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An intangible asset is an
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
that lacks physical substance. Examples are
patent A patent is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depe ...

patent
s,
copyright Copyright is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. ...

copyright
,
franchises Franchise may refer to: Business and law * Franchising, a business method that involves licensing of trademarks and methods of doing business to franchisees * Franchise, a privilege to operate a type of business such as a cable television pro ...
, goodwill,
trademark A trademark (also written trade mark or trade-mark) is a type of intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual pr ...

trademark
s, and
trade name A trade name, trading name, or business name is a pseudonym A pseudonym () (originally: ψευδώνυμος in Greek) or alias () is a fictitious name that a person or group assumes for a particular purpose, which differs from their original ...
s, as well as
software Software is a collection of Instruction (computer science), instructions that tell a computer how to work. This is in contrast to Computer hardware, hardware, from which the system is built and actually performs the work. At the low level lang ...

software
. This is in contrast to physical assets (machinery,
buildings A building, or edifice, is a structure A structure is an arrangement and organization of interrelated elements in a material object or system A system is a group of Interaction, interacting or interrelated elements that act according to a se ...

buildings
, etc.) and financial assets (government securities, etc.). An intangible asset is usually very difficult to valuate. They suffer from typical market failures of non-
rivalry A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Rivalry is the "against each other" spirit between two competing sides. The relationship itself may also be called "a rivalry", and each participant or ...
and non-
excludability In economics, a good, service or resource are broadly assigned two fundamental characteristics; a degree of excludability and a degree of Rivalry (economics), rivalry. Excludability is defined as the degree to which a good, service or resource ca ...
.


Definition

Intangible assets may be one possible contributor to the disparity between "company value as per their accounting records", as well as "company value as per their market capitalization". Considering this argument, it is important to understand what an intangible asset truly is in the eyes of an accountant. A number of attempts have been made to define intangible assets: * Prior to 2005 the
Australian Accounting Standards Board The Australian Accounting Standards Board (AASB) is an Australian Government agency that develops and maintains Financial statement, financial reporting standards applicable to entities in the private and public sectors of the Economy of Australi ...
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. *
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent, accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
standard 38 (IAS 38) defines an intangible asset as: "an identifiable non-monetary asset without physical substance". This definition is in addition to the standard definition of an asset which requires a ''past event'' that has given rise to a resource that the entity ''controls'' and from which ''future economic benefits'' are expected to flow. Thus, the extra requirement for an intangible asset under IAS 38 is ''identifiability''. This criterion requires that an intangible asset is separable from the entity or that it arises from a contractual or legal right. * The
Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous ...
Accounting Standard Codification 350 (ASC 350) defines an intangible asset as an asset, other than a financial asset, that lacks physical substance. The lack of physical substance would therefore seem to be a defining characteristic of an intangible asset. Both the IASB and FASB definitions specifically preclude monetary assets in their definition of an intangible asset. This is necessary in order to avoid the classification of items such as accounts receivable, derivatives and cash in the bank as an intangible asset. IAS 38 contains examples of intangible assets, including: computer software, copyright and patents.


Research and development

Research and development Research and development (R&D, R+D), known in Europe Europe is a continent A continent is any of several large landmasses. Generally identified by convention (norm), convention rather than any strict criteria, up to seven geogra ...
(known also as R&D) is considered to be an intangible asset (about 16 percent of all intangible assets in the US), even though most countries treat R&D as current expenses for both legal and tax purposes. Most countries report some intangibles in their National Income and Product Accounts (NIPA), yet no country has included a comprehensive measure of intangible assets. The contribution of intangible assets in long-term GDP growth has been recognized by economists. Corrado, Carol. Charles Hulten, and Daniel Sichel (2006). ''Intangible Capital and Economic Growth.'' Federal Reserve Board Discussion Paper N. 2006-24. April. http://www.federalreserve.gov/pubs/feds/2006/200624/200624pap.pdf Also of note, acquired "In-Process Research and Development" (IPR&D) is considered an asset under US GAAP. IAS 38 requires any project that results in the generation of a resource to the entity be classified into two phases: a research phase, and a development phase. The classification of research and development expenditure can be highly subjective, and it is important to note that organizations may have ulterior motives in their classification of research and development expenditures. Less scrupulous directors may manipulate financial statements through misclassification of research and development expenditures.


