Accounting for Intangible Assets
Intangible assets are the non-monetary assets that have no physical substance, which we cannot see or touch. They are different from other kinds of assets such as equipment, machinery, and building, which we can see with our eyes. They are classified as the part of a fixed assets that the company acquires by purchase or self-creation. They expect to have future economic benefits flow into the entity.
Base on IAS 38, Intangible assets must meet the following conditions:
- Identify: the company must be able to separate the asset to transfer, sale, rented, or exchanged with the other parties. They can be the assets raise from the contractual or legal right, which is transferable and separate from the entity.
- Control: Intangible assets must be under the control of the entity.
- Future economic benefit: The entity expects to generate future economic benefits from assets.
Example of Intangible Asseta
In real life, there are many types of intangible assets, such as:
- Patent: is the intellectual property that gives the owner an exclusive right to on his or her innovation. It prevents the copycat from taking benefit from the owner by copying the original idea.
- Trademark: is the written mark which company uses to identify its goods or service. It is a unique design that differentiates from the competitor.
- The customer list: is the list of previous company customers which is the potential to make more sales in the future.
- License: is the official permit from the government, which allows the entity to run a business, provide a particular service, or own something.
- Software: is the computer application which allows the human to perform many tasks on the computer.
Intangible Assets: Initial Measurement and criteria
Intangible assets can be purchase from external party or self-generated within the company. Under IAS 38, Intangible asset will recognize base on criteria:
- The cost can be measure reliably: it means that company knows how much they have spent on a purchase or create the asset. If we do not know the cost, how can we record into the accounting system?
- The future economic benefit will probably flow into company. It is not different from other types of asset, we only recognize when we know that the asset will provide benefit in the future. If the asset cannot provide any more benefit, we should record them as expenses in the current accounting period. For example, research and development will be recognized as an intangible asset only when it is clear that the company will be able to utilize them and produce the product to sell in market.
The criteria to recognize each kind of asset:
|Type of Intangible Asset||Criteria|
|R&D cost||Development Cost will recognize only when:
All research must record as expenses when occurs.
|Internal generated brand, customer list, goodwill, training cost, and advertising||Must record as expenses, cannot recognize as an asset.|
For the initial recognition, the entity must record at a cost in order to comply with the accounting standard (IAS 38).
|Purchase||The cost spends to acquire an asset.|
|Exchange with other assets||The fair value or carry amount of given up asset|
|Business Combination||The fair value on the acquisition date|
|Software||All costs related to building the software or purchase cost if we buy from external party.|
For the subsequent measurement of intangible asset, the entity has the option to use the cost model or revaluation model.
Cost Model: Intangible assets must be presented at cost less accumulated amortization and impairment loss, if any. After initial recognition at cost, intangible asset will be amortized to income statement over its useful life.
Revaluation Model: Intangible asset will present at the revalued amount, which is the fair value reference to an active market. Under this model, the increasing value will record as comprehensive income and accumulated in “revaluation surplus” in equity. The decreasing amount will reverse back from this surplus.
Noted: It is very hard to find the active market for intangible asset, so we rarely use this method. We cannot use the revaluation model on patent, trademark, and brand as they are specific and unique for each entity.
Under the cost model, intangible assets must be amortized over their useful life. The same to depreciation, it is the process of reducing asset balance to amortize expenses in income statement. The amortize expense will depend on the total cost of asset, and it is expected useful life as it is highly likely to have no residual value. The intangible asset with limited useful life such as copyright, patent, and trademark.
So we use the full cost amount to calculate with the Straight line method.
Amortization = Cost / useful life
For example, company A owns a software cost $ 200,000 and they expect to use them for 10 years. There is no residual value as the software will be useless after that.
Amortization expense = $ 200,000 /10 = $ 20,000 per year
Intangible asset with indefinite life
Some intangible asset does not have limited useful life which asset will generate economic benefit into company. The intangible asset with infinite useful life should not be amortized as we can’t estimate its life. However, the entity must access the impairment of asset.
Impairment testing for intangible asset
The intangible asset with infinite useful life should be tested for impairment one per year or whenever there is indicator that asset recovery amount may not be recoverable. Impairment testing is the process to ensure that the assets are not carried more than their recoverable amount.
Impairment = carry amount – recoverable amount
- Carry amount is the balance present on the balance sheet
- Recoverable amount is the higher of asset fair value, less transaction cost and its value in use.
Disposal of Intangible Asset
The company must derecognize the intangible asset when:
- Sale or dispose of the asset
- The asset has no longer provide future economic benefit, which is base on the result of the impairment test.
The process of derecognition of intangible asset is not different from normal fixed asset.
The gain or loss on disposal of fixed asset:
Net disposal proceeds – Asset Net carry amount
The gain or loss will be recognized in the income statement.
Based on the accounting standard (IAS 38), the company needs to disclose additional information regarding intangible asset such as:
- The useful life which company use as the basis for amortization
- The amortization method that the company use.
- The test of impairment of intangible asset and impairment gain or loss
- Reconciliation of balance sheet items with intangible asset listing
- Basic of determination of infinite life of intangible asset