What are intangible assets in accounting? How are tangible intangible assets classified, recognised, measured, and presented on the financial statements, and what are the main accounting journals for purchase, revaluation, amortisation, impairment and sale of intangible assets.

What are intangible assets in accounting? How are tangible intangible assets classified, recognised, measured, and presented on the financial statements, and what are the main accounting journals for purchase, revaluation, amortisation, impairment and sale of intangible assets.

What are intangible assets in accounting?

Intangible assets are assets that do not have physical substance i.e. goodwill, digital assets, intellectual property, etc. Therefore, the intangible assets differ from the tangible assets that are in a physical form such as buildings, machinery etc.

Intangible Assets can generate returns for the business in the future and are recorded as long-term intangible assets on the company Statement of financial Position (Balance Sheet) at cost that can be determined by expert valuers and subsequently the Intangible Assets are amortised over time. 

What are the two categories of intangible assets?

The two categories or Intangible Assets are the Identifiable Intangible Assets and Unidentifiable Intangible Assets as described below:

Identifiable Intangible Assets

The identifiable intangible assets a company hold are usually indefinite assets that do not have a physical form and can be bought or sold by the company.

Some examples of identifiable intangible assets are intellectual property, trademarks, patents. At the same time the company can hold non-monetary assets as licences, government grants etc.

In summary the main criteria for an asset to b classified as an identifiable intangible asset on the company books of accounting are:

• The asset is identifiable, that means the asset can be separate from the business or arise from contractual or other rights.
• The company must have control over the asset and the future benefits from holding the asset.
• The asset must generate future economic benefits.

Unidentifiable Intangible Assets

The unidentifiable intangible assets a company hold are usually assets with a definite or limited lifespan that do not have a physical form and can not be separated from the business. Therefore, these assets can not be bought or sold by the company especially because these assets are tied-up to the company and could be very difficult to quantify as a stand-alone asset. Some examples of unidentifiable intangible assets are goodwill and brand recognition, company reputation etc.

In summary the main characteristics for an asset to be classified as an unidentifiable intangible asset are:

• The asset is unidentifiable, that means the asset was generated within the company and can not be separate from the business or arise from contractual or other rights.
• The asset is difficult to valuate individually and can not be sold separately from the business.

What are the main types of intangible assets?

As mentioned above intangible assets are assets that do not have physical substance, but these assets are important for the company success. In most cases the intangible assets are long term assets contribute to the success over the lifetime of the company.

In many cases the intangible assets can not be sold separately as they are tied-up to the company and is mostly probable to be evaluated within the overall company valuation. On the other side there are tangible intangible assets that are not tied-up to the company and can be evaluated and sold separately.

In addition, there intangible assets can be indefinite that means will stay within the business as long as the business operate, and on the other side definite intangible assets that have a shorter life and depends on the scope of utilisation within the business.

There can be many types of intangible assets within a company, therefore, we will list and describe some of the main types of intangible assets as you can see below:

• Goodwill
• Brand Equity
• Intellectual Property
• Licensing and Rights   
• Customer Lists and Data
• Research and Development 

What is Goodwill when accounting for intangible assets?

Goodwill is a type of unidentifiable intangible assets that are created during the company lifetime and are usually attached to the company, therefore goodwill can not be valued and sold as a stand-alone intangible asset.

When a company is sold the goodwill is sold as a premium that arise in general from the company loyalty or brand reputation.

Goodwill is calculated by subtracting the market value of the tangible assets, identifiable intangible assets, liabilities from the selling cost as per the formula below:

Goodwill = Consideration transferred – (Tangible Assets at FV + Identifiable Intangible Assets + Liabilities)

In other words, goodwill is the difference between the value of tangible assets a company hold, and the value paid/received during the acquisition of a company.

When from the calculation of goodwill arise a positive result that exceeds the fair value of the net assets it means the company is doing well and is called goodwill. On the other side when from the calculation of goodwill arise a negative result that is below the fair value of the net assets then could mean that the company is not doing so well and is called badwill.

Goodwill is not recorded into the company books while is created but when the company is acquired by another company or is a merger the goodwill is recorded and presented on the Statement of Financial Position (Balance Sheet) within the acquirer financials.

On the Statement of Financial Position (Balance Sheet) goodwill is classified under the non-current (long-term) intangible asset and shown on a separate line called Goodwill

What is Brand Equity when accounting for intangible assets?