Related definitions

An example of research (as defined as "the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding"): a company can carry a research on one of its products which it will use in the entity of which results in future economic income. Development is defined as "the application of research findings to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services, before the start of commercial production or use". Accounting treatment of
expenses Expenditure is an outflow of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner">174x174px Money is any item or ve ...
depends on whether they are classified as research or development. Where the distinction cannot be made, IAS 38 requires that the entire project be treated as research and expensed through the Statement of Comprehensive Income. Research expenditure is highly speculative. There is no certainty that future economic benefits will flow to the entity. Prudence dictates that research expenditure be expensed through the Statement of Comprehensive Income. Development expenditure, however, is less speculative and it becomes possible to predict the future economic benefits that will flow to the entity. The
matching principle In accrual accounting, the revenue recognition principle states that revenues should be recorded during the period in which they are earned, regardless of when the transfer of cash occurs. And the matching principle instructs that an expense shou ...
dictates that development expenditure be capitalized, as the expenditure is expected to generate future economic benefit to the entity.


Financial accounting


General standards

The
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent, accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
(IASB) offers some guidance (IAS 38) as to how intangible assets should be accounted for in
financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s. In general, legal intangibles that are developed internally are not recognized and legal intangibles that are purchased from third parties are recognized. Wordings are similar to IAS 9. Under US GAAP
intangible assets
are classified into: Purchased vs. internally created intangibles, and Limited-life vs. indefinite-life intangibles.


Expense allocation

Intangible assets are typically expensed according to their respective life expectancy. Intangible assets have either an identifiable or an indefinite useful life. Intangible assets with identifiable useful lives are
amortized In computer science, amortized analysis is a method for Analysis of algorithms, analyzing a given algorithm's Computational complexity theory, complexity, or how much of a resource, especially time or memory, it takes to Execution (computing), execu ...
on a straight-line basis over their economic or legal life, whichever is shorter. Examples of intangible assets with identifiable useful lives are copyrights and patents. Intangible assets with indefinite useful lives are reassessed each year for impairment. If an impairment has occurred, then a loss must be recognized. An impairment
loss Loss may refer to: People with the surname *Joe Loss (1909–1990), founder of The Joe Loss Orchestra Arts, entertainment, and media Music *Loss (Bass Communion album), ''Loss'' (Bass Communion album) (2006) *Loss (Mull Historical Society album ...
is determined by subtracting the asset's fair value from the asset's book/carrying value. Trademarks and goodwill are examples of intangible assets with indefinite useful lives. Goodwill has to be tested for impairment rather than amortized. If impaired, goodwill is reduced and loss is recognized in the Income statement.


Taxation

For personal income tax purposes, some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses. Treasury regulations in the USA generally require capitalization of costs associated with acquiring, creating, or enhancing intangible assets. For example, an amount paid to obtain a trademark must be capitalized. Certain amounts paid to facilitate these transactions are also capitalized. Some types of intangible assets are categorized based on whether the asset is acquired from another party or created by the taxpayer. The regulations contain many provisions intended to make it easier to determine when capitalization is required. Given the growing importance of intangible assets as a source of economic growth and tax revenue, and because their non-physical nature makes it easier for taxpayers to engage in tax strategies such as income-shifting or transfer pricing, tax authorities and international organizations have been designing ways to link intangible assets to the place where they were created, hence defining nexus. Intangibles for corporations are amortized over a 15-year period, equivalent to 180 months. Definition of "intangibles" differs from standard accounting, in some US state governments. These governments may refer to stocks and bonds as "intangibles".Florida Intangible Tax
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See also

* Cognitive assets *
Intellectual capitalIntellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people (human capital), the value relati ...
*
Intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of ...
** Brand **
Copyright Copyright is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. ...

Copyright
**
Patent A patent is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depe ...

Patent
**
Patent valuationIntellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The most well-know ...
**
Trademark A trademark (also written trade mark or trade-mark) is a type of intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual pr ...

Trademark
**
Trade secret Trade secrets are a type of intellectual property that comprise formulas, best practice, practices, business process, processes, designs, legal instrument, instruments, patterns, or compilations of information that have inherent economic value be ...
*
Goodwill (accounting) In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
*
Tangible common equityTangible common equity (TCE), the subset of shareholders' equity In finance, equity is ownership of asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is any ...
*
Tangible property In law, tangible property is literally anything that Tangibility, can be touched, and includes both real property and personal property (or moveable property), and stands in distinction to intangible property. In English law and some Commonwealt ...


References


External links


National intangible capital NIC 2016 database / Findings and results for economic impacts of national intangible capital 2001 - 2016
{{DEFAULTSORT:Intangible Asset Asset Intangible assets