Definition of Intangible Assets
Intangible assets have no physical substance but will generate economic rewards for its owner.
Intangible assets are noncurrent, nonphysical assets. The right of ownership or usage gives them firm value in future revenue production or exchange, generating income.
However, intangible asset advantages are more unclear than tangible asset benefits.
Intangible assets are long-term and contribute to a business’s production or operational cycle, unlike nonphysical assets like accounts receivable or prepayments.
Unidentifiable and identified intangible assets are usually separated.
Identifiable intangible assets have costs that can be easily defined and benefits with a determinable life.
Patents, trademarks, franchises, and leaseholds.
Non-identifiable intangibles indicate a right or benefit with an uncertain life and a cost inherent in doing business. The main intangible is goodwill.
Intangible Asset Types
Intangible can be used to describe all non-physical assets, although accounting uses it for certain operating assets.
Lack of actual assets like checking account balances, receivables, securities investments, and prepaid expenses doesn’t bother accountants.
Identifiability and acquisition method classify intangibles. They are identifiable or unidentified, purchased or domestically developed.
Below is an example of intangibles from these areas.
Buy identified intangibles
Costs of organization
Internally produced intangibles
Identifyable intangible assets created internally
Development and research
Untagged intangible assets created internally
This example lists the most typical intangible assets.
Intangible asset accounting issues
Intangible assets are accounted for similarly to tangible noncurrent assets.
Therefore, we must:
(1) calculate and capitalize acquisition costs;
(2) amortize their cost over the shorter of their legal or economic life (nothing longer than 40 years);
(3) account for disposition gains or losses.
Calculating Acquisition Cost
The cost of intangible assets was documented. As with actual assets, cost includes all expenses to prepare an intangible asset for use. The acquisition cost includes fees and the buying price.
Unpriced intangible assets like trademarks and goodwill are not on the balance sheet.
Intangibles are valued at net book value, or cost minus amortization.
Intangible Assets and Operating Costs
Intangible assets lack physical features, making it hard to determine their existence, value, and lifespan.
Thus, operating expenses and intangible asset expenditures are hard to distinguish.
Advertising, promotion, and training assist the company in the future.
Without this, firms would not spend millions on these programs. However, measuring these programs’ effectiveness and lifespan is tricky.
Thus, these and related expenses are written off in the time incurred.
Recurring expenditures for these things in approximately similar amounts have the same effect on periodic income as capitalizing and amortizing them over their anticipated life.
Research and Development Costs
Research and development costs involve researching, planning, creating, and executing a new product or method.
These costs have caused major accounting issues. They certainly benefit the company in the future.
IBM spends billions on new successful items and others that never reach the market.
Thus, 1982 research and development expenditures that may not yield a product until 1990 are hard to quantify.
In today’s competitive global economy, it’s hard to predict how long research and development benefits will last.
For instance, IBM’s PC Jr. failed.
The FASB now requires all research and development costs to be expensed in the period incurred due to these issues and the diversity of accounting standards.
Specific intangible asset accounting
The previous example identified common intangible assets. The accounting for major intangible assets follows.
A patent from the U.S. Patent Office grants exclusive rights to use, manufacture, process, or sell a product. The inventor or holder can sell or produce patents.
Acquiring a patent from the inventor capitalizes its acquisition cost and other incidental costs like legal fees.
Patent defense costs are capitalized.
After successful research and development, a patent costs only legal or other fees to patent the innovation, product, or process.
All patent development research and development costs, including those in the year the patent is granted, must be written off to expense in the period incurred.
A patent is valid for 17 years. Its productive economic life is often shorter than 17 years.
Therefore, patents should be amortized over their remaining legal or economic life, whichever is shorter.
Consider a $240,000 patent acquisition from its inventor. Legally, the patent has 10 years left, but economically, it has 8 years.
The creator or their successors have copyrights to recreate and sell art or published works.
The U.S. government grants copyright for the creator’s lifetime plus 50 years.
Copyright from the government costs $10 for the creator.
Thus, the creator’s copyright costs are frequently paid to an expense account.
However, copyright purchased by someone other than the originator may be expensive and should be capitalized.
The capitalized cost should be amortized throughout its remaining economic life, which is usually much less than its legal life.