Brand equity is a type of unidentifiable intangible assets that are created during the company lifetime and are usually attached to the company products or services, therefore Brand Equity can not be valued and sold as a stand-alone intangible asset. At the same time brand equity can be an important part of the company Goodwill.

The brand equity can arise from the customer perception to the company products or services and usually will have a premium value that is included in the selling prices as the customers will be willing to pay more for a product or service that have a great branding. At the same time the brand equity will be an important driver to increase the sales of the company products or services.

Companies use many techniques to rise the company brand equity such as sound and unique brand names, customers loyalty programs, marketing and promotions and any other brand awareness programs that a company will find suitable to the market it operates

Brand equity is not recorded into the company books separately as this is usually a part of the premium price the customers are willing to pay for the company products or services.

What is Intellectual Property when accounting for intangible assets?

Intellectual Property is a type of identifiable intangible assets that are not in a physical form, but have a monetary value and can be bought, rented or sold by a company. In most cases the intangible assets that are part of the intellectual property are attached to a company and can not be used by another company without the authorization of the holding company. These types of intangible assets usually have a high value and, in many cases, could count more than the physical tangible assets of a company.

Intellectual property arises from the company or owner inventions and innovations that are protected by means of copyrights, patents or trademarks and are legally protect from uses by another company or individual without the owner authorisation. Some of the main forms of intellectual property are described below:

What are Copyrights in accounting?

Copyrights are non-physical intangible assets and represent a form of protection for the company or copyright owner granted official by governments to protect the copyright owner from unauthorized used of them work that can be in any form as designs, machinery, goods and services etc.

The copyrights are usually capitalized or if purchased from another party recorded at cost withing the intangible assets on the Statement of Financial Position (Balance Sheet) then subsequently amortised over the life of the asset.

What are Patents in accounting?

Patents are non-physical intangible assets and represent a form of protection of new technologies developed within the company from using or developing by others without the company authorisation. Patents can be in any form as designs, machinery or any other innovative technologies.

The patents are usually capitalized or if purchased from another party recorded at cost withing the intangible assets on the Statement of Financial Position (Balance Sheet) then subsequently amortised over the life of the patent.

What are Trademarks in accounting?

Trademarks are non-physical intangible assets created usually within the company i.e. company logo or other designs and symbols associated to the company as a whole or a particular product or service offered to be sold by the company

When the trademarks are developed internally can not be valuated and recorded as company assets as it will be very difficult to assess a value to the trademarks separated from the company and goodwill. On the other side when a trademark is bought from a third party this will be recorded at cost in the intangible assets on the Statement of Financial Position (Balance Sheet) then subsequently amortised over the life of the trademark.

What is Licensing and Rights when accounting for intangible assets?

Licensing and rights fall under the type of identifiable intangible assets that are not in a physical form, but have a monetary value and can be bought, rented or sold by a company. Usually licenses and rights are rented by means of giving authorisation for the use to third parties in exchange for royalties that are monetary compensation for the use of the licenses and rights.

Licensing and rights are usually capitalized or if purchased from another party recorded at cost withing the intangible assets on the Statement of Financial Position (Balance Sheet) then subsequently amortised over the life of the intangible asset.

What are Customer Lists and Data when accounting for intangible assets?

Customer lists is a type of intangible assets that are not in a physical and can be unidentifiable if created within the company or identifiable if purchased from a third party. Customer lists can be bought, sold or exchanged as per company needs. At the same time customers lists can arise from business combinations or mergers.

Customers lists have significant value for a company and can be used for promoting new products, promotions, incentives or loyalty programs offered to actual clients. In addition, customers lists can be monetized by selling to interested parties.

The unidentifiable customer lists created within the company can not be capitalized, whereas if the customers lists are purchased from another party and can be categorized as identifiable intangible assets will be recorded at cost as part of the intangible assets on the Statement of Financial Position (Balance Sheet) then subsequently amortised over the life of the intangible asset.

What is Research and Development when accounting for intangible assets?

Research and Development means the process of acquiring new technical knowledge about products and services and using it to improve or develop new products and services within the company. Research is referring mainly to the activities and prospects to find new way and knowledges to improve the company products or serviced. Whereas development is the process of implementation the acquired knowledges in the production within the company.

Research and Development are usually expensed but in may cases these costs can be of a significant value and can result in patents, or other intangible assets. Therefore, research and development intangible assets can be capitalized and show as part of the intangible assets on the Statement of Financial Position (Balance Sheet) then subsequently amortised over the life of the intangible asset.

