Intangible Assets – Overview and Recognition Principles

Intangible assets are identifiable non-physical assets that provide economic benefits to an entity over time. They are typically acquired through purchase, development, or as part of a business combination. Proper recognition and classification are essential due to the unique nature of these assets and their often subjective valuation.

This article outlines the recognition criteria, types, and accounting treatment of intangible assets under U.S. GAAP (ASC 350 and ASC 805) and IFRS (IAS 38), with clear distinctions between acquired and internally developed intangibles. Examples and journal entries are included.

1. What Are Intangible Assets?

Intangible assets lack physical substance but are identifiable and controlled by the entity through legal or contractual rights.

Examples include:

✦ Patents

✦ Copyrights

✦ Trademarks and trade names

✦ Licenses and franchises

✦ Customer relationships

✦ Software (internally developed or acquired)

✦ Goodwill (covered separately in ASC 350 and IAS 36)

To be recognized, the asset must meet specific criteria as discussed below.

2. Recognition Criteria

An intangible asset is recognized when:

✦ It is identifiable — separable or arises from contractual/legal rights

✦ It is probable that future economic benefits will flow to the entity

✦ Its cost can be measured reliably

If these criteria are not met, expenditures are typically expensed as incurred.

To record purchased patent: Dr. Patent – $50,000 / Cr. Cash – $50,000.

To capitalize legal fees incurred in registering a trademark: Dr. Trademark – $8,000 / Cr. Accounts Payable – $8,000.

3. Internally Generated Intangibles

Under U.S. GAAP, most internally developed intangible assets (e.g., brands, customer lists, R&D outcomes) must be expensed as incurred, unless acquired in a business combination.

Under IFRS, the development phase of internally generated assets may be capitalized if six criteria are met, including:

✦ Technical feasibility

✦ Intention and ability to complete

✦ Demonstrated future economic benefits

✦ Reliable measurement of development costs

To capitalize development costs (IFRS only): Dr. Intangible Asset – $60,000 / Cr. Salaries Payable – $60,000.

Research costs are always expensed under both frameworks.

4. Business Combinations and Intangible Assets

When an intangible is acquired in a business combination, it is recognized at fair value, regardless of whether it was previously recognized by the acquiree.

✦ Examples include: customer lists, order backlog, non-compete agreements

✦ Recorded separately from goodwill

To recognize customer relationship on acquisition: Dr. Customer Relationship – $120,000 / Cr. Business Combination Gain – $120,000.

The fair value measurement must follow ASC 820 or IFRS 13, based on observable inputs when available.

5. Indefinite vs. Finite-Lived Intangibles

Intangibles are classified by their useful life:

Finite-lived

✦ Amortized over useful life

✦ Subject to impairment testing when indicators arise

To record annual amortization: Dr. Amortization Expense – $10,000 / Cr. Accumulated Amortization – $10,000.

Indefinite-lived

✦ Not amortized

✦ Tested for impairment at least annually

Common examples: trademarks (renewable), some licenses, certain brand names

The useful life must be reassessed each reporting period.

6. Disclosure Requirements

Financial statements must disclose:

✦ Classes of intangible assets and their useful lives

✦ Gross carrying amounts and accumulated amortization

✦ Amortization expense recognized in the period

✦ Impairment losses or reversals

✦ Whether indefinite-lived assets are renewable and under what terms

Balance sheet example: ✦ Patent – $90,000 ✦ Less: Accumulated Amortization – ($30,000) ✦ Net Patent – $60,000