FRD 109
Intangible Assets
Purpose
To prescribe the recognition and measurement basis of intangible assets.
Application
Applies to all entities defined as either a public body or a department under
section 3 of the Financial Management Act 1994. Application by State
owned corporations is encouraged.
Requirement
Recognition of an Intangible Asset:

Expenditure on a non-monetary item without physical substance can
only be recognised as an intangible asset if:
(a) the item satisfies the recognition criteria contained within AASB 138
Intangible Assets; and
(b) the expenditure meets the capitalisation threshold that is material to
the entity.
Otherwise such expenditure must be expensed as incurred.
Measurement after Initial Recognition:

Subsequent to initial recognition, an entity must measure its intangible
assets at cost less any accumulated amortisation and accumulated
impairment losses.
First-Time Adoption:

Operative Date
An entity is encouraged to apply the deemed cost exemptions outlined
in this FRD and AASB 1 First-time Adoption of Australian Equivalents to
International Financial Reporting Standards to its intangible assets at
the date of transition to Australian equivalents to International Financial
Reporting Standards (“A-IFRS”).
Annual reporting periods commencing on or after 1 January 2005. Comparative
information prepared for these reporting periods is to be restated as if these
requirements had always applied.
FRD 4 Internal Use Computer Software Costs (issued June 2003) is withdrawn
effective for annual reporting periods commencing on or after 1 January 2005.
First-time Adoption
Full retrospective application of AASB 138 must be performed on the adoption of
A-IFRS, subject to the deemed cost exemption election allowed under AASB 1.
This FRD mandates that intangible assets be measured on a cost basis
subsequent to initial recognition. Therefore any revaluation reserve relating to
intangible assets must be adjusted against accumulated funds at date of transition
to A-IFRS.
In addition, any intangible asset recognised under previous Australian generally
accepted accounting principles (AGAAP) that does not satisfy the recognition
criteria of AASB 138 or this FRD, and any adjustments required to the
measurement of an intangible asset, must also be adjusted against accumulated
funds at the date of transition to A-IFRS.
FRD 109 “Intangible Assets” (February 2005)
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FRD 109
Intangible Assets
Definitions
Refer to paragraph 8 of AASB 138 for the following definitions:
Amortisation;
Asset;
Cost;
Intangible asset;
Impairment loss; and
Useful life.
Guidance
Capitalisation Threshold:

This FRD requires expenditure on a non-monetary item without physical
substance to be recognised as an intangible asset only if the amount involved
meets the capitalisation threshold that is material to the entity (refer
AASB 1031 Materiality for guidance on materiality). In addition, an entity
should consider the following in determining the capitalisation threshold:

the impact of the capitalisation threshold on the operating statement and
balance sheet, taking into consideration the pattern of investment and that
an intangible asset may have a relatively short useful life (e.g. useful life of
software is usually only 3-5 years); and

the administrative burden of conducting annual impairment tests of
intangible assets.
Research activities (or research phase of internal projects):

AASB 138 differs from previously existing accounting standards in that it
specifically prohibits the recognition of research activities as an asset.
Internal-use Software:

Purchased internal-use software may comprise of components with differing
accounting treatment (refer to Appendix 1). Where accounting treatment
differs, the total purchase price must be proportionately allocated to each
component of the software based on its cost.

Internally developed internal-use software usually involves three stages:

preliminary project stage – costs to be expensed;

application development stage – costs to be capitalised or expensed; and

post-implementation/operation stage – costs to be expensed.
(Refer Appendix 1 below for additional guidance)

Internally developed internal-use software may comprise of more than one
component, for example, the development of an accounting software system
may consist of three components: general ledger, accounts payable
sub-ledger and an accounts receivable sub-ledger. Where this is the case,
each component of the system should be accounted for as a separate
component and accounted for in accordance with this FRD.
FRD 109 “Intangible Assets” (February 2005)
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FRD 109
Intangible Assets
Relevant
Pronouncements

AASB 1 First-time Adoption of Australian Equivalents to IFRS (July 2004)

AASB 101 Presentation of Financial Statements (July 2004)

AASB 136 Impairment of Assets (July 2004)

AASB 138 Intangible Assets (July 2004)

AASB 1031 Materiality (July 2004)

FRD 101 First Time Adoption of Australian Equivalents to International
Financial Reporting Standards (February 2005)

AASB 138 requires an entity to measure its intangible assets after recognition
using either the cost model or the revaluation model.

