In this article, you will learn:
Business entities spend resources or undertake liabilities to acquire, maintain, or improve Intangible Assets.
These Intangible Assets include licenses, computer software, patents, copyrights, trademarks, goodwill, etc.
Thus, Intangible Assets are identifiable non-monetary assets that do not hold any physical substance. Furthermore, assets are called Intangible Assets only if they meet certain recognition criteria as defined in IAS 38 – Intangible Assets.
Thus, IAS 38 provides accounting treatment for Intangible Assets. That is, it tells you:
In this article, you will learn what Intangible Assets are, examples of Intangible Assets, types of Intangible Assets, and their Accounting Treatment.
As per IAS 38, Intangible Assets definition is as follows:
“Intangible Assets refer to the identifiable non-monetary assets without any physical substance.’
Here, it is important to understand the basic definition of an asset. This is because it will help us in understanding the three important characteristics of Intangible Assets.
In other words, you will come to know about the three criteria on the basis of which you would decide whether an asset is Intangible or not.
Thus, an asset is a resource that you own as a business entity. Such resources result from any past business activity. Furthermore, these are the resources that generate economic benefits for your business in the future.
Therefore, intangible assets are resources that do not have a physical existence. Furthermore, the different types of intangible assets too generate economic benefit for your business in the future.
Now, let’s understand the three characteristics that define an intangible asset. Accordingly, intangible assets must be:
An Intangible Asset is taken as identifiable if:
You control the asset if you hold the power to receive future economic benefits from that particular asset. Also, you limit the access of such economic benefits to others.
Furthermore, your control over the future returns from an intangible asset originates from the legal rights. These rights are enforceable in the Court of Law. However, the legal enforceability of your right does not necessarily give you control over the asset.
This is because you may be able to control the future return from intangible assets in some other way.
Intangible Assets may give your business future economic benefits in a variety of ways. This may include revenue from the sale of goods and services, cost savings, or other benefits arising from the use of the asset.
As per IAS 38, the following are the intangible assets examples or intangible assets list.
Intangible Assets can be classified based on the useful life of such assets. Accordingly, the types of Intangible Assets are as follows.
The types of intangible assets with an indefinite life are the assets that generate cash flows for your business for an unlimited period. That is, there is no cap on the period for which such assets are expected to generate cash flows for your business.
Furthermore, you do not amortize the intangible assets having indefinite useful life. Besides, you also have to review the useful life of such assets in each accounting period. This is done to know if the conditions exist for these types of intangible assets to have an indefinite useful life.
Accordingly, the useful life assessment changes for such intangible assets. Further, you need to account for such changes so as to reflect them in your accounting estimates. Finally, you must also check these assets for impairment.
These are the types of intangible assets that generate economic benefits for your business for a limited period of time. Accordingly, you need to amortize the cost less residual value of such assets systematically over their useful life.
Also, the amortization amount is shown in your Profit and Loss Statement. Provided IFRS does not require that such a charge must be included in the cost of any other asset.
In addition to this, you must review the period of amortization at least annually. Finally, you also need to check such an asset for impairment.
As per Intangible Assets Accounting, you can acquire intangible assets via:
You need to recognize various types of intangible assets if they meet the following criteria. This is irrespective of whether you purchase or self-create such assets.
Remember, this recognition criterion applies to both self-created or intangible assets acquired externally. However, there exist additional criteria for self-created or internally generated intangible assets.
Furthermore, the possibility of future economic returns flowing from such intangible assets must depend on valid assumptions. These assumptions must be with regard to circumstances existing over the life of the asset.
Say, the intangible asset in question does not satisfy the intangible assets definition and the recognition criterion. As per Intangible Assets Accounting, you must recognize such an item as an expense at the time it is incurred.
Furthermore, the fair value of the intangible asset acquired under the Business Combination can be measured reliably.
Accordingly, expenditure incurred on an intangible asset not satisfying the intangible assets definition and recognition criteria is included in Goodwill. This Goodwill is identified at the time of the acquisition of such an asset.
Also, say, you initially recognized an item as an expense. Thus, you cannot later reinstate such an expense as an intangible asset.
In other words, an item originally identified as an expense cannot later be reported as an intangible asset.
Now, let’s understand the additional criteria for internally generated intangible assets.
You should recognize the intangible assets arising out of the research phase of the internal project as an expense.
You must recognize Development cost as an intangible asset and capitalize the same over its useful life. This is unlike the assets arising out of the Research Phase.
However, this is possible only if you are able to determine the technical and commercial feasibility of the asset for sale or use.
In other words, you business must have the intent or the ability to generate, use, or sell the intangible asset. Furthermore, you should be able to showcase how such an asset will generate economic returns in the future for your business.
Thus, you must be able to differentiate between the Research Cost and the Development Cost. However, you will treat the entire cost as if it was incurred in the Research Phase of the Project. Provided you are not able to differentiate between the Research Cost and the Development Cost.
Say, you acquire an R&D Project in a business combination. As per Intangible Assets Accounting, you need to treat such an R&D Project as an intangible asset at cost.
Furthermore, you also need to recognize such an R&D Project as an intangible asset even if it consists of the Research Phase.
