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How should a micro-entity account for intangible assets and goodwill?

Bought: at cost. Home-made: never.

An intangible asset your company buys, or goodwill from buying a business, goes on the balance sheet at cost and is written off over its useful life. Anything the company builds itself is a cost of the year.

Published

At a glance

Bought intangibles
Unless held to sell on, shown at cost, then written off over their . This is called
Home-made intangibles
Never shown as assets. Brands, logos, research and start-up costs are costs of the year
Goodwill
Shown only when your company buys another 's and assets. Written off over its life
Useful life
Always limited. If, exceptionally, it cannot be reliably estimated, 10 years at most

Sources

This entry is general information for directors of UK private limited companies, not advice about a particular company.

What to do

  1. Sort what you spent. An bought on its own goes on the . One your company holds to sell on is treated as stock instead. Anything built in-house is a cost of the year.

  2. Record a bought intangible at its cost.

  3. Write it off over its useful life, starting when it is ready to use. Use equal amounts each year if you cannot tell how its will be used up.

  4. At each year end, look for signs it is worth less than its figure on the balance sheet, and write it down if so.

Sources

How it works

Bought intangibles: at cost, written off over their life

An is something of value you cannot touch, such as a software licence. Your company must it and expect future benefit from it. It counts if it can be sold or licensed on its own, or comes from a contract or other legal right.

Your company must show every intangible asset it buys on its own, unless it holds it to sell on. It goes on the at cost: the price, import duties and taxes you cannot get back, less discounts. Add any costs of getting it ready to use.

After that, the balance sheet shows cost less the so far, and less any . Amortisation works like depreciation: it spreads the cost over the useful life.

Every intangible has a limited life. If it comes from a contract or legal right, its life cannot be longer than that right. It can be shorter, if you expect to use it for less time.

For example

Say your company buys a five-year software licence for £3,000. It expects to use it for three years, with no clear pattern of use.

Useful life
shorter of 5 and 3 years
3 years
Written off each year
£3,000 ÷ 3
£1,000

The life cannot be longer than the licence, but it can be shorter.

If, exceptionally, you cannot reliably estimate the life, it must not be more than 10 years.

Amortisation starts when the asset is ready to use. Choose a method that matches how the company uses up the asset's . If you cannot tell, use the "" method: equal amounts each year.

Assume the asset will be worth nothing at the end. The exceptions are where someone has agreed to buy it then, or there is an for it.

Sources

The detail The rules for bought intangibles

Appendix I: an intangible asset is an identifiable non-monetary asset without physical substance; it is identifiable when it is separable, or arises from contractual or other legal rights. Amortisation is the systematic allocation of the depreciable amount of an asset over its . Useful life is the period over which an asset is expected to be available for use, or the number of production or similar units expected from it.

Paragraph 13.1: Section 13 applies to separately acquired and internally generated intangibles, but not to intangibles held for sale in the ordinary course of , or assets arising from contracts with customers recognised under Section 18. Paragraph 13.2: business combinations and are in Section 14. Paragraph 13.3: a micro-entity shall recognise all separately acquired intangible assets. Paragraph 13.6: cost is the purchase price, including import duties and non-refundable purchase taxes, after trade discounts and rebates, plus any directly attributable cost of preparing the asset for its intended use. Paragraph 13.7: an intangible obtained in exchange for non-monetary assets is measured at fair value, unless the exchange lacks commercial substance or neither fair value is reliably measurable.

Paragraph 13.8: after initial recognition, cost less accumulated amortisation and accumulated impairment losses. Paragraph 13.9: intangible assets have a finite useful life; one arising from contractual or other legal rights shall not exceed the period of those rights, but may be shorter. Paragraph 13.10: if, in exceptional cases, the life cannot be reliably estimated, it shall not exceed ten years. Paragraph 13.12: amortisation begins when the asset is available for use and ceases when it is derecognised; the method reflects the expected pattern of consumption, and straight-line is used if that pattern cannot be determined reliably. Paragraph 13.13: is assumed to be zero unless a third party is committed to buy the asset at the end of its useful life, or there is an active market for it. Paragraph 13.11: the charge is recognised in profit or loss unless another section requires it to form part of an asset's cost. Paragraph 13.14: a change in these estimates is a change in an accounting estimate. Paragraph 13.16: on disposal, or when no future benefits are expected, the asset is derecognised and a gain or loss recognised in profit or loss.

Sources

Home-made intangibles: a cost, never an asset

Anything intangible your company creates itself is never an asset. What you spend on it is a cost of the year, straight away.

That includes:

  • research and development

  • brands, logos, customer lists and similar items you build yourself

  • start-up costs, including the legal and secretarial costs of setting up a company

  • training

  • advertising and promotion

  • moving or reorganising the business

  • goodwill you build up yourself.

