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FRS 10: Goodwill and intangible assets

28th Sep 2012
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FRS 10 deals with accounting requirements of goodwill and intangible assets. The standard itself recognises that goodwill obtained during an acquisition is not an asset, like other assets, nor is it an immediate loss in value, explains Steve Collings. 

Instead, the standard recognises that goodwill is essentially the difference between the cost of an investment shown in the acquirer’s financial statements and the values that have been attributed to the various assets and liabilities subjected to the acquisition in the consolidated financial statements and is referred to in the standard as ‘purchased goodwill’. Purchased goodwill can be positive, whereby the acquisition cost exceeds the aggregate fair values of the identifiable assets and liabilities; whilst negative goodwill arises when the purchase consideration is less than the fair values of the identifiable assets and liabilities. 

The objective of FRS 10 is to ensure that goodwill and intangible assets capitalised in an entity’s balance sheet are charged to the profit and loss account over their useful economic lives. The standard then goes on to say that its objective is also to ensure that users can determine the impact that goodwill and intangible assets has on the financial position and performance of the reporting entity.

Classes of intangible assets

The standard suggests six examples of intangible assets:

  • Licences
  • Quotas
  • Patents
  • Copyrights
  • Franchises
  • Trademarks

The standard recognises that these may be treated as separate types of intangible assets, but also states that further subdivision of these may be appropriate in individual circumstances (for example where different types of licence have different functions within the business).

Recognition and measurement

Purchased goodwill

Paragraph 7 to FRS 10 requires positive, purchased goodwill to be recognised as an asset on the balance sheet.

Negative goodwill

Where the initial calculations suggest negative goodwill has arisen during the acquisition, paragraph 48 requires the fair values of the acquired assets to be tested for impairment and also that the fair values of acquired liabilities have also been checked to ensure completeness (i.e. that none have been missed or understated). If negative goodwill still arises, then this should be recognised and disclosed separately on the face of the balance sheet, directly underneath the goodwill heading and followed by a subtotal arriving at the net amount of positive and negative goodwill.

Furthermore, negative goodwill up to the fair values of the non-monetary assets acquired (e.g. fixed assets) should be recognised in the profit and loss account in the periods in which the assets are recovered. The standard recognises at paragraph 49 that such non-monetary assets can be recovered by way of depreciation or through sale.

Internally-generated goodwill

The standard prohibits internally-generated goodwill being recognised in the financial statements (FRS 10.8). Many practitioners have been criticised by their professional body over recent years for inappropriately recognising internally-generated goodwill on a balance sheet, particularly when a client incorporates.

Intangible assets

When a company purchases an intangible asset separately from a business, paragraph 9 to FRS 10 requires such an asset to be capitalised at cost. However, if the entity purchases an intangible asset as part of the acquisition of a business, the intangible asset(s) should be capitalised separately from goodwill if the value of the intangible asset can be measured reliably on initial acquisition (FRS 10.10). In instances where the value of an intangible asset(s) cannot be measured reliably, paragraph 13 to FRS 10 requires the asset to be subsumed within the amount of the purchase price attributed to goodwill.

Useful lives and amortisation

Goodwill and intangible assets that are regarded as having limited useful economic lives are required to be amortised over their useful economic lives. The standard suggests a rebuttable presumption that the useful economic lives of purchased goodwill and intangible assets are limited to periods of 20 years or less. However, care must be taken before rebutting this presumption. Paragraph 19 to FRS 10 says that the presumption can only be rebutted and a useful economic life regarded as longer than 20 years, or indefinite, if:

  • the durability of the acquired business or intangible asset can be demonstrated and justifies estimating the useful economic life to exceed 20 years
  • the goodwill or intangible asset is capable of continued measurement (so that annual impairment reviews will be feasible). (FRS 10.19(a) and (b))
  • In terms of the first bullet point, FRS 10 offers some factors to determine durability:
  • the nature of the business
  • the stability of the industry in which the acquired business operates
  • typical lifespans of the products to which the goodwill attaches
  • the extent to which the acquisition overcomes market entry barriers that will continue to exist
  • the expected future impact of competition on the business

There is an inherent uncertainty factor when it comes to determining the useful economic lives of goodwill and intangible assets which needs careful handling which can be illustrated as follows:


Company A Ltd has acquired an intangible asset, separately from a business acquisition. The directors are uncertain as to how long the intangible asset’s useful economic life actually is and in view of this uncertainty have decided to treat the useful economic life as indefinite.

Paragraph 21 to FRS 10 says that any uncertainty surrounding the useful economic life of an intangible asset does not form grounds for treating such useful economic lives as being indefinite (or even for defaulting to the 20-year amortisation period). Where it is expected that such a useful economic life is expected to be less than 20 years, then the standard requires an estimate of the useful economic life to be made.

