Hi
A new client has spent £7,000 net on designing packaging for their products and acquiring templates to use on new products.
Under FRS105, I feel the amount should be capitalised as an intangible asset, as the amount is to create an item over a period of time. However the client is adamant that the amount should be allocated to marketing costs.
The design costs relate to 4 packaging designs (wrappers) for 4 products. Where there is added difficulty is that if one product is unsuccessful then it will be discontinued. Additionally the useful life all of designs.
Can anyone give their thoughts on this.
Would you treat as intangible and request an estimated UEL from the client (how often do they plan to change the packaging) and tax relief be given under amortisation.
Or given the uncertainty in the product life, would this be written off as advertising (i think not).
Many thanks for your support
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Replies (3)
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As long as these were externally incurred costs (FRS105 does not allow internally generated intangible assets), then I would agree with your opinion. I assume the amounts are material given that it is a micro-entity.
What would a larger business be doing? They would likely be classifying these as part of the product cost/marketing. The exception might be if some of those costs are for creating logos that will continue to be used over several years.
You say that the products will be dropped if unsuccessful, which to me indicates that the packaging could have a relatively short usage.
If I was the client, I would say the estimated useful life is one year (because I can't be sure that the products will succeed), thereby creating the same P&L effect as charging directly to expense.
