Intangible Assets
Intangible assets comprise nonphysical acquired assets and include:
Brand
Franchise
Trademarks
Patents
Customer lists
Licenses
Goodwill
These intangible assets are items that have value based on the rights belonging to that company.
Intangible Assets Are Typically Recognized Only When AcquiredUnder U.S. GAAP the value of internally developed intangibles cannot be accurately quantified and recorded (think back to Coke, General Electric, Microsoft). Companies are not permitted to assign values to these brand names, trademarks unless the value is readily observable in the market (via an acquisition). |
Source: Used with permission. Microsoft 2005 Annual Report.
IFRS Perspective: Certain Internally Generated Intangible Assets RecognizedRecall that U.S. GAAP requires research and development (R&D) expenses, which can often be associated with the creation of internally generated intangible assets, to be expensed on the income statement. The IFRS allows development costs, when certain criteria are met, to be capitalized (on the balance sheet) and amortized (on the income statement) over their useful life. |
Intangible Assets Are Linked to Amortization on the Income Statement
Recall that amortization is the systematic allocation of intangible assets over an estimated useful life. Intangible assets are reduced on the balance sheet via amortization on the income statement.
Intangible assets are amortized, just like fixed assets are depreciated, over their useful lives:
Suppose a drugstore acquired a pharmacy customer list from another drugstore two years ago for $100.
This customer list is recorded as an intangible asset on the balance sheet and amortized over five years at $20 per year.
This year, the impact on the financial statements would be as follows:
| Debit | Credit | |
|---|---|---|
| Amortization expense (SE) | 20 | |
| Intangible assets (A) | 20 |
Recall that PP&E is reported net of accumulated depreciation on the balance sheet. Likewise, intangible assets are reported on the balance sheet net of accumulated amortization, which is the sum of all amortization expenses (net of intangible asset sales) on the income statement.