Intangible Assets: Recognition, Amortization, and Impairment

Intangible assets include identifiable, nonphysical resources that can provide future economic benefits to an entity. Examples range from patents and trademarks to customer lists, franchise agreements, copyrights, and internally developed software. The accounting for intangible assets involves strict criteria for recognition, careful measurement at initial and subsequent stages, and regular assessment for impairment. These procedures ensure that only assets capable of generating probable benefits and measured reliably are presented on the balance sheet.

Recognition Criteria for Intangible Assets

An intangible asset is recognized when:

• It is identifiable, either separable (capable of being sold, transferred, or licensed) or arising from contractual or legal rights.

• The entity has control over the future economic benefits (often established through legal rights or enforceable contracts).

• Future economic benefits are probable.

• The cost can be reliably measured.

There is a critical distinction between intangible assets acquired in a business combination or external purchase, which are typically recognized, and internally generated intangible assets, which are usually expensed, except in certain cases (such as development costs under IFRS).

Internally Generated Intangibles: Research vs. Development

• Research phase: Costs are always expensed as incurred. This phase includes original investigation and evaluation to obtain new knowledge, concepts, or products.

• Development phase: Under IFRS, costs are capitalized if specific criteria are met (technical feasibility, intention to complete, ability to use/sell, probable future benefits, adequate resources, reliable measurement of costs). Under US GAAP, development costs are generally expensed except for specific software costs.

Example:

A company spends $200,000 researching a new chemical process and $500,000 developing a commercially viable product. Under IFRS, the $500,000 may be capitalized if criteria are met; under US GAAP, both amounts are typically expensed unless software-related.

Initial Measurement of Intangible Assets

• Purchased intangible assets: Recognized at acquisition cost, including purchase price and directly attributable costs (e.g., legal fees, registration costs).

• Acquired in a business combination: Recognized at fair value at the acquisition date.

• Internally generated: Capitalized only if qualifying (per IFRS development phase); otherwise expensed.

Example:

A patent is purchased for $60,000 with $5,000 in legal and registration costs. The initial measurement is $65,000.

Amortization of Intangible Assets

Intangible assets with a finite useful life are amortized over the period the asset is expected to generate benefits, using a systematic method (typically straight-line unless another method better reflects benefit consumption). The useful life and amortization method should be reviewed at least annually.

Example:

A trademark is purchased for $120,000 with a 10-year useful life.

• Annual amortization = $120,000 ÷ 10 = $12,000 per year

Journal Entry for Amortization:

 Dr. Amortization Expense

  Cr. Accumulated Amortization – Trademark

Intangible assets with an indefinite useful life (e.g., certain brand names) are not amortized but must be tested for impairment annually.

Impairment Testing of Intangible Assets

• Finite-lived intangibles: Tested for impairment when indicators arise. Impairment occurs if carrying amount exceeds recoverable amount (higher of fair value less costs of disposal or value in use).

• Indefinite-lived intangibles: Tested for impairment at least annually, or more often if indicators exist.

Impairment Loss Example:

If the carrying amount of a patent ($40,000) exceeds its recoverable amount ($30,000):

 Dr. Impairment Loss ........... $10,000

  Cr. Patent ............................. $10,000

Reversals:

• Under IFRS, impairment losses (except for goodwill) can be reversed if circumstances change.

• Under US GAAP, reversals are not permitted for intangible assets held for use.

Derecognition of Intangible Assets

An intangible asset is derecognized on disposal or when no further economic benefits are expected. Any gain or loss is recognized in profit or loss as the difference between the proceeds and the asset’s carrying value.

Disclosure Requirements

Financial statements must disclose:

• Useful lives, amortization methods, and gross carrying amounts

• Accumulated amortization and impairment losses

• Movements in intangible assets during the period (additions, disposals, impairment, amortization)

• The nature and carrying amounts of significant intangible assets

• For assets with indefinite useful lives: factors supporting this classification

Special Topics and Practical Considerations

• Software development costs: Capitalized if intended for sale (after technological feasibility) or for internal use (after preliminary stage), with different treatment under US GAAP and IFRS.

• Customer relationships and contracts: Often recognized in business combinations but not as internally developed assets.

• Goodwill: Not amortized, but subject to annual impairment testing and is accounted for separately from other intangibles.

Summary Table: Intangible Asset Accounting

Type	Recognition	Amortization	Impairment Test	Reversal
Purchased finite-lived	At cost or fair value	Yes, over useful life	If indicators of impairment	IFRS: yes; GAAP: no
Purchased indefinite-lived	At cost or fair value	No	At least annually	IFRS: yes; GAAP: no
Internally developed (development phase)	If criteria met (IFRS)	Yes, over useful life	If indicators/annually	IFRS: yes; GAAP: no

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