This FRD limits the choice provided by the AASB in relation to the above two
models. The cost model has been determined to be the most efficient and
appropriate method of reporting across government.

This FRD requires that intangible items be capitalised where the amount
meets the capitalisation threshold that is material to the entity and outlines
factors to be considered in determining the capitalisation threshold.

Full retrospective application of AASB 138 must be performed on the adoption
of A-IFRS. However, determining true historical cost under AASB 138 could
be difficult or impossible to determine, and as a result, AASB 1 provides a
deemed cost exemption election to the requirement to calculate original cost
less accumulated depreciation in accordance with A-IFRS.

This FRD was initially issued in December 2004 to provide guidance for the
preparation of the 2005-06 Budget. It was revised in February 2005 to
remove the recommended capitalisation threshold included in the
December 2004 version.
Background
Model for Disclosure
AASB 101 requires disclosure of accounting policies used that are relevant to
Within Financial Report gaining an understanding of the financial report. The following disclosure may be
deemed appropriate.
Summary of Significant Accounting Policies Note:
Intangible Assets
Intangible assets represent identifiable non-monetary assets without physical
substance.
Intangible assets are recognised at cost. Costs incurred subsequent to initial
acquisition are capitalised when it is expected that additional future economic
benefits will flow to the entity.
Amortisation is allocated to intangible assets with finite useful lives on a
systematic basis over the asset’s useful life. Amortisation begins when the asset
is available for use, that is, when it is in the location and condition necessary for it
to be capable of operating in the manner intended by management. The
amortisation period and the amortisation method for an intangible asset with a
finite useful life are reviewed at least at the end of each annual reporting period.
In addition, an assessment is made at each reporting date to determine whether
there are indicators that the intangible asset concerned is impaired. If so, the
assets concerned are tested as to whether their carrying value exceeds their
recoverable amount.
FRD 109 “Intangible Assets” (February 2005)
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FRD 109
Intangible Assets
Intangible assets with indefinite useful lives are not amortised. The useful life of
intangible assets that are not being amortised are reviewed each period to
determine whether events and circumstances continue to support an indefinite
useful life assessment for that asset. In addition, the entity tests all intangible
assets with indefinite useful lives for impairment by comparing its recoverable
amount with its carrying amount:
(a) annually, and
(b) whenever there is an indication that the intangible asset may be impaired.
Any excess of the carrying amount over the recoverable amount is recognised as
an impairment loss.
FRD 109 “Intangible Assets” (February 2005)
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Appendix 1
Guidance on type and accounting treatment for activities in each of the three stages of developing internal-use software
Stages of
development
Preliminary project
stage
Related activities
Accounting treatment

Expense all internal and external costs as incurred


Application
development stage




Post-implementation
or operation stage
Conceptual formulation of alternatives – examples include
considering whether:
(a) to develop a new payroll system or direct efforts towards
correcting existing problems
(b) to run software on a mainframe or on a client serve
system
Determination of existence of the required technologies
Final selection of alternatives – examples include selecting
vendors or consultants
Design of chosen path – examples include software
configuration and interfaces
Coding
Hardware installation
Testing – example include parallel processing
Post-implementation, training and application maintenance
activities
FRD 109 “Intangible Assets” (December 2004)
Capitalised or expensed depending on the type of expenditure:
(1) Examples of costs that should be capitalised as part of the asset value:
 Employee benefit or costs directly attributable to developing the software
 External direct costs of materials and services consumed in developing or
obtaining the software (eg fees paid to third parties)
 Certain data conversion costs associated with software that permit access or
conversion of old data by the new systems
 Costs of specified upgrades and enhancements that increase the function
and/or performance of the existing software.
(2) Examples of costs that should be expensed as incurred:
 General, administrative and overhead costs
 Training costs (both internal and external)
 Maintenance costs (both internal and external).
(Note: Where external maintenance costs are combined with specified
upgrades and enhancements in a single contract, costs relating to maintenance
work should be separately identified and expensed as incurred).
 Internal costs for minor upgrades and enhancements that are not material and
cannot be distinguished on a cost effective basis from internal maintenance
costs
 External costs for unspecified upgrades and enhancements
 Certain data conversion costs, such as purging or cleansing existing data,
reconciliation or balancing and converting the old and new system’s data.
Expense all internal and external costs as incurred.
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