Intangible assets include operational assets that lack physical substance, such as patents, copyrights, trademarks, franchises and goodwill. A company’s intangible assets are often not reported on a company's financial statements or will be reported at significantly less than their actual value. This is because assets are accounted for at their historical cost. Unlike tangible fixed assets such as a building or machinery, intangibles are often developed internally without any direct measurable cost that can be capitalized. When an intangible is purchased, however, or when costs can be directly traced to the development of the asset, the cost is recorded as an intangible asset on the balance sheet.
Intangible Asset Valuation
Intangible assets are valued at their cost of acquisition. A purchased intangible is valued based on the amount paid for the asset. Research and development costs associated with developing an intangible are expensed as incurred, however, costs of registering patents or trademarks and legal fees incurred to defend a company’s rights of use are included in the cost of acquisition which is reported as an intangible asset on the balance sheet.
Intangibles with a Determinable Life
Intangible assets with a determinable life are amortized over their useful lives. Amortization is a process of allocating the expense over a number of accounting periods to reflect the actual amount of the asset consumed each period. The useful life of an intangible asset is often assumed to be the intangible’s legal life, although the useful life will often be shorter. A patent, for example, has a legal life of 17 years, but its useful life may expire earlier if a new invention makes the patented technology obsolete.
Intangibles with an Indefinite Life
Many intangible assets have indeterminable lives. For instance, there is often no reasonable way to determine how long a company’s brand will hold value. For this reason, intangibles with an indefinite life are not amortized, but are rather tested for impairment. An impairment expense is recognized if the asset’s carrying value exceeds its fair value. A company should test all intangibles for impairment at least annually and once the impairment is recognized, it is not permitted to be recovered.
Section 197 Intangibles
Section 197 of the Internal Revenue Code defines tax accounting procedures for intangible assets such as copyrights, goodwill and trademarks.These assets must be amortized over a period of 15 years regardless of their useful life. Section 197 does not permit impairment testing, but a loss may be recognized if the asset is disposed of before it is completely amortized.
- Cornell University Law School: Section 197
- “Intermediate Accounting”; Jan R. Williams et al.; 1995
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