An intangible asset is an asset that lacks physical substance (unlike physical assets
such as machinery and buildings) and usually is very hard to evaluate.
It includes patents, copyrights, franchises, goodwill, trademarks, trade names, the general
interpretation also includes software and other intangible computer based assets.
Contrary to other assets, they generally—though not necessarily—suffer from typical market
failures of non-rivalry and non-excludability.
Definition: Intangible assets have been argued to be one
possible contributor to the disparity between company value as per their accounting records,
and company value as per their market capitalization.Considering this argument, it is important to understand
what an intangible asset truly is in the eyes of an accountant.
A number of attempts have been made to define intangible assets:
Prior to 2005 the Australian Accounting Standards Board issued the Statement of Accounting
Concepts number 4 (SAC 4).
This statement did not provide a formal definition of an intangible asset but did provide that
tangibility was not an essential characteristic of asset.
International Accounting Standards Board standard 38 (IAS 38) defines an intangible
asset as: "an identifiable non-monetary asset without physical substance."
This definition is in addition to the standard definition of an asset which requires a past
event that has given rise to a resource that the entity controls and from which future
economic benefits are expected to flow.
Thus, the extra requirement for an intangible asset under IAS 38 is identifiability.
This criterion requires that an intangible asset is separable from the entity or that
it arises from a contractual or legal right.
The Financial Accounting Standards Board Accounting Standard Codification 350 (ASC
350) defines an intangible asset as an asset, other than a financial asset, that lacks physical
substance.
The lack of physical substance would therefore seem to be a defining characteristic of an
intangible asset.
Both the IASB and FASB definitions specifically preclude monetary assets in their definition
of an intangible asset.
This is necessary in order to avoid the classification of items such as accounts receivable, derivatives
and cash in the bank as an intangible asset.
IAS 38 contains examples of intangible assets, including: computer software, copyright and
patents.
Research and development: R&D is considered as one among several other
intangible assets (e.g., about 16 percent of all intangible assets in the US ), even
if most countries treat R&D as current expenses for both legal and tax purposes.
While most countries report some intangibles in their National Income and Product Accounts
(NIPA), no country has included a comprehensive measure of intangible assets.
Yet, economists recognize the growing contribution of intangible assets in long-term GDP growth.
IAS 38 requires any project that results in the generation of a resource to the entity
be classified into two phases: a research phase, and a development phase.
Research is defined as "the original and planned investigation undertaken with the prospect
of gaining new scientific or technical knowledge and understanding.
For example, a company can carry a research on one of its products which it will use in
the entity of which results in future economic income.
Development is defined as "the application of research findings to a plan or design for
the production of new or substantially improved materials, devices, products, processes, systems,
or services, before the start of commercial production or use."
The accounting treatment of such expenses depends on whether it is classified as research
or development.
Where the distinction cannot be made, IAS 38 requires that the entire project be treated
as research and expensed through the Statement of Comprehensive Income.
As research expenditure is highly speculative, there is no certainty that future economic
benefits will flow to the entity.
As such, prudence dictates that research expenditure be expensed through the Statement of Comprehensive
Income.
Development expenditure, however, is less speculative and it becomes possible to predict
the future economic benefits that will flow to the entity.
The matching concept dictates that development expenditure be capitalised as the expenditure
will generate future economic benefit to the entity.
The classification of research and development expenditure can be highly subjective, and
it is important to note that organisations may have an ulterior motive in its classification
of research and development expenditure.
Less scrupulous directors may manipulate financial statements through their classification of
research and development expenditure.
Financial accounting: General standards:
The International Accounting Standards Board (IASB) offers some guidance (IAS 38) as to
how intangible assets should be accounted for in financial statements.
In general, legal intangibles that are developed internally are not recognized and legal intangibles
that are purchased from third parties are recognized.
Wordings are similar to IAS 9.
Under US GAAP, intangible assets are classified into: Purchased vs. internally created intangibles,
and Limited-life vs. indefinite-life intangibles.
Expense allocation: Intangible assets are typically expensed according
to their respective life expectancy.
Intangible assets have either an identifiable or indefinite useful life.
Intangible assets with identifiable useful lives are amortized on a straight-line basis
over their economic or legal life, whichever is shorter.
Examples of intangible assets with identifiable useful lives include copyrights and patents.
Intangible assets with indefinite useful lives are reassessed each year for impairment.
If an impairment has occurred, then a loss must be recognized.
An impairment loss is determined by subtracting the asset's fair value from the asset's book/carrying
value.
Trademarks and goodwill are examples of intangible assets with indefinite useful lives.
Goodwill has to be tested for impairment rather than amortized.
If impaired, goodwill is reduced and loss is recognized in the Income statement.
Taxation: For personal income tax purposes, some costs
with respect to intangible assets must be capitalized rather than treated as deductible
expenses.
Treasury regulations generally require capitalization of costs associated with acquiring, creating,
or enhancing intangible assets.
For example, an amount paid to obtain a trademark must be capitalized.
Certain amounts paid to facilitate these transactions are also capitalized.
Some types of intangible assets are categorized based on whether the asset is acquired from
another party or created by the taxpayer.
The regulations contain many provisions intended to make it easier to determine when capitalization
is required.
Given the growing importance of intangible assets 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 tax strategies such as income-shifting or transfer pricing, tax authorities and international
organizations have been designing ways to link intangible assets to the place where
they were created, hence defining nexus.
Intangibles for corporations are amortized over a 15-year period, equivalent to 180 months.
Definition of "intangibles" differs from standard accounting, in some US state governments.
These governments may refer to stocks and bonds as "intangibles."
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