For the purposes of tangible fixed assets, the depreciable value is usually calculated using the formula: cost of asset less expected residual value. For the purposes of intangible assets, the standard does allow a residual value to be assigned, provided that such residual values can be measured reliably (paragraph 28). The standard acknowledges two circumstances where an intangible asset can be measured reliably:

  • when there is a legal or contractual right to receive a certain sum at the end of the period of use of the intangible asset
  • there is a readily ascertainable market value for the residual asset.  (FRS 10.29 (a) and (b))


Company B Ltd has acquired £30,000 worth of goodwill by acquiring 100% of the net assets of Company C Ltd and which has been duly capitalised. The directors of Company B Ltd have estimated that the residual value of this goodwill after the end of its useful life will be in the region of £8,000 and have taken this into consideration when calculating the amount to amortise the goodwill over its estimated useful economic life of 10 years.

Paragraph 28 to FRS 10 specifically prohibits any residual value being assigned to goodwill. Company B Ltd must therefore amortise the full £30,000 of goodwill over a 10-year period.

Methods of amortisation can vary between clients and paragraph 30 requires a method of amortisation to be chosen that reflects the expected pattern of depletion of the goodwill or the intangible asset. The standard requires amortisation to be calculated using the straight-line method, unless another method can be demonstrated to be more appropriate in the company’s individual circumstances. Where goodwill is concerned, the standard does recognise that it is unlikely that there will be circumstances when it can be justified (or evidence made available to suggest) a less conservative amortisation method than straight-line.

Impairment issues

Where goodwill and intangible assets are being amortised over a period of less than 20 years, impairment issues cannot simply be ignored. Paragraph 34 requires an impairment review for such goodwill and intangible assets to be reviewed for impairment:

  • at the end of the first full financial year following the acquisition (‘the first year review’)
  • in other periods if events or changes in circumstances indicate that the carrying values may not be recoverable
  • In relation to the first bullet point, paragraph 40 says that the first year impairment review can be performed in two stages:
  • initially identifying any possible impairment by comparing post-acquisition performance in the first year with pre-acquisition forecasts used to support the purchase price
  • performing a full impairment review in accordance with the requirements of FRS 11 Impairment of Fixed Assets and Goodwill only if the initial review indicates that the post-acquisition performance has failed to meet pre-acquisition expectations or if any other previously unforeseen events or changes in circumstances indicate that the carrying values may not be recoverable


On 31 March 2011, a company carried an intangible asset in its balance sheet at £10,000. On 31 March 2012, an impairment review was carried out on this intangible asset which resulted in a loss being recognised of £5,000. 

Paragraph 41 requires that if an impairment loss is recognised and the revised carrying value is being amortised, then it should be amortised over the current estimate of the remaining useful economic life.

The standard also requires that where goodwill and intangible assets are being amortised over a period in excess of 20 years (or where no amortisation is being charged at all), the reporting entity must undertake an impairment review at the end of each reporting period in accordance with FRS 11 Impairment of Fixed Assets and Goodwill


This article has provided a summary of the main issues which may affect practitioners dealing with goodwill and intangible assets. It is not a comprehensive overview of FRS 10 and readers are encouraged to consult the mainstream standard if they encounter difficulties concerning goodwill and intangible assets.

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates and the author of ‘Interpretation and Application of International Standards on Auditing’. He is also the author of ‘The AccountingWEB Guide to IFRS’ and ‘IFRS For Dummies’ and was named Accounting Technician of the Year at the 2011 British Accountancy Awards.

Replies (14)

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By atajhya
02nd Oct 2012 12:20

A quick question to Steve

Dear Steve

I had a quick question on intangible assets and want to check if you can advise if I am allowed to capitalise the cost.


My organisation consultant developed the well-being at work survey website. Cost includes salary cost of the consultant who develop the survey and UK national survey database cost done by a different company. This survey website is generating us revenue as we are selling licences per head to different companies to use these survey so that they can carry out well-being check of their employees in comapred to national average. Our management is intersted in capitalising the cost incurred which is approximately £34K.

I would very much appreciate your comment and advise on this.



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By mdoyle
02nd Oct 2012 12:25

Accounts Treatment - Tax Treatment

Internally-generated goodwill

The standard prohibits internally-generated goodwill being recognised in the financial statements (FRS 10.8). Many practitioners have been criticised by their professional body over recent years for inappropriately recognising internally-generated goodwill on a balance sheet, particularly when a client incorporates.


Can someone please confirm for me if this article is totally unrelated to the post/pre April 2002 generated goodwill and the tax relief on amortisation as i'm getting confused between the accounts treatment and the tax treatment. Reading the above article i would say the accounts treatment is never to recognise on the balance sheet, however, the tax treatment seems to be you can get relief on amortisation of internally generated goodwill depending on whether or not it was generated pre or post April 2002?


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By Bryan
02nd Oct 2012 13:58

The issue of goodwill due to incorporation was always a niggle with inspectors because it was clear on non audit jobs that goodwill was recognised on balance sheet that was internally generated which is in contravention of the rules. Certainly back in the early noughties when incorporation was rife this would be on inspectors hit lists!

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By Anne Fairpo
02nd Oct 2012 18:33

Internally generated - no amortisation

There's no tax deduction for a company's own internally generated goodwill, even if the business was set up post-1 April 2002.  If the company acquires the goodwill of another business, that acquisition cost can be amortised, or written off at 4% on a straight line basis if the accounts don't permit amortisation, for tax purposes.

