Intangible Assets are identifiable non-monetary assets without physical substance that a company controls as a result of past events. Common examples include:
Patents and Licenses: Exclusive rights to inventions or technologies.
Trademarks and Brands: Legal protection of brand names and logos.
Copyrights and Software: Rights to artistic works, software, or media.
Customer Lists and Proprietary Processes: Keys to competitive advantage built over time.
Why are Intangible Assets Important?
Intangible Assets are important because they:
Drive Competitive Advantage: Unique technologies and brands help differentiate products and services.
Generate Future Cash Flows: Licensed intellectual property and royalties can provide ongoing revenue.
Enhance Valuation: Strong intangible asset portfolios often increase a company’s market value beyond its tangible assets.
How are Intangible Assets Calculated?
On the balance sheet, Intangible Assets are recorded at:
Intangible Assets(Net)= Cost of Acquisition or Development − Accumulated Amortization − Impairment Losses
Where:
Cost of Acquisition or Development: Purchase price or capitalized development costs.
Accumulated Amortization: Total amortization expense recognized to date.
Impairment Losses: Write-downs when the asset’s recoverable amount falls below its carrying value.
Additional Considerations
Amortization Policies: Intangible assets with finite lives are amortized over their useful life; assets with indefinite lives (e.g., goodwill) are tested annually for impairment.
Impairment Testing: Required when events or changes indicate an asset may not be recoverable, affecting both balance sheet and income statement.
Disclosure Requirements: Companies must describe useful lives, amortization methods, and impairment losses in financial statement notes.