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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-18/” type=”big” color=”red”] Return to Section 18 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Example 1: Commencement of capitalisation
Company A purchased specialised software from a third party for CU600,000. The company incurred CU20,000 on tailoring to the company’s specific circumstances, CU10,000 in labour costs training staff on the software and a cost of CU2,000 on testing the new software.
In this example the total to be capitalised is the initial cost of CU600,000, the tailoring cost of CU20,000 and the CU2,000 on testing. The other costs are ignored as they are not directly attributable.
Example 2: Allowable costs for capitalisation
Company A has developed specific software for onward sale, it has carried out extensive advertising and promotion to attract customers as well as incurring operating losses during the start up period. Under Section 18 none of these costs can be capitalised as advertising costs are not allowed and the operating losses are just start up costs, the intangible itself is ready to use, it is just that customers now need to be found, so the operating losses are expensed.
Example 3: Revising residual value of an asset
In year 1 an asset was purchased for CU100,000. It had an estimated life of 6 years. It’s estimated residual value was estimated to be CU10,000 and the residual value could be used as there was an active market. This residual value was assessed for indicators of change at each year end and there were no issues up to the end of year 4. During year 5 and at the end of year 5, due to a change in the market for this type of asset the residual value increased to CU20,000 (being the present value of future residual amount). At the end of year 4, the asset had a carrying amount of as follows:
|
Cost |
CU100,000 |
|
Residual Value |
(CU10,000) |
|
Depreciable Amount |
CU90,000 |
|
Depreciation (CU90,000 / 6 yrs * 4 yrs) |
(CU60,000) |
|
Carrying Amount |
CU30,000 |
In year 5, the residual amount is CU20,000, therefore the depreciable amount is CU80,000. Deducting amortisation charged to date of CU60,000 leaves CU20,000 to be depreciated over the remaining useful life of 2 years. Therefore, amortisation of CU10,000 is charged in year 5 and year 6. Disclosure of the change in estimate would be required in the financial statements.
If we take this example and assume the residual value increases to CU50,000, then the carrying amount in year 5 of CU30,000 is in excess of the residual amount. Therefore, no amortisation is required in year 5 and 6 and any over amortisation is not reversed. Disclosure of the change in estimate would be required in the financial statements detailing the effect on current and future periods. Detailed below is an example of the disclosure requirements for a change in accounting estimate.
Example 4: Change in accounting estimate
During the year ended 31 December 201X the company changed its amortisation method for intangible assets to amortise same over 20 years on a straight line basis as opposed to 10 years. The effect of same was to reduce the amortisation charge by CU680,000 for the current year. In future years the amortisation charge will be extended whereby the amortisation charge will be lower but will go on for a longer period of time as it is being depreciated over its useful economic life. The reason for the change in depreciation method is that the new policy more correctly reflects the useful economic life of these assets.
Example 5: Transition adjustments for intangibles previously having limited life
An intangible asset of CU500,000 was recognised under old GAAP (acquired 5 years prior to the date of transition) which was determined to have a finite useful life. On transition, under FRS 102, a useful life of 15 years was determined. Therefore, a transition adjustment is required whereby, if the useful life on the date of transition is 15 years, then the original useful life should have been 20 years when acquired. Therefore, amortisation of CU125,000 (i.e. CU500,000/20 years * 5 years) will need to be posted to retained earnings on transition so as to show the carrying amount at CU375,000 (CU500,000-CU125,000) in the opening balance sheet.
Example 6: Derecognition
Company A has an intangible asset which has a useful life of 20 years. In year 10, there is a risk that the asset is no longer required, as technology has changed and it is likely there will no longer be demand from the market. Management expect this to be the case. If this is the case the company believe that it will have no further use and therefore would have a nil scrap value. In year 11, managements belief is confirmed. It is in year 10 that the asset should be derecognised as at that point there is a reasonable expectation that there will be no further economic benefits.
If in the above example, the future economic benefits were reduced but not expected to be eliminated an impairment would have been required.
Example 7: Extract from an accounting policy for an entity with intangible assets including goodwill:
Intangible assets
Intangible assets acquired as part of a business combination are initially recognised at fair value being their deemed cost as at the date of acquisition. These generally include brand and customer related intangible assets. Computer software that is not an integral part of an item of computer hardware is also classified as an intangible asset. Where intangible assets are separately acquired, they are capitalised at cost. Cost comprises purchase price and other directly attributable costs.
Intangible assets with finite lives are amortised over the period of their expected useful lives in equal annual instalments, as follows;
Brands 5 to 10 years
Customer related 5 to 20 years
Supplier agreements 4 to 10 years
Computer related 3 to 7 years
Subsequent to initial recognition, intangible assets are stated at cost less accumulated amortisation and impairment losses incurred.