If you incorporate a business, it should be possible to get the 4% quasi-amortisation deduction for the goodwill of the business if and to the extent that you can persuade HMRC that the goodwill isn't personal to the individual whose business is incorporated, or attached to a property, or otherwise unavailable. My understanding of the accounting standards (which is definitely subject to challenge, as I'm a lawyer!) is as in the article - that the company should not (under accounting standards) be putting the goodwill on the balance sheet and amortising it.

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By Bryan
03rd Oct 2012 08:21

Certainly from an inspectors point of view the issue as muted in the article is about firms that include goodwill on incorporation that does not have evidence of it actually being transferred from an individual or group of individuals to a company. This is where firms used to run into difficulty. The tax issues are one thing and accounting issues another. In my experience to comply with the standard one would need evidence that the goodwill is not internally generated such as an independent valuation. Failing that how can you demonstrate compliance with UK GAAP?

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By sylou
03rd Oct 2012 15:00

Goodwill on incorporation

Is this article saying then, that goodwill on incorporation should never be shown on the accounts?

We have been including this for years and have never had it challenged.  I was under the impression it wasn't counted as internally generated because it was generated by the sole trader, not the limited company.

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By TC2
03rd Oct 2012 15:09

Goodwill on Incorporation

"If you incorporate a business  - the company should not (under accounting standards) be putting the goodwill on the balance sheet and amortising it." ......

Now I'm confused.  A Ltd Company is a separate entity from an individual.  If a Ltd Company has only just been formed, how can the goodwill have been internally generated?  In my view, that's impossible.  It seems extraordinary that HMRC will allow tax relief for the amortisation but the accounting standards won't let me show it on the balance sheet.  It's usually the other way round!

And a practical question: If neither the goodwill nor the amortisation are mentioned anywhere in the accounts, is the amortisation simply deducted in the tax calculations?


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By Rowland Rat
03rd Oct 2012 15:46

Can of Worms!

Leaving aside the taxation relief on goodwill and any CGT on the owner arising from the transfer of the goodwill, going back to the early noughties, the general consensus of opinion appeared to be to create internal goodwill by incorporation which would be a debit to the Balance Sheet and a credit to the director's loan account. This would then be available for the director to draw upon. If goodwill is not recognised in the company accounts, this would leave a lot of directors with seriously overdrawn loan accounts!

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By TC2
03rd Oct 2012 16:40

Can of Worms - Yes!

Roland Rat - yes, a can of worms, I'm only just realising how big a can!

So do we keep two sets of accounts: one for HMRC and one for ROW?

I wonder what happened to True and Fair.  If a Ltd Company buys a going concern, then they've bought it - related parties or not.  I haven't noticed the lack of an independent valuation affecting other significant areas of accounting practice.  If the method of valuation is documented and HMRC accepts it, isn't that reasonable enough? 


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03rd Oct 2012 18:03


A new partnership acquires a business and  90% of the  purchases consideration is goodwill. After four years the partnership is incorporated and all the assets are transferred into the new company, including original goodwill ,at cost. The question arises:a) Is the yearly amortised amount of say 5% per annum straight line basis allowable for tax purposes.b/ Do the accounts comply with FRS 10. Are there any CGT implications for the partners.?


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By Anne Fairpo
04th Oct 2012 08:48

Election needed

"If neither the goodwill nor the amortisation are mentioned anywhere in the accounts, is the amortisation simply deducted in the tax calculations?"

If there's no amortisation in the accounts then the only tax deduction for post-1 April 2002 acquired goodwill is the 4% straight-line deduction - this requires an election, which will effectively let HMRC know that the company has acquired an intangible asset which is not being amortised. If the asset is not on the balance sheet then this election may get some scrutiny, but the definition of an intangible fixed asset for tax purposes isn't bound by the accounts (s713(3) CTA 2009).

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By halesir
04th Oct 2012 10:45


We are having interesting "discussions" with HMRC and Valuation Office iro purchased goodwill in the Care Home sector. This has been ongoing for several years now but seems no nearer conclusion. From conversations with individual Inspectors and Valuers it appears that HMRC are looking for a suitable test case but have so far been unsuccessful. What are other practioners experiences in such cases?  ,  H  experiences in such cas

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By tadek
07th Oct 2012 10:48

FRS 10

Dear Sir - i am a little confused as to which Financical Standard you refer to, is it International Financial Standard 10 [IFRS10] or a local UK financial standard ??? if a local financial stadard could you provide a reference to the domestic institute standard setting body - from International Subscriber

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By bella bob
10th Jul 2015 08:08

Acquire a company already had goodwill

Dear Sir,

Company A acquire Group B  which has 3 companies. As at June, Co A hold 90% shares in Group B and the interest in Group B increased to 100% in December. At the acquisition date, Group B had higher fair value and Company A bought in negative goodwill. The Company A reporting date is June.


I understand that the goodwill in the book of Group B will not show in Company A as at June. I try the line by line combine balance sheet item. How to eliminate goodwill line in Group B as at June?

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