Intangible Assets: The Complete Guide

Everything you need to know about intangible assets (with examples!)

Emilie N.- FCCA, CB, MBS
Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

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Definition: What Are Intangible Assets?

Intangible assets are separately identifiable non-physical economic resources with a useful life greater than one year that have a financial value and help a business generate revenue.

In short, intangibles are “invisible” assets.

Intangible asset = “invisible” economic resource

11 Examples: What Are Examples of Intangible Assets?

This is a list of 11 most common intangible assets examples:

1. Brand equity: brand name, brand identity, brand recognition, brand reputation

2. Intellectual property: patent, trademark, copyright, trade secret

3. Technology: software, internet domain, algorithm, database, website

4. Contracts: licensing agreement, franchise agreement, lease agreement, service contract, use rights (e.g., royalties, broadcasting, extraction), permits, import quotas

5. Customer relationships: customer list, email list, returning customer base, order backlog

6. Employee relationships: employment contracts, non-compete agreements, trained employees

7. Vendor relationships: supplier and distribution network with contracts

8. Artistic works: designs, literature, video, audiovisual material, performance art

9. Know-how: strategy, systems, processes, knowledge

10. Goodwill

11. Research and development

Intangible vs. Tangible Assets: What’s The Difference?

Assets are tangible and intangible resources controlled by an entity (e.g., individual, company, government) with the expectation to generate future economic benefits.

Let’s suppose that a software developer keeps all his algorithms saved on his laptop. While the algorithms are intangible assets, the laptop itself is a tangible asset.

Explanation: Why Are Intangible Assets Important?

When you think of the international brand recognition and customer loyalty of corporations like Coca-Cola or Nike, it becomes clear how immensely valuable intangibles can be for a company’s success, even though they do not have the obvious tangible value of a physical building, vehicle or a piece of equipment.

And even on a smaller scale, you are more likely to choose a local real estate agent with the best reputation, as opposed to one that has no experience or bad reviews.

While most businesses have some proportion of intangible assets, some may find that the value of their intangibles exceeds the value of their tangible physical resources, and sometimes even by far.

Imagine all the assets owned by giants like Amazon, Apple, Microsoft, Facebook, Adobe or Netflix. Brands, domain names, online platforms, algorithms, databases of recurring customers, intellectual property and other intangible assets, which you cannot touch, see or count.

Similarly, intangibles account for more than 80% of S&P 500 total assets as the stock market index is dominated by companies that derive majority of their value from non-physical economic resources.

This continuously increasing trend is completely understandable considering how technology has become so ingrained in our daily lives.

3 Types: What Are Types of Intangible Assets?

Intangible assets can be classified into three categories:

1. Purchased vs. Internally-created Intangible Assets

Internally created intangible assets are created through time and effort of an entity.

As the name suggests, purchased intangibles are acquired from/by a third party.

2. Identifiable and Non-identifiable Intangible Assets

Identifiable intangible assets are those that are separable from other assets of an entity (e.g., can be individually sold, transferred, licensed, rented or exchanged) or arise from legal rights (e.g., contract, agreement), such as intellectual property or software.

Conversely, unidentifiable intangible assets are those that cannot be separated from an entity’s other assets or do not meet the contractual-legal rule, such as goodwill, brand and reputation.

For example, a company could theoretically sell its brand assets like logos and trademarks, but it would be challenging to truly separate the branding and reputation from the company.

3. Definite vs. Indefinite Intangible Assets

An intangible asset can either be definite or indefinite, depending on whether there is a foreseeable end to the value of the asset.

Indefinite, indefinite-life, unlimited-life or perpetual, intangible assets have an indefinite or unlimited useful life, such as a company’s brand name, goodwill, reputation and perpetual franchise because they do not have a definite or foreseeable end-date and stay with the company for as long as it stays in business.

In contrast:

Definite, definite-life, limited-life or finite, intangible assets have an identifiable limited useful life, such as copyrights, patents, trademarks, licenses, legal agreements and contracts with expiration date that, unless renewed or extended, only have value for a set and limited period of time.