The company’s policy is to review the remaining economic lives and residual values of intangible assets on an on-going basis and to adjust the amortisation charge to reflect the remaining estimated life where applicable and residual value where indicators of a change are present.
Example 8: Intangible asset with an indefinite useful life under old GAAP
An intangible asset of CU500,000 was recognised under old GAAP (acquired 5 years prior to the date of transition) which was determined to have a infinite useful life. Assume on transition, under FRS 102, a useful life of 15 years was determined. Therefore, a transition adjustment is required whereby, if the useful life on the date of transition is 15 years, then the original useful life should have been 20 years when acquired. Therefore, amortisation of CU125,000 (i.e. CU500,000/20 years * 5 years) will need to be posted to retained earnings on transition so as to show the carrying amount at CU375,000 in the opening balance sheet. The journals required are:
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
125,000 |
|
|
Cr Intangible Asset |
|
125,000 |
Being journal to recognise amortisation charge for the period from acquisition to the date of transition i.e. 1 January 2014 for a company with a December year end. Then in future years an amortisation charge of 25,000 should be posted. Here we have assumed that this intangible has not been allowable for capital allowance purposes so therefore there is no deferred tax effect nor was there a revaluation.
The journals required for 31 December 2014 assuming the above journals are posted to reserves:
|
|
CU |
CU |
|
Dr Amortisation in the P&L (CU500,000/20yrs) |
25,000 |
|
|
Cr Accumulated Amortisation |
|
25,000 |
Being journal to reflect amortisation for the 2014 year as intangible was not previously amortised.
The same journal as above will be required to be posted for the 2015 year assuming the above journals are posted to reserves.
If we assume capital allowances was allowable on these intangibles and assume the deferred rate is 10% and the capital allowances are at a set rate per annum as opposed to being allowed based on the amortisation charge. The journals required are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Deferred Tax Liability (CU125,000*10%) |
12,500 |
|
|
Cr Profit and Loss Reserves |
|
12,500 |
Being journal to reflect deferred tax on the amortisation charged to profit and loss reserves
In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the deferred tax impact as follows (assuming the opening adjustments above are carried forward):
|
|
CU |
CU |
|
Dr Deferred Tax Liability (CU25,000*10%) |
2,500 |
|
|
Cr Deferred Tax in P&L |
|
2,500 |
Being journal to reflect deferred tax on the amortisation charged in the year
The same journal as above will be required to be posted for the 2015 year assuming the above journals are posted to reserves.
Example 9: Deferred tax on revaluation where a previous revaluation is used as deemed cost
Company A previously had a policy of revaluation on intangibles. The original cost was CU600,000. Assume the date of transition is 1 January 2014. The intangibles were revalued on 31 December 2012 to CU700,000 and at 31 December 2013, the carrying amount was CU630,000 (useful life of 10 years at that time – amortisation charge of CU70,000). The amount in the revaluation reserve at 31 December 2013 was CU30,000. On transition to FRS 102, the company has decided to discontinue adopting the revaluation option and instead use the previous revaluation as the deemed cost. On the date of transition, assuming the intangible can be sold separately a deferred tax liability should be recognised for the uplift in value above its tax cost which was not required under old GAAP. Assume deferred tax is 10%. The deferred tax rate to be recognised is as follows:
Deferred tax = CU630,000 less CU600,000 = CU30,000 * 10%= CU3,000.
Journal required be posted on transition i.e. 1 January 2014 is:
|
|
CU |
CU |
|
Dr Revaluation Reserve |
30,000 |
|
|
Cr Non Distributable Reserve |
|
30,000 |
Being journal to reclassify previous revaluations under old GAAP to a non-distributable reserve.
|
|
CU |
CU |
|
Dr Non Distributable Reserve |
3,000 |
|
|
Cr Deferred Tax Liability |
|
3,000 |
Being journal to recognise deferred tax on the uplift at the date of transition to the non-distributable reserve
In the 31/12/14 (comparative year) and 31/12/15, deferred tax will also be required to be posted for the deferred tax on the movement on the carrying amount in relation to additional amortisation posted on the revalued amount each year. From 1 January 2014 the CU630,000 is depreciated over its useful economic life at that date, that being 9 years (CU630,000/9 years=CU70,000). The additional amortisation on the revalued amount is therefore CU333 ((CU630,000-CU600,000)/9 yrs)*10%).
The journal required to be posted in relation to deferred tax for each year is:
|
|
CU |
CU |
|
Dr Deferred Tax Liability (CU30,000/9yrs *10%) |
333 |
|
|
Credit Profit and Loss–Tax Change |
|
333 |
Being journal to reflect release of deferred tax for depreciation charged in the year. This deferred tax journal will also be required in the 2015 year.
