2 4 Intangible Assets Explained

Key Concepts

• Definition of Intangible Assets
• Characteristics of Intangible Assets
• Types of Intangible Assets
• Accounting for Intangible Assets
• Impairment of Intangible Assets

Definition of Intangible Assets

Intangible assets are non-physical assets that provide economic benefits to a company. Unlike tangible assets such as property, plant, and equipment, intangible assets do not have a physical form but are still valuable to the business.

Characteristics of Intangible Assets

Intangible assets typically have the following characteristics:

• Non-physical nature
• Identifiability
• Control by the entity
• Expected future economic benefits

Types of Intangible Assets

Common types of intangible assets include:

• Patents
• Trademarks
• Copyrights
• Franchises
• Goodwill
• Software

Accounting for Intangible Assets

Intangible assets are recorded at their cost, which includes all expenditures necessary to acquire and prepare the asset for its intended use. These assets are amortized over their useful life, which is the period over which the company expects to derive economic benefits from them.

Example: A company acquires a patent for $100,000 with a useful life of 10 years. The annual amortization expense would be $10,000 ($100,000 / 10 years).

Impairment of Intangible Assets

Impairment occurs when the carrying amount of an intangible asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. If impairment is identified, the asset's carrying value is reduced to its recoverable amount, and a corresponding impairment loss is recognized.

Example: A company has a trademark with a carrying value of $50,000. Due to a change in market conditions, the recoverable amount is now $30,000. The company would recognize an impairment loss of $20,000 ($50,000 - $30,000).

Examples and Analogies

Consider intangible assets as "intellectual property" that a company owns. Just as a physical asset like a building provides shelter, intangible assets like a patent provide exclusive rights to produce a product.

Another analogy is that of a "recipe" for a successful business. The recipe, which includes trademarks, copyrights, and patents, is the secret sauce that gives the business a competitive edge, even though it cannot be touched or seen.