However, say you incur an expense on this project post the Business Combination. Then, as per Intangible Assets Accounting, you need to charge such an expenditure as an expense. Provided, it does not meet the intangible assets definition and recognition criteria.
There are certain cases where an asset contains both tangible and intangible elements. You need to make use of sound judgment to understand whether to treat such an asset as intangible or not. Computer Software is one of such assets.
Say, you own a computer-controlled machine that cannot function without the embedded computer software. This means Computer Software is an integral part of the machine’s hardware. This is because the machine cannot function without the Software. In such a case, you cannot treat Computer Software as an intangible asset since it is inseparable from the machine.
The same is the case with the operating system used in a computer. Typically, the cost of such an operating system is included in the cost of the hardware. Thus, the operating system cannot be treated as an intangible asset.
As a result, you must charge internally developed software as an expense irrespective of whether it is meant for use or sale. However, you need to charge such a cost as an expense only till the time you are not able to determine the following:
Accordingly, you recognize the computer software as an intangible asset if you purchase it and capitalize the same over its useful life. Further, you treat computer software as a part of the hardware costs if it is an operating system for hardware.
However, you charge computer software as an expense if it is generated internally for use or sale. Provided, you are able to determine its feasibility and measure its reliability.
You must carry the intangible asset at Cost once you have recognized it as intangible. Now, you can choose between two methods to measure the intangible assets post the acquisition.
As per this method, you need to carry the intangible assets at cost less accumulated amortization and impairment losses post the initial recognition of such assets.
As per this model, you may carry intangible assets on a fair value basis. That is the amount of asset revalued as per Fair Value less Amortization and Impairment losses.
However, you can determine the revalued amount of the asset only if there exists an active market for such an asset.
As discussed under Intangible Assets Accounting, you first need to recognize if an asset is intangible. Subsequently, you either charge the intangible as an expense or report it as an intangible asset on the asset side of the balance sheet.
As you already know, your Balance Sheet reports your entity’s assets, liabilities, and shareholder’s equity. Accordingly, you need to report only those items as intangible assets that satisfy both the intangible assets definition and its recognition criteria.
As discussed above, you cannot recognize internally generated intangibles as intangible assets except for a few. Rather, you need to charge such intangibles as an expense at the time when it is incurred.
For instance, you need to take all the Research Costs as an expense. However, you need to charge the Development Cost as an intangible Asset. Provided you can determine its technical and commercial feasibility for sale or use.
Thus, you need to recognize only those items as Intangible Assets on the asset side of your balance sheet meeting both the intangible assets definition and recognition criteria.
As per International Accounting Standard 38, you can recognize only the acquired intangible assets. In other words, intangible assets represented on your balance sheet are either acquired as a part of the Business Combination. Or such assets are purchased as individual assets from outside.
The Property, Plant, and Equipment (PPE) are Tangible Assets you own for producing goods or rendering services. Further, your business is expected to utilize such assets for more than one accounting period.
Thus, you recognize Property, Plant, and Equipment as assets on your Balance Sheet, much like Intangible Assets. Provided, such assets give you economic benefits and you can measure their cost reliably.
Likewise, you need to carry these tangible assets at any of the following charges once they meet the recognition criteria.
Whereas, intangible assets are assets that do not hold any physical substance. As mentioned above, you need to record these items as intangible assets on your balance sheet. Provided such assets meet both the intangible assets definition and the recognition criteria.
Accordingly, you need not recognize the internally generated intangible assets as intangible assets on your balance sheet. As per the Accounting Standard, you can only record the intangibles acquired in a Business Combination or purchased from outside as Intangible Assets on your Balance Sheet.
Furthermore, you need to amortize such assets over their useful life once recognized as intangible assets. This is unlike Property, Plant, and Equipment which is depreciated over its useful life.
You must carry intangible assets at Cost less Accumulated Amortization and Impairment Loss once you have recognized them.
Amortization is nothing but a charge against an intangible asset. It reflects the utilization of the intangible asset over its useful life.
In other words, Amortization refers to the systematic allocation of the cost of the Intangible Asset as an expense over its useful life.
Thus, Amortization is much like Depreciation. Depreciation too spreads out the cost of the asset over its useful life. However, it is used in the case of Tangible Assets. Whereas, Amortization is used to expense the Intangible Assets of your business over their useful life.
Furthermore, you can use various methods to calculate the amortization expense to be charged to the intangible asset. But, you must remember that such a method should reflect the pattern in which you consume the economic returns generated from such an asset.
However, you can use the Straight Line Method to calculate the Amortization expense if you cannot reliably determine such a pattern.
Thus, the following are the various Amortization Methods you can use:
As mentioned above, Amortization is typically charged as an expense. However, there are times when you use the economic returns generated from such an asset to produce other assets. In such a case, the Amortization cost forms part of the cost of the other asset.
As discussed above, intangible assets are classified on the basis of their useful life. These include intangible assets with a finite life and ones with an indefinite life.
Thus, you need to amortize only assets with a finite life over their useful life on a systematic basis. However, the assets with an indefinite useful life are not amortized.
Furthermore, you need to consider the following points when amortizing intangible assets with a finite life:
