Intangible assets are identifiable non-monetary assets without physical substance.
An identifiable asset can be acquired on a standalone basis (i.e., can be separated from the entity) or arises from contractual or legal rights and privileges. Common examples include patents, licenses, trademarks, and customer lists. The most common intangible that is not separately identifiable is goodwill, which arises in business combinations.
For each intangible asset, a company assesses whether the useful life of the asset is finite or indefinite. Amortisation and impairment principles apply as follows:
- An intangible asset with a finite useful life is amortised on a systematic basis over the best estimate of its useful life, with the amortisation method and useful life estimate reviewed at least annually.
- Impairment principles for an intangible asset with a finite useful life are the same as for PP&E.
- An intangible asset with an indefinite useful life is not amortised. Instead, at least annually, the reasonableness of assuming an indefinite useful life for the asset is reviewed and the asset is tested for impairment.
A company may have developed intangible assets internally that can be recognized only in certain circumstances. Companies may also have assets that are never recorded on a balance sheet because they are non-identifiable and the company does not have sufficient control over their future economic benefits. These assets might include management and technical skills of employees, market share, name recognition, a good reputation among customers, and so forth. Such assets are valuable and are reflected, in theory, in the price at which the company’s equity securities trade in the market (and the price at which the entirety of the company’s equity would be sold in an acquisition transaction). Such assets may be recognised as goodwill by an acquirer if the company is sold.
Identifiable Intangibles
Under IFRS, identifiable intangible assets are recognised on the balance sheet if it is probable that future economic benefits will flow to the company and the cost of the asset can be measured reliably.
IFRS provides that for internally created intangible assets, the company must separately identify its research phase and development phase.
US GAAP prohibits the capitalisation of most costs of internally developed intangibles and research and development. All such costs are expensed. Costs related to the following categories typically are expensed under IFRS and US GAAP. They include the following:
- internally generated brands, mastheads, publishing titles, and customer lists;
- start-up costs;
- training costs;
- administrative and other general overhead costs;
- advertising and promotion;
- relocation and reorganisation expenses; and
- redundancy and other termination costs.