How are intangible assets presented on the Statement of Financial Position (Balance Sheet) and Income Statement (Profit & Loss)?

Intangible Assets that are created internally during the company lifetime and fall under the unidentifiable intangible assets category can not be capitalized and the costs incurred will be recorded as an expense within the Statement of Comprehensive Income (Profit & Loss) at the time when incurred.

Intangible Assets that can be identified and fall under the identifiable intangible assets category will be recorded within the intangible assets on the Statement of Financial Position (Balance Sheet) and amortized over the life of the asset.

How to account for the purchase of intangible assets?

In many cases intangible assets are created within the company i.e. goodwill, customer lists, trademarks etc. In addition, intangible assets can be purchased from other parties or acquired from mergers and acquisitions i.e. licences, copyrights etc.

When calculating the value of a tangible asset can be a bit difficult to evaluate a price for a specific asset, while when calculating the total company tangible assets value this can be easier as the value can be deducted from the market value of the business less the net tangible assets as per formula below:

Intangible Assets Value = Market Value of Business – Net Tangible Assets Value

As an example, the calculation of the goodwill value can be determined when a company is sold and there is a known purchase price by subtract the difference between the fair market value of the business assets and liabilities from its purchase price as per formula below:

Goodwill = Purchase Price – (Assets – Liabilities)

As mentioned above intangible Assets created in house does not have a book value, therefore when a company is sold the price can be above of the assets value as shown on the Statement of Financial Position (Balance Sheet) and the premium paid will be subsequently recorded in the buyer books as an intangible asset and shown on the Statement of Financial Position (Balance Sheet) of the buyer.

When you purchase an intangible asset, the company will have to record the cost of the asset within the accounting books, the liability is there is a purchase on credit or bank movement if there is a cash purchase.

Double entry accounting journal for a cash purchase of an intangible asset:

• Credit (CR): Statement of Financial Position (Balance Sheet) – Cash
• Debit (DR): Statement of Financial Position (Balance Sheet) – Intangible assets

Double entry accounting journal for a purchase of an intangible asset on credit:

• Credit (CR): Statement of Financial Position (Balance Sheet) – Accounts Payable
• Debit (DR): Statement of Financial Position (Balance Sheet) – Intangible assets

Double entry accounting journal for a payment of an intangible asset purchased on credit:

• Credit (CR): Statement of Financial Position (Balance Sheet) – Cash
• Debit (DR): Statement of Financial Position (Balance Sheet) – Accounts Payable

What are the valuation methods for intangible assets?

To purchase intangible assets, the buyers should firstly determine the price of the asset. There are a few ways to valuate intangible assets, and the most common ways that intangible assets can be measured and valuated are at the market value, net present value or cost as you can read below.

How intangible assets are valuated at market value? 

The measurement of intangible assets at market value is most used where there is a marketplace with similar intangible assets and would be possible to determine the selling price.

How intangible assets are valuated at net present value? 

Net present value is known as the income approach valuation methodology for intangible asset that is applicable when the intangible generates a measurable cash flow.

When the intangible assets are measured at net present value both earnings generated from intangibles and expenses incurred by the business are calculated to determine the value of the asset.

In addition, for identifiable intangible assets with definite lifetime the business should perform the recoverability test of future cash flows derived from use and subsequent disposal of the asset and at the same time the fair value test of expected net future cash flows discounted at the rate of interest associated to the intangible assets marketplace.

How intangible assets are valuated at cost?  

The cost approach for valuation of intangible assets is not so popular and is mostly used when there is no active market for the intangible assets, or the assets have a unique nature with no comparable assets available on the market.

The intangibles that are valuated at cost are usually unidentifiable assets that are created internally within the life of the business. At the same time the cost approach of valuation does not account for future benefits from the asset. Therefore, the valuation of an intangible asset can only be determined from the creation costs or derived from the estimated cost for substitution/replacement of the intangible asset.

As an example of intangible asset valued at cost is the brand equity of a company that can be measured including the costs of research, design or adverting and proportions costs.

When an asset is valuated at the replacement cost, the valuers will take in considerations the all the cost to create a similar asset including research, development promotion and so on. At the same time the replacement asset could be of a lower or better quality that will result in adjustment to the valuation of the intangible asset.

What is amortisation and impairment of intangible assets?

The amortisation method of intangible assets is similar the depreciation method for tangible fixed assets that you might be already familiar with. However not all the intangible assets can be amortized, as they must be meet some criteria as listed below to apply for amortisation method:

• The intangible assets should be identifiable.
• The intangible asset should have a definite lifetime.
• The assets should be measurable.