The list is not complete. Anything else created in-house is treated the same way.

For example

Say your company spends £2,500 on advertising to launch a new service, and £600 on staff training.

Both are costs of that year. Neither goes on the balance sheet, whatever they cost.

The paragraphs that separate bought and home-made intangibles do not say whether a logo you pay an outside designer to create counts as bought. If that matters to your accounts, get advice before you show it as an asset.

Sources

The detail The rules for home-made intangibles

FRS 105 paragraph 13.4: an internally generated intangible shall not be recognised as an asset; all expenditure incurred is recognised as an expense immediately in profit or loss. Paragraph 13.5 lists expenditure recognised as an expense and not as intangible assets, and says the list is not exhaustive: (a) research and development activities; (b) internally generated brands, logos, publishing titles, customer lists and items similar in substance; (c) start-up activities, including legal and secretarial costs incurred in establishing a legal entity; (d) training activities; (e) advertising and promotional activities; (f) relocating or reorganising part or all of a ; (g) internally generated goodwill. Paragraphs 13.1 to 13.4 contrast separately acquired intangibles with internally generated ones and with those acquired in a business combination, but do not define "separately acquired", or say whether a logo commissioned from an outside designer is separately acquired.

Sources

Goodwill: only when you buy a business

Goodwill appears when your company buys the and assets of another business. It is the extra you pay above the value of the separate assets and debts you take on. Those debts include some that may or may not arise, called .

You do not show intangibles that come with the business, such as customer lists, separately. That works because goodwill is whatever is left after the separate assets and debts. So their value sits inside goodwill. The , which sets the standard, gives its reason: separate intangible assets are not items the micro-entity layouts require.

For example

Say your company pays £10,000 for another studio's trade and assets. The assets less the debts it takes on come to £4,000.

Goodwill
£10,000 − £4,000
£6,000

Any value in the studio's customer list sits inside the £6,000, not as a separate asset.

After that, goodwill is shown at cost, less amortisation so far and any write-downs. The rules are the same as for bought intangibles. Its life is limited, and if in exceptional cases it cannot be reliably estimated, it must not be more than 10 years.

Goodwill you build up yourself is never an asset.

Sources

The detail The rules for goodwill

FRS 105 paragraph 14.1: a micro-entity that acquires the trade and assets of another business applies Section 19, except that it "shall not separately identify and recognise intangible assets" (a), "shall not recognise a asset or liability" (b), shall apply FRS 105 paragraph 14.2 instead of FRS 102 paragraph 19.23 (c), and "is not required to provide any of the disclosures" (f). Acquired share-based payments and employee benefits follow FRS 105 Sections 21 and 23 (paragraph 14.1(d) and (e)). Paragraph 14.2 refers to goodwill recognised "in accordance with paragraph 19.22 of FRS 102". FRS 102 paragraph 19.22(b) measures goodwill initially "at its cost, being the excess of the cost of the business combination over the acquirer's interest in the net amount of the identifiable assets, liabilities and contingent liabilities". Paragraph 14.2 then measures it "at cost less accumulated amortisation and accumulated impairment losses", applying paragraphs 13.9 to 13.14; if in exceptional cases the life cannot be reliably estimated, it "shall not exceed 10 years". Paragraph 14.2(b) applies Section 22 for impairment. Appendix I: goodwill is future economic benefits arising from assets that are not capable of being individually identified and separately recognised.

FRS 105 Basis for Conclusions, paragraph 19(k) (not part of the standard): recognition of separately identifiable intangible assets in a trade and asset acquisition is prohibited "because these are not required items in the financial statements ".

Sources

Where they show in your accounts

The micro-entity balance sheet has one heading for . There is no separate heading for intangible assets. A bought intangible held for continuing use in the business is a fixed asset.

The profit and loss layout has one line for and other amounts written off assets. None of the layout headings names amortisation.

A bought intangible can be written down, as other assets can. The loss is a cost straight away. If the reasons for the write-down later go away, and only then, it is reversed. The asset goes back up, but no higher than it would have been with normal amortisation and no write-down.

A bought intangible cannot be upwards. That is because the law lets micro-entities use only the cost rules.

Goodwill is tested through the part of the business it belongs to, its "". That is because goodwill cannot be sold on its own, and earns no money by itself. A write-down of goodwill can never be reversed.

For Corporation Tax, amounts written off intangible assets that fall within the tax rules for intangibles are , sometimes with adjustments. Which assets fall within those rules is not covered here. A micro-entity shows no deferred tax, on an acquisition or otherwise.

