For accounting purposes, the classification intangible assets refers to nonphysical assets. In the most companies, this type of assets are very important, for example, franchise of MC Donald is very expensive.
Categoriezed Intangible assets
- Brands, Loyalty, Trademarks, Company reputation
- Contracts, Licenses, Legal monopolies, Customer Lists
- Organizational models, software, proprietary processes, Franchise rights
- R&D, Patents, Formula of products, Human capital
The basic value of these assets is derived from their potential earning power for the business. Whether this earning potential is ever realized is, of course, another matter.
- intangible Assets in any companies
Valuation of Intangible Assets
As with other assets, the valuation basis for this category is cost. The value of the intangible is written off over its useful life and charged against the revenue it produces.
When an intangible is acquired by purchase, its cost includes all associated acquisition expenses (i.e., ‘technical drawings, legal and consulting fees, license applications, etc.), When such assets are acquired by exchange (i.e., for non-monetary assets), the fair market value of the asset exchanged or that of the intangible, whichever provides clearer evidence, is used to assign a cost to the asset acquired.
With respect to internally developed intangibles, the difficulty in distinguishing revenue expenditures from capital expenditures has resulted in several acceptable treatments of research and development costs:
- Where research and experimental costs can be associated with a specific project, they are summarized and included with all other development expenses in the reported cost of the intangible.
- Research and development costs which mayor may not benefit revenue in future periods may be expense as incurred, according to function (i.e., sales, manufacturing, etc.), Tax laws encourage this approach as a stimulus to economic growth.
- An alternative to (2) above is the capitalization of research and development costs and the subsequent amortization of such amounts over the useful lives of those projects having profitable results.
Amortization of Intangible
The process of writing off the cost of intangibles is called amortization. However, not all intangibles are subject to
amortization; thus, two distinct categories of intangible assets are generally recognized.
- Limited Existence. Some intangibles have a limited term of existence as a result of governmental laws, regulation or contractual arrangement. This category includes patents, copyrights, leases, fixed-term franchises, and goodwill for which there is evidence of a limited life. These assets are amortized over their useful service lives (i.e., in the same manner as depreciable assets). The straight-line method is generally used, although an accelerated method may be substituted if there is evidence that a greater part of the value will be lost in the earlier years than in the later ones.
- Unlimited Existence. This category includes such intangibles as goodwill, trade names, subscription lists and perpetual franchises which possess no indication or evidence of limited existence. Although no amortization would seem the logical treatment for these assets, APB Opinion No. 17 states that it is an acceptable accounting principle to write them off over some time period for balance sheet purposes, and that the time period selected should not be more than forty years. It specifies, however, that “the cost of each type of intangible asset should be amortized on the basis of the estimated life of that specific asset and should not be written off in the period of acquisition.”
More info : Identifiable Intangible