However, an intangible asset that has a definite useful life but is expected to be easily renewed can also be considered perpetual.

It is important to understand the differences between these categories, because they drive the accounting and tax treatment of intangible assets >>>

Accounting Standards: How to Account for Intangible Assets?

The treatment of intangible assets for individual, company, non-profit and government financial reporting, tax and legal purposes varies wildly across the world.

Accounting standards dictate how intangible assets should be accounted for in a company’s financial statements and the rules also differ between jurisdictions, for example:

Accounting Standards - Intangible Assets - Examples
Accounting Standard Issuing Organization
IFRS IAS 38 “Intangible Assets” International Accounting Standard (IAS) International Accounting Standards Board (IASB)
US GAAP ASC 350 “Intangibles - Goodwill and Other” Accounting Standard Codification (ASC) Financial Accounting Standards Board (FASB)
UK GAAP FRS 102 - Section 18 “Intangible Assets Other Than Goodwill” Financial Reporting Standard (FRS) Financial Reporting Council (FRC)
IPSAS IPSAS 31 “Intangible Assets” International Public Sector Accounting Standard (IPSAS) International Public Sector Accounting Standards Board (IPSASB)

The accounting standards provide guidance on the financial reporting of intangibles and set out the criteria for their:

  1. Definition
  2. Recognition
  3. Measurement
  4. Amortization and impairment
  5. Disclosure

Since each standard and jurisdiction has some unique requirements regarding the accounting treatment of intangibles, keep reading to find out about those that are most commonly used >>>

Definition of Intangible Assets

Both IASB IAS 38 and FASB ASC 350 define an intangible asset as a non-monetary resource without physical substance, IAS 38 even lists some examples.

This means that like cash in bank, accounts receivable, derivatives and other financial assets do not fall under the classification of an intangible.

Nevertheless, digital currencies (e.g., bitcoin) do appear to meet the definition of an indefinite intangible asset in accordance with both ASC 350 and IAS 38, at least temporarily until regulators update their guidance for digital currencies.

Recognition of Intangible Assets

What are intangible assets on a balance sheet and income statement?

Any expenditure for an intangible item is recognized in accounting records as an expense on an income statement, unless it meets the definition of an intangible asset, in which case it can be capitalized in a balance sheet.

The typical intangible asset recognition criteria include:

Hence, a company that develops valuable intangible assets internally may not be able to capitalize and record them in its balance sheet because they do not meet the recognition criteria.

For instance, the cost or fair value of internally-generated intangible assets may not be possible to clearly ascertain as they were not acquired through purchase and there is not an active market for them.

As an example, the Coca-Cola’s brand recognition and reputation is estimated to be worth billions, yet you cannot find it on the company’s balance sheet.

Measurement of Intangible Assets

Initial Measurement

The initial measurement of an intangible asset depends on how the asset was acquired, such as:

Initial Measurement of Intangible Assets: Examples
Acquisition Type Measurement Example
Purchased separately Acquisition cost = purchase price - discounts + import duties + non-refundable taxes + costs directly attributable to preparing the asset for its intended use
Purchased as part of business combination Fair value Cost allocated to an asset as derived from its fair value on an acquisition date
Internally generated Directly attributable costs Costs incurred during development that are directly attributable to the asset, but only after a predetermined set or criteria is satisfied (e.g., R&D)

Subsequent Measurement

Subsequently, intangible assets are usually measured in a similar way to tangible assets.

Subsequent Measurement of Intangible Assets: Examples
Method Explanation
Cost = cost - accumulated amortization - accumulated impairment loss
Revaluation = fair value at revaluation date - accumulated amortization - accumulated impairment loss

The revaluation method is not commonly used, however, because there is rarely an active market for intangible assets, which is required to determine the fair value.

Valuation

Although there are a number of valuation methods available to calculate the value of an intangible asset, the cost, income and market approaches are generally the most commonly used.

Valuation of Intangible Assets: Examples
Method Explanation
Cost Estimate of present-day costs that would be incurred to recreate or replace the asset today.
Income Estimate of the earning capacity and future economic benefits generated from the asset over its useful life based on present value of projected cash flows.
Market value Fair value of comparable assets purchased under similar circumstances and/or owned by another entity used as a point of reference.