Sources

The detail Presentation, impairment and tax

SI 2008/409, Schedule 1, Section C: one fixed assets heading in each balance sheet format, and one profit and loss line for depreciation and other amounts written off assets. The Section C formats give only line headings, and none names amortisation. Schedule 8, paragraph 3: fixed assets are assets intended for use on a continuing basis in the company's activities. Paragraphs 13.17 and 14.3 send unrecognised for intangibles and acquisitions, and intangibles given as security, to the Section 6 notes (paragraphs 6.2(d), 6A.4 and 6A.5).

Paragraph 13.15 applies Section 22 to separately acquired intangibles; Section 22 covers goodwill and other intangibles, and a loss is recognised immediately in profit or loss. Paragraph 22.4: for goodwill acquired in a business combination, FRS 102 paragraphs 27.24 to 27.27 apply. FRS 102 paragraph 27.24: goodwill cannot be sold by itself or generate independent cash flows, so its is derived from that of the cash-generating unit or units of which it is part. Paragraph 22.19: an impairment loss for goodwill is not reversed. Paragraphs 22.20 and 22.21: for all assets other than goodwill, an impairment loss is reversed in a subsequent period if, and only if, the reasons for it have ceased to apply, and the reversal is recognised immediately in profit or loss. Where the prior loss was based on the recoverable amount of the individual asset, the reversal "shall not increase the of the asset above the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years", and future amortisation is adjusted to allocate the revised carrying amount, less its residual value (if any), over the remaining useful life.

SI 2008/409 regulation 3(1A) and FRS 105 Appendix III paragraph A3.8: micro-entities may apply only the . With paragraph 13.8, it follows that an intangible cannot be revalued upwards.

HMRC's Corporate Intangibles Research and Development Manual (CIRD10110): sums written off assets within the scope of Corporation Tax Act 2009 Part 8 in a company's accounts are deductible for Corporation Tax as income, not capital, items, subject sometimes to adjustment; receipts from those assets are also revenue items. FRS 105 paragraphs 14.1(b) and 24.7: no deferred tax.

The September 2024 edition of FRS 105 incorporates the Periodic Review 2024 amendments, which apply for beginning on or after 1 January 2026 (paragraph 1.10). They reworded the scope exclusion in paragraph 13.1, inserted paragraph 13.3A on the meaning of "asset" in Section 13, and added item (eA) to paragraph 14.1. The later Adapted formats and size thresholds amendments made no change to Sections 13 or 14.

Sources

Consequences

If you get it wrong

If you show a home-made brand, logo or other intangible as an asset, your accounts do not follow the . The same applies if you show a bought intangible above its cost less .

Sources

Less common situations

Buying shares instead of a business. Buying a company's shares is not buying its and assets. An investment in shares, or in a , is shown at cost less any write-down.

Getting an intangible in exchange for other assets. Where you swap other non-cash assets for it, it is usually measured at .

Agreeing to buy an intangible, or offering one as security. not on the , and assets given as security, go in the note on commitments.

Sources

Worked example: Bramley Studio Ltd

Say Bramley Studio Ltd's of £5,400 at 31 December 2026 are all studio equipment, with no .

Now say Bramley pays £1,200 on 1 January 2026 for a three-year design software licence. It is bought on its own and ready to use that day. Bramley expects to use it for all three years.

Nobody has agreed to buy the licence at the end, and there is no for it. Bramley cannot tell how its will be used up.

Software licence

  • Cost at 1 January 2026

    Amount
    £1,200

    Bought on its own, so shown at cost

  • Useful life

    Amount
    3 years

    Cannot be longer than the three-year licence

  • Amortisation for 2026

    Amount
    (£400)

    £1,200 ÷ 3. Straight-line, as the pattern is unclear. Nothing left at the end

  • At 31 December 2026

    Amount
    £800

    £1,200 − £400

  • Fixed assets with the licence

    Amount
    £6,200

    £5,400 + £800. Held for continuing use, so a fixed asset

Sources

Now say instead that Bramley pays £10,000 on 1 January 2026 for another studio's and assets. The assets less debts it takes on are £4,000. Say the life of the cannot be reliably estimated, and Bramley uses the 10-year maximum. It cannot tell how the benefit will be used up.

Goodwill

  • Price paid

    £10,000

  • Less assets less debts taken on

    (£4,000)

    No customer list or other intangible is shown separately

  • Goodwill at 1 January 2026

    £6,000

    The excess of the price over the assets less debts

  • Amortisation for 2026

    (£600)

    £6,000 ÷ 10. Straight-line

  • At 31 December 2026

    £5,400

    £6,000 − £600

Sources

Not covered here

Which fall within the Corporation Tax rules for intangibles, and physical assets. See fixed assets and depreciation, revenue or capital spending and why micro-entity accounts show no deferred tax.

Where this comes from

80 official sources. Open a group to see them.

The law 18 sources
HMRC 10 sources
GOV.UK 13 sources
FRC 39 sources

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