Fax: 020 7270 4545
MS FD (09) 09
Richard Douglas
Director General Finance & Chief Operating Officer
Department of Health
Room 126, Richmond House
79 Whitehall
London SW1A 2NS
5 March 2009
Dear RichardInternational Accounting Standard 38, Intangible Assets and Standing Interpretations Committee Consensus 32 Intangible Assets – Website Costs
This letter provides further guidance on the accounting to be applied to intangibles assets from 1st April 2009.
2The Treasury received evidence from some government entities that applying the interpretations in the Government Financial Reporting Manual for 2009/10, of IAS 38 (paragraph 7.2.6) and of SIC 32 (paragraphs 7.2.9 and 7.2.10), led to the unintended consequence that some assets would be removed from the balance sheet, particularly where they satisfied the reduced cost criterion but not direct service to the public. At its meeting of 20 November 2008 the Financial Reporting Advisory Board (the Board) considered these concerns.
3These interpretations restrict the application of the standard for internally generated intangibles so that only those that contribute to the delivery of service to the public can be capitalised. The board felt that this interpretation unintentionally restricted the scope of the standard and could have the following unintended consequences;
- Software assets capitalised under SSAP 13 and FRS 15 may have to be derecognised where they are only used for administrative purposes;
- In future it may create a bias towards purchasing in administrative software assets, rather than developing these assets in-house, as the FReM only allowed for purchased in assets to be recognised as intangibles, and
- It would create an unintended unjustifiable divergence in accounting between the private and public sectors.
4In light of these concerns the Treasury has looked again at the interpretations and concluded that there is no good central government sector reason to retain them.
5Therefore, at the February 2009 meeting of the Board the Treasury proposed the removal of the IAS 38 and SIC 32 interpretations, which the Board approved. The FReM has been amended to reflect this change (Annex A shows the revised FReM text for intangible assets with the removed text scored through).
Yours sincerely
Chris Lusty
Assurance and Financial Reporting Policy Team
ANNEX A
7.1Introduction
7.1.1This chapter deals with accounting for intangible non-current assets.
7.2Accounting standards
7.2.1The following accounting standards and Interpretations deal with accounting for intangible fixed assets:
IAS38 Intangible Assets
SIC32 Intangible Assets – Web Site Costs
IFRS6 Exploration for and Evaluation of Mineral Resources is not likely to be relevant and is not discussed further in this Manual. However, if it is applicable, it should be applied in full.
IAS38 Intangible Assets and SIC 32 Intangible Assets – Web Site Costs
Applicability
7.2.2IAS38 and SIC32 apply in full, as interpreted, to all reporting entities covered by this Manual.
Objectives of IAS38
7.2.3The objective of IAS38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another standard. This standard requires an entity to recognise an intangible asset if, and only if, specific criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires specified disclosures about intangible assets. When capitalising internally generated intangible assets, such as software, only directly attributable costs, including staff costs and staff-related costs, should be capitalised.
Interpretations of IAS38 for the public sector context
7.2.4On first time adoption of IAS38, entities should refer to IFRS1.18 and IFRS1.IG50. IFRS1.18 allows an entity, on first time adoption, to elect to use deemed cost for initial recognition of the intangible asset where that asset meets the recognition criteria in IAS38 and the revaluation criteria. That deemed cost might be fair value or cost or DRC. However, IFRS1.IG50 makes it clear that an entity can only elect to use one of these routes if the intangible asset meets both recognition criteria in IAS38, including reliable measurement of original cost. Thus, an entity adopting the requirements of this Manual for the first time can only use retrospective capitalisation where it holds reliable original cost information in relation to the internally generated asset.
7.2.5Following the initial recognition of an intangible asset, for subsequent measurement IAS38 permits the use of either the cost or revaluation model for each class of intangible asset. Where an active (homogeneous) market exists, intangible assets should be carried at fair value at the reporting period date – that is, the cost option given in IAS38 has been withdrawn. Where no active market exists, entities should revalue the asset, using indices or some suitable model, to the lower of depreciated replacement cost and value in use where the asset is income generating. Where there is no value in use, the asset should be valued using depreciated replacement cost. These measures are a proxy for fair value.
7.2.6For internally generated intangible assets references to “future economic benefits” should be interpreted as “future service potential” – that is, a direct contribution to the delivery of services to the public – in determining whether to recognise a non cash generating intangible asset.
Other requirements
7.2.7Entities should analyse their intangible assets in accordance with 5.4.42.
SIC32 consensus
7.2.8The consensus in SIC32 is that an entity’s own web site that arises from development and is for internal or external access is an internally generated intangible asset that is subject to the requirements of IAS38.
Interpretation of SIC32 for the public sector context
7.2.9Reporting entities covered by the requirements of this Manual may have web sites that provide a means of delivery of specific services offered by the entity in fulfilment of its principal objectives. In applying SIC32, such entities should interpret the IAS38 criterion of the ‘generation of future economic benefits’ as the ‘delivery of future service potential’.
7.2.10Costs associated with a web site that does not satisfy the requirement to deliver future service potential, but which is designed for the purpose of informing stakeholders of the services or other objectives of the reporting entity, should not be capitalised.
EU Greenhouse Gas Emission Allowance Trading Directive
7.2.11A cap and trade scheme gives rise to an asset for allowances held, a government grant and a liability for the obligation to deliver allowances equal to emission that have been made. Allowances, whether allocated by government or purchased, should be recognised as assets. Allowances intended to be held for use on a continuing basis should be classified as intangible assets. If not, they should be classified as current assets, within current asset investments. Whether or not the asset is classified as intangible or current, the same measurement requirements apply. Allowances that are issued for less than their fair value shall be measured initially at their fair value.
7.2.12Allowances, whether issued by government or purchased, are intangible assets if they are held for use on a continuing basis. Allowances that are issued for less than their fair value shall be measured initially at their fair value.
7.2.13When allowances are issued for less than their fair value, the difference between the amount paid and fair value is a government grant. The government grant reserve should be credited with the same proportion of the amount of the revaluation, which the amount of the grant bears to the acquisition cost of the asset. The remainder of the revaluation is credited to the revaluation reserve.
7.2.14As emissions are made a liability is recognised for the obligation to deliver allowances equal to emissions that have been made. This liability is a provision. It shall be measured at the best estimate of the expenditure required to settle the present obligation at the reporting period date. This will usually be the present market price of the number of allowances required to cover emissions made up to the reporting period date.