What do the amendments to FRS 102 really mean for intangible assets?

In the amendment to FRS 102 - Triennial review 2017 the FRC is aiming to reduce the cost of accounting for business combinations. It states that fewer intangibles will need to be recognised separately from goodwill going forwards.

However, entities will need to take care. This in no way implies a roll back to old UK GAAP. In addition, the amendments mean that the accounting for intangibles in a business combination in FRS 102 is no longer aligned to IFRS 3. There are now specific technical issues and ambiguities arising from the amendments to the recognition of intangible assets in a business combination. 

What are the changes relating to the recognition of intangible assets?

Under the amendments, the separate recognition of intangible assets in a business combination will now only be required if the intangible asset arises from contractual or other legal rights and it is separable. 

  • The intangible asset is separable if it is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged either individually or together with a related contract, asset or liability.    
  • The intangible asset must have probable future economic benefits and reliable measurement in the first instance as these are the overarching criteria for recognising an asset

The amendments also introduce a new disclosure requirement in the year of a business combination, which requires a qualitative description of the nature of any intangibles assets subsumed within goodwill. The interaction of this new disclosure with the existing requirement for disclosure about critical judgements, and consistency with any narrative reporting accompanying the financial statements, will need to be considered.

Any changes in the accounting policy for the recognition of intangible assets in a business combination that arise when the amendments are applied must be applied prospectively. There is no restatement of comparative information and previously recognised intangible assets cannot be subsumed within goodwill.

Entities will have to consider for each business combination whether there are any intangible assets that meet the criteria of being both contractual/legal and separable.  Unfortunately, in some cases, this will not be straight forward and judgement will be required.  

What if only one of the criteria is met?

Under the amendments, the separate recognition of intangible assets is an accounting policy choice. However, there is a new requirement to disclose the nature of the intangible assets separately recognised and the reason why they have been separated from goodwill. 

This policy choice must be applied to all intangible assets in the same class (ie having a similar nature, function or use in the business), and must be applied consistently to all business combinations. For example, licences are a category of intangible asset that may be treated as a separate class, however, further subdivision may be appropriate if different types of licences have different functions within the business.


In the ‘Basis for conclusions’ to the amendments, the FRC has provided some relatively useful guidance about which intangible assets are expected to meet the criteria for separate recognition in a business combination: 

  • examples of intangible assets that would normally satisfy all three criteria include licences, copyrights, trademarks, internet domain names, patented technology and legally protected trade secrets; and
  • examples of intangible assets that would not normally satisfy all three criteria include customer lists, customer relationships and unprotected trade secrets (such as secret recipes or formulas) as no contractual or legal right exists that would give rise to expected future economic benefits.

Whilst the above is a bit helpful, it is cautious with its ‘not normally’ references and it does not cover the more difficult considerations for intangible assets, such as for customer relationships (see below).  

An additional source of guidance could be IFRS as FRS 102 derives from the International Financial Reporting Standards and (before the amendments) the current provisions for recognition of intangible assets are aligned with IFRS 3 Business Combinations.  As the principles in FRS 102 are based on IFRS, it is logical and persuasive to look at the illustrative examples in IFRS 3 to consider whether such assets are contractual/legal and/or separable. 

Customer relationships

One of the main challenges will concern recognition of customer relationship intangible assets.  

Treatment under existing FRS 102 and IFRS 3

Under existing FRS 102 (and IFRS 3), many acquisitions would result in the recognition of a customer relationship intangible asset (amongst others such as brands, software and intellectual property). In practice, the customer relationship asset may be made-up of one or both of the following:

  • customer contracts – where there is a contractual relationship between the business and its customers that provides a secured future revenue stream at the acquisition date; and
  • non-contractual customer relationships – where there is no contractual relationship that provides any secured/guaranteed future revenues but there is an identifiable customer or pool of customers that have a history of purchasing from the business and a reliable estimate can be made of the future revenue that these customers are expected to generate.

Customer contracts were recognised because they were contractual/legal and separable, and non-contractual customer relationships were recognised because they were often separable (they may not be due to confidentiality restrictions). 

In practice, businesses may have had a mix of customer contracts and non-contractual customer relationships that were recognised as a single customer relationship intangible asset which incorporates both the existing contracts in place (i.e. the customer contract), together with the probability of the contracts being renewed (i.e. the customer relationship).

Treatment under amended FRS 102

Under the changes to FRS 102, non-contractual customer relationships are no longer required to be recognised because they do not meet the contractual/legal and separability criteria. 

Examples of potentially different treatments

  Treatment under existing FRS 102 and IFRS 3
Treatment under amended FRS 102
Recruitment business that has long-term relationships with corporates who use the agency to find specialist staff. A contract is agreed for each new role the agency is commissioned on.
Recognised as a non-contractual customer relationship (the customer relationship is separable).
Not required to be recognised as the customer relationship is not contractual/legal and therefore does not meet both elements of the recognition criteria.

Food manufacturer has contracts running for 3 years with a range of supermarkets to supply ‘white-label’ products.
Mobile phone business with a pool of subscribers on pay monthly contracts.

Recognised as a customer contract together with the non-contractual customer relationship which incorporates the likelihood of renewal of the contracts beyond the current expiry date. Customer contracts continue to be recognised. 
In practice, it remains to be seen whether the non-contractual customer relationship element (ie the probability of contract renewal) will be regarded together with the related customer contract as a single asset which is assessed against the recognition criteria.
Retail business selling to the public through a chain of high-street stores.
No customer-related intangible asset is recognised as the customer base consists entirely of ‘walk-in’ customers.
No change.

Trademarks and brands

In our view, if the trademark is for a product it is separable and, therefore, must be recognised. It is less clear if the trademark is the company name and advice should be sought.

If a brand is protected legally (eg trademark, trade name etc) it will be contractual/legal and normally separable, so must be capitalised under the amendments to FRS 102.

Future uncertainty

There are currently areas of uncertainty which will attain greater clarity as the standard is used in practice.  This could mean that a view/decision made initially may have to be adjusted in future. It is important to have timely discussions with your auditor following a business acquisition to identify issues requiring consideration.  

If you have any queries on any of these matters please do not hesitate to contact your usual RSM contact.

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