No adjustment is required for depreciation as the depreciation charge in 2014 and 2015 is equal to what should have been charged.
Example 10: Transfer of software and website costs to intangibles
Under old GAAP, Company A classified website development costs and software costs which are not an integral part of the asset as property, plant and equipment. Under FRS 102, these should be classified as intangible assets. The NBV of these assets on transition was CU100,000. Assume the useful life of the asset will remain unchanged. The journal required on transition is therefore:
On 1 January 2014
|
|
CU |
CU |
|
Dr Intangible Assets |
100,000 |
|
|
Cr PPE |
|
100,000 |
For the year ended 31 December 2014 and 2015 a similar adjustment will be required for the NBV at that date assuming the above journal is not brought forward year on year.
Example 11: Intangible asset that used a default useful life of 20 years under old GAAP
An intangible asset of CU500,000 was recognised under old GAAP (acquired 5 years prior to the date of transition). Under old GAAP the default life of 20 years was chosen so the carrying amount in old GAAP books was CU375,000. Assume the date of transition is 1 January 2014 and the useful life cannot be determined under FRS 102 either, hence the default rate of 10 years for UK companies which have early adopted and 5 years for Republic of Ireland companies or UK entities that have not early adopted the September2015 version of FRS 102 should be used. Therefore, a transition adjustment is required. As the default rate is 10 years under FRS 102, at the date of transition using this default rate a remaining useful life of 5 years exists. Therefore, the carrying amount required on transition for UK companies is CU250,000 (CU500,000/10 years*5 years remaining at the date of transition) and for Republic of Ireland companies or UK entities who have not early adopted is nil (CU500,000/5 years*0 years remaining at the date of transition)
The journals required on 1 January 2014 are:
UK companies that have early adopted
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU375,000 carrying amount under old GAAP-CU250,000 required under FRS 102) |
125,000 |
|
|
Cr Intangible Asset |
|
125,000 |
Republic of Ireland companies and UK companies that have not early adopted
|
|
CU |
CU |
|
Debit Profit and Loss Reserves (CU375,000 carrying amount under old GAAP-Nil required under FRS 102) |
375,000 |
|
|
Credit Intangible Asset |
|
375,000 |
Being journal to recognise additional amortisation charge under FRS 102 for the period from acquisition to the date of transition i.e. 1 January 2014 for a company with a December year end. Then in future years an amortisation charge of CU25,000 should be posted. Here we have assumed that this intangible has not been allowable for capital allowance purposes so therefore there is no deferred tax effect nor was there a revaluation.
The journals required for 31 December 2014 assuming the above journals are posted to reserves:
UK companies that have early adopted
|
|
CU |
CU |
|
Dr Amortisation in the P&L ((CU500,000/10 yrs under FRS 102) = (CU500,000/20yrs under old GAAP)) |
25,000 |
|
|
Cr Accumulated Amortisation |
|
25,000 |
Being journal tor reflect additional amortisation for the 2014 year for the fact that this is being written off over 10 years as opposed to 20 years under old GAAP.
Other companies
|
|
CU |
CU |
|
Dr Accumulated Amortisation |
25,000 |
|
|
Cr Amortisation in the P&L (CU500,000/20yrs) |
|
25,000 |
Being journal required to reverse previous depreciation posted under old GAAP as under FRS 102 this has a nil NBV on transition
The same journal as above will be required to be posted for the 2015 year assuming the above journals are posted to reserves.
If we assume capital allowances was allowable on these intangibles and assume the deferred rate is 10% and the capital allowances are at a set rate per annum as opposed to being based on the amortisation charged. The journals required are:
On 1 January 2014
UK companies that have early adopted
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU125,000*10%) |
12,500 |
|
|
Cr Profit and Loss Reserves |
|
12,500 |
Being journal to reflect deferred tax on the amortisation charged to profit and loss reserves
Other companies
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU375,000*10%) |
37,500 |
|
|
Cr Profit and Loss Reserves |
|
37,500 |
Being journal to reflect deferred tax on the amortisation charged to profit and loss reserves
In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the deferred tax impact as follows (assuming the opening adjustments above are carried forward):
UK Companies that have early adopted
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU250,000*10%) |
2,500 |
|
|
Cr Deferred Tax in P&L |
|
2,500 |
Being journal to reflect deferred tax on the amortisation charged in the year
Where capital allowances/tax deductions were allowed based on the amortisation charged the deferred tax recognised up to 1 January 2015 would be released in line with the tax authorities tax transition guidelines which details when the deduction is allowed in the tax computation.
Other Companies
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
2,500 |
|
|
Cr Deferred Tax Asset (CU25,000*10%) |
|
2,500 |
The same journal as above will be required to be posted for the 2015 year assuming the above journals are posted to reserves.
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