Once the criteria above are meet the intangible assets can be amortised usually using the straight-line method that means writing off the cost over the intangible asset lifetime. The amortization expense can be calculated using the formula below:

Intangible Asset Amortization Expense = Intangible Asset Value / Intangible Asset Lifespan

The main characteristic that differentiates the amortisation from depreciation method is that the intangible assets do not have a residual value as you can see residual value is not included in the formula above.

Not all the assets are amortized and some of the intangible assets can be measured as fair value (i.e. Goodwill). These types of intangibles are not amortized but would require from time to time to be revaluated to align the book value to the most probable selling price and tested for impairment. If there will be any change in the value of assets because of impairment this will be recorded within the books of accounting a presented on the Statement of Income (Profit & Loss)

Double entry accounting journal for a cash purchase of an intangible asset:

• Credit (CR): Statement of Financial Position (Balance Sheet) – Intangible assets
• Debit (DR): Income Statement (Profit & Loss)) – Amortisation Expense

How to account for the sale of intangible assets?

The unidentifiable intangible assets can not be bought or sold by the company especially because these assets are tied-up to the company and could be very difficult to quantify as a stand-alone asset. On the other side, unidentifiable intangible assets can be recorded within the purchaser books of accounts at the time of purchase because a cost could be attributable to them at the time of purchase these assets can be classified as identifiable assets.

When selling an identifiable intangible asset, the company or client is performing a valuation of an asset based on income, cost or market approach as would be more suitable for the type of asset to be sold. Once the valuation and price are agreed the sale could take place and the company will record the transactions for the sale of intangible assets in the accounting books as you can see more detailed below.

Double entry accounting journal for a cash sale of an intangible asset:

• Debit (DR): Statement of Financial Position (Balance Sheet) – Cash
• Credit (CR): Statement of Financial Position (Balance Sheet) – Intangible assets

Double entry accounting journal for a sale of an intangible asset on credit:

• Debit (DR): Statement of Financial Position (Balance Sheet) – Accounts Receivable
• Credit (CR): Statement of Financial Position (Balance Sheet) – Intangible assets

Double entry accounting journal for a payment receipt of an intangible asset sold on credit:

• Debit (DR): Statement of Financial Position (Balance Sheet) – Cash
• Credit (CR): Statement of Financial Position (Balance Sheet) – Accounts Receivable

What is an Intangible Asset Register?

Intangible Asset Register is a record kept by the company that ca be either in a physical form on the paper or electronically within the accounting software intangible assets register module. Within the intangible assets register the company is tracking each asset over time by keeping recording all the assets information’s such as description, identification number, cost, amortisation or impairment data and any other information the company might find useful to keep track and analyse of the intangible assets over time.

The intangible assets register is a valuable set of data for the company and decision makers. At the same time the intangible assets register can be requested by company stakeholder like lenders, insurance companies etc. or for statutory requirements.

What is recorded within intangible assets register.

An intangible assets register is a database of information about company intangible assets, and the main information recorded within the register is outlined below:   

Intangible assets description: The company will keep a main record of the asset description on the purchase data or other requirements as the company might find suitable.

Acquisition details: The company will record the purchase details as the date of acquisition, invoice etc, or if the asset was created in house there will be a record of the date of its completion. Ath the same time

Costs of intangible assets: If the asset is purchased the company will recognise, measure and record the asset costs as per the acquisition documentation for each asset, or if the asset is created in house the company will record the costs as incurred.

Intangible assets identification data: For assets tracking and identification the company should allocate unique asset identification data for each asset. The identification data can be in a form of asset serial number or unique ID number allocated as per company assets classification policy.

Disposal information: When an intangible asset is sold the asset should be deleted from the intangible assets register module within the accounting records. However, the company might opt to keep on a separate storage the historical data of the asset records for future analyses, or as per the statutory requirements.

The intangible assets of a company can have a high value on the Statement of Financial Position (Balance Sheet) of a company. Keeping an intangible asset register will be a meaningful source of data for the company reporting and analyses of the assets efficiency and profitability over the time resulting in more informed decisions about the company future.

At the same time the intangible assets register could be mandatory as per the local statutory requirements.

What are the main intangible assets standards requirements per IAS 38 — Intangible Assets?

