Technical improvements of intangible assets

What are the rules for technical improvements of intangible assets and their amortisation? What is the definition of intangible fixed assets? What are the technical improvements of intangible assets? The following article provides answers to these questions and more.

Intangible fixed assets

The accounting perspective

According to Section 6 of Regulation No. 500/2002 Coll. for Businesses (the “Regulation”), research and development, software, and valuable rights with a useful life longer than one year and from the amount of valuation determined by the reporting entity are considered intangible fixed assets.

For these items, the entity must, preferably in the form of an internal guideline, set a value limit from which it will recognise the acquisition of intangible assets in accounting group 01 – Intangible fixed assets and, if the acquisition cost is lower, it will charge it to expenses in accounting group 51 – Services. The amount of the financial limit should respect the principle of materiality and the principle of a true and fair view of the assets in the balance sheet and the recognition of a correct profit or loss. The accounting regulations do not provide for a financial limit.

In addition, emission allowances and preference limits, as well as goodwill, are treated as IFAs regardless of their valuation amount.

In particular, expert opinions, market surveys, development plans, promotional and advertising designs, quality system certifications and software for the management of technology or for equipment that cannot work without such software are not intangible fixed assets under Section 6(9) of the Regulation. In addition, an entity may decide that intangible fixed assets do not include, in particular, technical and energy audits, forest management plans, and river basin management plans.

In practice, we often encounter the question of how to proceed when creating our own websites. In the case of e-shops or sales promotion, where the website is part of the business and sales model, we recommend that the costs of creating the website are capitalised (if they exceed the value limit set by the entity). Conversely, updating the data on the company’s website will be an operating expense.

The area of intangible assets has become increasingly important in recent years, whether in terms of complex solutions combining databases, software, technical equipment, and cloud solutions or, for example, in terms of capitalised development costs. Goodwill vs. valuation difference in the purchase of part of a business or in transformations is also an important topic.

The new accounting legislation will certainly bring more guidance in this area and more solutions that will be closer to IFRS solutions and will be tax compliant.

The tax perspective

Until the end of 2020, the Income Tax Act defined intangible fixed assets as assets with the cost of more than CZK 60,000 and a useful life of more than one year.  As of 1 January 2021, the Income Tax Act no longer contains any definition of intangible assets. Taxation follows the accounting treatment.

Amortisation of IFAs

The accounting perspective

Amortisation of fixed assets is regulated in Section 56 of the Regulation and at the same time, this issue is covered by Czech Accounting Standard No. 13, which deals with specific procedures for fixed asset accounting.

Entities establish an amortisation plan, including updates depending on use and changes in use.

According to Section 28(6) of the Accounting Act, there is no fixed time limit for the accounting amortisation of IFAs and it is therefore up to the entity to consider the expected useful life of the intangible asset.

According to Section 6(1) of the Regulation, useful life means the period during which the asset is usable for the present or can be preserved for further activities or can serve as a basis or part of improved or other processes and solutions, including the period of verification of intangible results.

An entity should also assess at least annually whether there is any indication of impairment of intangible assets. If they are impaired, provisions should be recognised.

The tax perspective

From 1 January 2021, the accounting amortisation of IFAs is treated as a tax-deductible expense under Section 24(2)(v) of the Income Tax Act.

Technical improvements of IFAs

The accounting perspective

According to Section 47(4) of the Regulation, technical improvements of intangible fixed assets include:

  • modifications to assets put into use,
  • that result in a change in their purpose or technical parameters, or an extension of the usability of the asset,
  • provided the costs incurred reach the valuation determined by the entity for the recognition of the individual intangible fixed assets.

Costs incurred for technical improvements are the aggregate of the costs of completed modifications to individual fixed assets during the reporting period.

The inclusion of technical improvements in assets is linked to the condition suitable for use, which according to Section 6(8) of the Regulations means the completion of the acquired assets and the fulfilment of the specified functions and obligations laid down by law for its use.

In accordance with Section 47(5) of the Regulation, the valuation of an individual IFA is increased by the amount of technical improvement that the entity is entitled to account for and amortise.

Technical improvements of intangible assets from an amount exceeding the value limit set by the entity for the recognition of individual IFA is also regarded as IFA:

a) if the acquirer of the right of use of IFA that is not accounted for as an asset (e.g. technical improvements of software used under a licence agreement) is entitled to account for and amortise the technical improvements;

b) for low-value intangible assets with a useful life of more than 1 year that the entity charged to expenses.

As the original intangible assets are not recorded in the assets, a new inventory card must be created for this technical improvement.

In the case of software, a distinction must be made between an “update”, which is not considered a technical improvement but a “repair”. Conversely, a software “upgrade”, such as an extension of a network licence, is a technical improvement.

The tax perspective

Section 32a of the Income Tax Act, which regulated technical improvements of intangible assets, was repealed as of 1 January 2021. Reporting entities therefore follow the accounting regulations.

Amortisation of technical improvements of IFAs

The accounting regulations do not explicitly address the method of amortisation of technical improvements of intangible assets. By default, technical improvements are amortised over the remaining useful life of the intangible asset. If the technical improvement extends the useful life, we recommend adjusting the length of amortisation after the technical improvement is completed.

The tax perspective

Even in the case of amortisation of technical improvements of intangible assets, accounting amortisation is considered a tax-deductible expense from 1 January 2021.

In practice, there are questions on how to proceed in the case of technical improvements carried out after 1 January 2021, which concerns intangible assets acquired by the end of 2020. According to the Financial Administration, it is necessary to proceed according to the rules that applied to the original intangible assets, including the original limits set for technical improvements and the amortisation period for individual categories of intangible assets.

Czech Accounting dReport newsletter

Upcoming events

Seminars, webcasts, business breakfasts and other events organized by Deloitte.

    Show morearrow-right