Intangibles
Intangible assets lack physical existence. Unlike tangible assets such as property, plant, and equipment, intangible assets derive their value from the rights and privileges granted to the company using them.
They are not financial instruments. Assets such as bank deposits, accounts receivable, and long-term investments in bonds and stocks lack physical substance, but are not classified as intangible assets. These assets are financial instruments and derive their value from the right or claim to receive cash or cash equivalents in the future.
In most cases, intangible assets provide services over a period of years. As a result, they are normally classified as long-term assets. The most common types of intangibles are patents, copyrights, franchises or licenses, trademarks or trade names, and goodwill.
Valuation and Accounting
Intangibles purchased from another party are recorded at cost . Cost includes all costs of acquisition and expenditures necessary to make the intangible asset ready for its intended use—for example, purchase price, legal fees, and other incidental expenses.
Reporting Intangibles
Valuation and Accounting
If intangibles are acquired for stock or in exchange for other assets, the cost of the intangible is the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident.
The accounting treatment for purchased intangibles closely parallels that followed for purchased tangible assets. The cost of created intangibles is generally expensed as incurred. Therefore, even though a company may incur substantial research and development costs to create an intangible, these costs are expensed.
Various reasons are given for this approach. Some argue that the costs incurred internally to create intangibles bear no relationship to their real value. Therefore, expensing these costs is appropriate. Others note that with a purchased intangible, a reliable number for the cost of the intangible can be determined. With internally developed intangibles, it is difficult to associate costs with specific intangible assets. And others argue that due to the underlying subjectivity related to intangibles, a conservative approach should be followed—that is, expense as incurred.
The accounting for intangible assets depends on whether the intangible has a limited or an indefinite life. The costs of acquiring and defending a copyright may be capitalized, but the research and development costs involved must be expensed as incurred. Generally, the useful life of the copyright is less than its legal life. The costs of the copyright should be allocated to the years in which the benefits are expected to be received. The difficulty of determining the number of years over which benefits will be received normally encourages the company to write these costs off over a fairly short period of time.