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Intangible Assets Introduction

Intangible asset is an asset which is not tangible or does not have any physical form and is usually very hard to evaluate. Normally it is identified as the only means to fulfil the gap between the value of the company as per their accounting records and the company's value according to market capitalisation. Intangible assets derive their value from intellectual or legal rights. It includes patents, copyrights, franchises, goodwill, trademarks, trade names, reputation, name recognition, and intellectual property such as knowledge and know how, the general interpretation also includes software and other intangible computer based assets.

Intangible assets cannot be destroyed by fire, hurricane, or other accidents or disasters and so they can be of immense use to build back destroyed tangible assets.

An intangible asset can be split into definite and indefinite depending on the particulars of the asset.

1. Limited-life intangible assets, such as patents, copyrights, and goodwill
2. Unlimited-life intangible assets, such as trademarks.
   
   

Numerous attempts have been made to define intangible assets. Before 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.

Intangible assets normally cannot fetch loans as it cannot be used as a collateral to raise loans where as some intangible assets (goodwill, for example) can be destroyed by carelessness, or a backlash of the failure of a business. Tangible assets not only add to an entity's current market value, intangible assets only add to its future worth. An estimate of the monetary value of a company's intangible-assets is calculated by deducting the net value of its tangible assets from its market value.

Intangible assets can be classified as follows:

• Purchased intangible assets:- These are recorded with the amount as and when the cost is incurred to purchase it from another firm or entity, including the acquisition costs as well as expenditures incurred to erect the asset and make it ready for its intended use, such as dock fees, legal fees, etc.
• Internally created intangible assets:- Internally created intangible assets are often not recorded on the balance sheet. a bigger share of the costs incurred to internally develop an intangible asset are to be expensed and only certain costs can be capitalized.
• Finite life intangible assets:- These intangible assets have a limited useful life (e.g. copyrights, patents). Such intangibles are orderly amortized throughout the assets finite life of the intangible asset known as depreciation process, using either written down method or straight-line method. The depreciation amount equals to the difference between the intangible asset cost and the asset residual value.
• Unlimited life intangible assets:- These intangible assets are not depreciated because there is no predictable limit to the revenue and cash flows generated by the intangible asset. Such intangible assets have no legal, contractual, regulatory, economic, or competitive limiting factors. Indefinite-life intangibles, nevertheless, are subject to an impairment test that should be performed at least annually.

Types of Intangible Assets

1. Media related copyrights (photos, videos, audio materials)
2. Consumer-associated: customer lists, contractual customer relationships, etc.
3. Contract-associated: franchises, licensing agreements, broadcast rights, construction permits, exploration permits, import and export permits, service contracts, etc.
4. Goodwill (identified only with a business as a whole)
5. Market-associated: trademarks, brand names, Internet domain names, magazine mastheads, etc.
6. Technology-associated: patents, trade secrets, computer programs, product formulas, etc.

Financial Accounting Treatment of Intangible Assets

General standards

The International Accounting Standards Board (IASB) offers some guidelines (IAS 38) for the accounting treatment of intangible assets in financial. In general, "legal intangibles that are developed internally are not recognized and legal intangibles that are purchased from third parties are recognized"

Expense Allocation

Intangible assets are normally depreciated according to their expected life. Intangible assets with finite useful lives are depreciated on a straight-line basis over their life, either economic or legal, whichever is shorter. Intangible assets with ambiguous lives are reassessed each year for damages. If impairment has occurred, then a loss must be recognized. Damages or loss by impairment is determined by subtracting the assets fair value from the asset's book/carrying value. Goodwill has to be tested for damages rather than depreciation. If impaired, goodwill is reduced and loss is recognized in the Income statement.

Tax

For income tax purpose, some costs related to intangible assets should be capitalized instead of being treated as deductible expenses. Generally, the cost incurred for acquiring, creating, or enhancing intangible assets is required to be capitalised. For example, the cost of acquiring a trademark must be capitalized.

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