Amortization & Impairment of Intangible Assets

Just like physical assets, intangibles can lose value over time and eventually stop being useful due to use, expiry, obsolescence or other factors.

In order for a company’s financial statements to reflect this gradual decline in value, intangible assets are amortized, which is a process that works in a similar way to the depreciation of tangible assets.

In order to do amortize an intangible asset, you will need to determine the following:

  1. Amortization amount (= how much to amortize)
  2. Useful life (= how long to amortize)
  3. Amortization method (= how to amortize)

Regarding the last point, the straight-line method is arguably the easiest and most commonly used, even though there are other ways (e.g., units of activity) available to amortize intangibles.

The general ledger journal entry for the amortization expense is a debit to the amortization expense account and a credit to the appropriate intangible asset account or, more often, the contra accumulated amortization account.

Accounting for Amortization: General Ledger - Journal Entry
Journal Entry Debit Credit
Amortization of an intangible asset Amortization (expense account) Accumulated Amortization (contra account) or Intangible Asset (asset account)

Intangible assets are usually expensed according to their life expectancy, where only finite limited-life intangible assets can be amortized.

Intangible assets with indefinite or unlimited useful life are not amortized because there is no foreseeable time limit to the cash flows they can generate.

Instead, perpetual non-physical assets with indeterminate life should be evaluated for impairment at least once a year, as well as whenever there is any indication that the asset may have become impaired.

Intangible Assets: Amortization vs. Impairment
Useful Life Accounting Treatment
Definite – Limited - Finite Amortized
Indefinite - Unlimited - Perpetual Evaluated for impairment

In any case, the useful life of all intangible assets should be checked at the end of each financial year, or more often if there is any indication of change, and the amortization calculations adjusted accordingly.

Disclosure of Intangible Assets

In financial statements, intangible assets are displayed on the balance sheet.

The notes to financial statements contain any required and voluntary disclosures for each class of intangible assets, such as:

Summary: How to Report Intangibles in Financial Statements?

In summary, intangible assets are generally accounted as follows:

Economic resources meeting the definition of an intangible asset as well as the relevant recognition criteria are initially measured at cost, subsequently measured at cost or using the revaluation model; and amortized on a straight-line systematic basis over their useful lives, except for indefinite-life assets that are not amortized.

Capitalized intangible assets are shown on a balance sheet and any expenses go through the income statement.

Details of a company’s accounting treatment of intangibles are disclosed in the notes to financial statements.

Goodwill and Research & Development

However, there are some specific classes of intangible assets that are treated differently than others, such as goodwill or research & development (R&D).

Examples of some of the distinct accounting requirements for goodwill and R&D under IFRS (International Financial Reporting Standards) include:

Research & Development - IFRS

According to IAS 38, the accounting treatment of expenses depends on whether they are classified as research or development:

Goodwill - IFRS

According to IFRS, goodwill is a separate class of intangible assets with the following attributes:

  • Internally generated goodwill is always expensed and never capitalized as an asset on a company’s balance sheet because it is not a separately identifiable resource. (IAS 38)
  • Externally generated goodwill purchased as part of a business combination can be capitalized when an entity acquires or merges with another and pays above its fair value, where the difference is recorded as a goodwill asset. (IFRS 3)
  • Goodwill is never amortized but must be tested for impairment at least annually and whenever an indication of an impairment occurs. (IAS 38)
  • Impairment loss must be recorded if the value of goodwill is lower than its book value.
  • Reversal of goodwill impairment loss is not allowed. (IAS 36)

Taxation: How Are Intangible Assets Taxed?

Understandably, the tax authorities across the globe have great interest in intangible assets, considering their growing importance as a source of economic growth and tax revenue, as well as the fact that their non-physical nature makes it easier for taxpayers to engage in various income shifting tax strategies.

The tax regulators devise their own rules regarding intangible assets, which may be in conflict with the accounting standards used for financial statements reporting, for instance:

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Emilie N., FCCA, CB, MBS
Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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