The International Accounting Standard, IAS 38 — Intangible Assets accountings standard apply only to identifiable intangible assets. Therefore, the IAS 38 accounting standard outline the criteria of classification, recognition, measurement and revaluation and amortisation of identifiable intangible assets.

An asset is recognised as an identifiable intangible asset within the accounting books if it is probable that the asset will generate future economic benefits for the company, and the asset can be measured reliably.

Once the intangible asset are recognised within, the company Statement of Financial Position (Balance Sheet) the asset will be measured using either the cost model or revaluation model. Subsequently the intangible asset can be amortised usually using the straight-line method that means writing off the cost over the intangible asset lifetime.

What are the main IFRS Standards that apply to intangible assets?

Goodwill is one or the most important intangible asset of a company and in many cases can have a value much higher than all the company tangible assets. However, Goodwill is an unidentifiable intangible asset and can be valuated only when is a merger or the company is sold. Therefore, the most relevant International Financial Reporting Standard that apply to Goodwill is IFRS 3 – Business Combinations.

As per IFRS 3 – Business Combinations at the acquisition the purchaser can record the goodwill as an intangible asset within the Statement of Financial position (Balance Sheet) and the value Goodwill can be determined using the formula below:

Goodwill at Acquisition = (Consideration paid + Non-Controlling Interest at Acquisition) – Net Assets at Acquisition

While other intangible assets that are valuated and amortised over the life of the asset, Goodwill is valuated and tested for impairment annually or each financial period. The determination of Goodwill value at the reporting date you can use the formula below.

Goodwill at Reporting Date = Goodwill at Acquisition – Impairment to Date

What is the difference between US GAAP and IFRS in relation to the intangible assets accounting standards?

The International Financial Reporting Standards (IFRS) and US General Accepted Accounting Practice (GAAP) are very similar, however not in totality and we will outline below some of the main differences:

Revaluation of intangible assets at Fair Value

GAAP:  Under the US General Accepted Accounting Practice (GAAP) there is no revaluation at Fair value for intangible assets.

IFRS: Under the International Financial Reporting Standards (IFRS) once the intangible assets are recognised within the accounting books, the assets can be revaluated at fair value if there is a comparable marketplace for the assets.

The treatment of costs for Intangible Assets.

GAAP:  As per US General Accepted Accounting Practice (GAAP) the costs for research and development of internally created intangible assets would be expensed as incurred.

IFRS: As per International Financial Reporting Standards (IFRS) only the costs for research of internally created intangible assets can be expensed as incurred, while the cost of development can be capitalized subject to accounting standards criteria.

What are the main intangible assets accounting ratios?

There are many ways to analyse the intangible assets over the company performance and we will outline below the main intangible assets accounting ratios:

Goodwill to Assets Ratio

The goodwill can represent a high share of total company value and the goodwill to assets ratio is an important metric of a company health. The goodwill to assets ratio is calculating by dividing the goodwill by total assets.

Goodwill to Assets Ratio = Goodwill ÷ Total Intangible Assets

A high goodwill to assets ratio will indicate that the company intangible assets are accounting for a significant proportion of the total company assets that could mean the company have good prospects for the future. On the other side, a low goodwill to assets ratio could mean that the company might be in trouble, or is at the beginning of the road (i.e. start up) and will still need time to make a reputation within the market.

Intangible Assets Turnover Ratio

The company decision makers and stakeholders when analysing a company health will look in most of the cases at how much sales are generating the assets. The intangible assets turnover ratio is calculation by dividing the net revenue by total intangible assets.

Intangible Assets Turnover Ratio = Net Revenue ÷ Total Intangible Assets

A high intangible assets turnover ratio will mean the resources spent on intangible assets generate high returns while a low ratio means the returns generated from intangible assets are low and the company should consider how to improve the efficiency and effectiveness of such assets.

Intangible assets can account for a large proportion of the company valuation and the intangible accounting ratios can be key metrics for analysing the profitability and efficiency of intangible assets and how they impact on the company health.

Conclusion

Most companies have both tangible and intangible assets and separate records should be kept to reflect the type and classification of each asset on the company Statement of Financial Position (Balance Sheet). At the same time the companies should be aware of the accounting standards required within them location and apply with due care and diligence the accounting standard for the recognition, measurement, amortisation, impairment or derecognitions when accounting and reporting for intangible assets. 

If you found this article helpful, please go to the rest of the website for more about accounting, or other financial articles about International Accounting, Audit, Taxation, Accounting Software, Cloud Accounting and Accounting Automation.

Read this article in: English – Dutch – French – German – Spanish