Intangible assets are non monetary assets which lack physical substance, this is in contrast to tangible assets such as equipment, which do have a physical presence.
Not all intangibles are intangible assets. Some intangible items such as goodwill, brands, logos, and research expenditure are generated or developed internally by a business, and are not regarded as intangible assets. Expenditure on these items is charged as an expense in the income statement as it is incurred, and does not become an an intangible asset on the balance sheet of the business.
Accounting for Intangible Assets
Intangible assets are normally purchased by the business, but there are examples of internally developed intangibles such as development costs, which can be capitalized providing there is a reasonable expectation of future revenue.
The accounting treatment for intangible assets differs depending on whether the asset has a limited (finite) useful life or an indefinite life.
Intangible Assets with a Limited Life
The cost of intangible assets with a finite life is amortized (written off) over the shorter of its legal life or useful life.
A patent granted to a business for an invention or purchased from a third party, is an example of an intangible asset with a finite life. For example, a patent is purchased for 40,000 and has a 10 year useful life remaining. The bookkeeping journal to record the purchase of the intangible asset would be as follows:
The amortization expense is given by the formula above and is calculated as follows:
Amortization expense = Cost / Useful life Amortization expense = 40,000 / 10 = 4,000
The amortization is recorded with the following bookkeeping journal entry.
Intangible Assets with an Indefinite Life
An intangible asset with an indefinite life is not amortised, but is tested for impairment and written down to its recoverable amount.
As they do not expire, a trademark is an example of an intangible asset with an indefinite life. For example, if a business has a trademark which is carried in the balance sheet at 50,000, and an impairment review shows that the recoverable amount is only 40,000, then the impairment is calculated as follows.
Impairment loss = Carrying value - Recoverable amount Impairment loss = 50,000 - 40,000 = 10,000
The bookkeeping journal to reflect this impairment is recorded as follows:
|Loss on impairment||10,000|
|Accumulated impairment loss||10,000|
List of Typical Intangibles
There are numerous example of intangibles including the following items:
- Domain names
- Franchise agreements
- Technical documentation
- Computer software
- Chemical formulas
- Purchase goodwill
- Development costs
- Customers lists
- Licensing agreements
- Broadcast rights
- Usage rights
- Leasehold improvements (asset belongs to landlord)
- Government licenses
- Mailing lists
- Non-compete covenants
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.