INTANGIBLE ASSETS: Recognition, Amortization, and Reporting Requirements
- Graziano Stefanelli
- Jun 11
- 2 min read
Intangible assets are non-physical assets with long-term economic value—such as trademarks, patents, and software.
Accounting rules define how to recognize, measure, amortize, and disclose these assets over time.
1. What Are Intangible Assets?
Intangible assets lack physical substance but contribute to a company’s income-generation capacity.
They are classified into:
Identifiable intangibles: Can be separated or arise from contractual/legal rights (e.g. patents, licenses, software)
Unidentifiable intangibles: Cannot be individually separated (e.g. goodwill)
2. Recognition Criteria
Under ASC 350 (GAAP) and IAS 38 (IFRS), an intangible asset can be recognized if it meets both conditions:
Identifiability: Separately measurable or legal rights exist
Future Economic Benefit: Expected inflow of resources from its use or disposal
Initial measurement is at cost, including:
Purchase price
Import duties and non-refundable taxes
Directly attributable costs (e.g., legal fees)
Internally generated goodwill, brands, and customer lists are not recognized under IFRS or GAAP.
3. Amortization Rules
Amortization method:Usually straight-line, unless another pattern better reflects benefit consumption.
4. Journal Entry for Amortization
Each period:
debit Amortization Expense
credit Accumulated Amortization (contra-asset)
Example:
A patent costs €120,000 and is amortized over 10 years.
debit Amortization Expense ...................... 12,000
credit Accumulated Amortization .............. 12,000
5. Impairment of Intangibles
If an intangible asset's carrying value exceeds recoverable amount, an impairment loss must be recorded.
Goodwill and indefinite-life assets require annual impairment testing, even without indicators.
Entry for impairment loss:
debit Impairment Loss
credit Intangible Asset or Allowance
Under IFRS, impairment losses (except goodwill) may be reversed in future periods.
6. Disposals and Derecognition
When an intangible asset is sold, retired, or abandoned:
Remove its cost and accumulated amortization
Record any gain or loss on disposal
Example:
Software cost: €50,000
Accumulated amortization: €35,000
Sold for €20,000 → Gain = €5,000
Entry:
debit Cash ...................................................... 20,000
debit Accumulated Amortization ............. 35,000
credit Software (Intangible Asset) ............. 50,000
credit Gain on Disposal .................................. 5,000
7. Financial Statement Presentation
Balance Sheet:
Intangibles shown at cost, less accumulated amortization and impairment
Income Statement:
Amortization and impairment losses shown under operating expenses
Cash Flow Statement:
Purchase: investing outflow
Amortization: non-cash add-back in operating activities (indirect method)
8. Required Disclosures
Companies must disclose:
Asset categories and carrying amounts
Amortization methods and periods
Total amortization expense for the period
Impairment losses or reversals
Basis for useful life assessment
Internally generated vs. acquired intangibles
Under IFRS, additional disclosure is required for internally generated development costs that are capitalized.
Key take-aways
Intangible assets must be identifiable and expected to generate future benefits.
Assets with finite lives are amortized; those with indefinite lives (and goodwill) are tested for impairment.
Amortization spreads the cost across periods, reducing profit but not cash flow.
Accurate classification and disclosure enhance transparency and comparability.
______________
FOLLOW US FOR MORE.
DATA STUDIOS
