018, the FRC issued an updated edition of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland reflecting the changes made to the accounting standard as a result of the triennial review amendments published the previous December. FRS 102 (March 2018) is applicable to accounting periods beginning on or after 1 January 2019.

This article outlines the changes in FRS 102 (March 2018) in respect of intangible assets acquired in business combinations.

The theory

FRS 102 (March 2018) introduces new criteria for recognising intangible assets separately to goodwill in a business combination. In summary, fewer intangibles are now required to be recognised separately. However, recognition of further intangibles is permitted if it is felt to be providing useful information, subject to certain criteria being met.

Previously, to be recognised separately, intangible assets had to meet the definition of being an identifiable, non-monetary asset without physical substance together with the general recognition criteria of the standard. To be identifiable, the asset needs to be either separable or arise from contractual or other legal rights. Separable means the asset is capable of being separated from the entity and either sold, transferred, licensed, rented or exchanged individually or with a related item. FRS 102 went on to explain that intangibles acquired in business combinations would normally be recognised separately to goodwill as their fair value could be reliably measured.

Following the Triennial review 2017 amendments, FRS 102 (March 2018) requires that only those intangibles acquired in a business combination that are separable and arise from contractual or other legal rights must be capitalised. (The general recognition criteria must also be met, as before). This means fewer intangibles must be recognised separately from goodwill.

However, as an accounting policy choice, entities may capitalise intangibles that are either separable or that arise from contractual or other legal rights. The choice must be applied consistently for each class of intangible and for all business combinations.

Any change in accounting policy arising from this aspect of the triennial review amendments will be applied prospectively ie, any intangibles separately identified in earlier accounting periods which would not have been separately identified under the new accounting policy are not now subsumed within goodwill.

Where an entity chooses to recognise further intangibles separately, the nature of those intangibles and the reason why they have been separated from goodwill must be disclosed. FRS 102 (March 2018) also requires a qualitative description of the nature of intangible assets included in goodwill to be disclosed for each business combination effected during the reporting period.

In practice

Some practical examples to illustrate the impact of the amendments are considered below. All of these examples would have been required to be capitalised separately under previous versions of FRS 102.

  • Trademarks or trade names are separable and have legal rights attached to them. They must continue to be recognised separately to goodwill.
  • Customer lists do not arise from contractual or other legal rights, but are separable. They may be recognised separately but are not required to be.
  • Customer contracts have contractual rights. However, it will depend on individual contracts as to whether or not they are separable. If they are transferable, they must be capitalised separately. If not transferable, it is a matter of accounting policy choice whether they are capitalised.
  • Licensing and royalty agreements, lease agreements and construction permits are similar. Legal rights arise from the agreement or permit, but whether they are separable will depend on individual circumstances. If transferable, they must be capitalised otherwise entities have a choice.
  • Unpatented technology / software may be capitalised as, although it will be capable of being sold or transferred, there will be no legal rights if it is not patented. Patented or copyrighted technology / software on the other hand, will be required to be recognised separately.

The Financial Reporting Faculty has produced various resources to help entities transition to the amended version of FRS 102, including blogs, podcasts and FAQs. Additional resources will continue to be provided during 2019.


Sally Baker, Technical Manager, Financial Reporting Faculty

Practicewire, February 2019