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INTANGIBLE ASSETS: Recognition, Amortization, Impairment

Intangible assets are non-physical resources with economic value, such as patents, trademarks, and software.
They are capitalized when acquired or internally developed under strict conditions, amortized if they have finite lives, and tested for impairment periodically.

1. What Are Intangible Assets?

Intangible assets lack physical substance but provide future economic benefits.


Common examples:

  • Patents

  • Copyrights

  • Trademarks

  • Software

  • Licenses

  • Customer lists

  • Franchise rights

  • Goodwill (only from business combinations)


2. Recognition Criteria

Intangible assets are recognized if:

  • They are identifiable (separable or arise from legal rights)

  • The company controls the asset

  • Future economic benefits are expected

  • Cost can be measured reliably


Types of acquisition:

  • Purchased: Recognized at cost

  • Internally developed: Only certain development costs can be capitalized under IFRS; research costs are expensed

  • Business combinations: Recognized at fair value as part of purchase price allocation


3. Initial Measurement

At acquisition, intangible assets are measured at cost, including:

  • Purchase price

  • Import duties and non-refundable taxes

  • Directly attributable costs (legal, registration)


4. Amortization of Finite-Lived Intangibles

Intangibles with a finite useful life are amortized over that life.


Journal entry:

  • debit Amortization Expense

  • credit Accumulated Amortization


Example:

Patent cost = $20,000, useful life = 10 years

Annual amortization = $2,000


No amortization is recorded for indefinite-lived assets (e.g., trademarks not limited by law or contract).


5. Impairment of Intangible Assets

Assets must be tested for impairment if:

  • There’s an indication of decline in value

  • They are indefinite-lived (tested annually)

  • They are not yet available for use


Impairment test steps (IFRS & GAAP):

  1. Compare carrying amount to recoverable amount (fair value or value in use)

  2. If carrying > recoverable → recognize impairment loss


Entry:

  • debit Impairment Loss

  • credit Intangible Asset (or Accumulated Impairment)


6. Internally Generated Intangibles (IFRS vs. GAAP)

Phase

IFRS Treatment

US GAAP Treatment

Research

Expense immediately

Expense

Development

Capitalize if criteria met

Expense (except software)

Software

Capitalize after feasibility

Same (ASC 350-40)


7. Derecognition

An intangible asset is derecognized when:

  • It is disposed of

  • No future economic benefits are expected


Entry for disposal:

  • debit Cash or Loss on Disposal

  • debit Accumulated Amortization

  • credit Intangible Asset


8. Disclosures

Required disclosures include:

  • Useful lives and amortization method

  • Gross carrying amount and accumulated amortization

  • Impairment losses

  • Reconciliation of opening and closing balances

  • Internally generated intangible amounts


Key take-aways

  • Intangibles are recognized only if identifiable, controlled, and reliably measurable.

  • Finite-lived assets are amortized; indefinite-lived are tested annually for impairment.

  • Internally developed intangibles face strict capitalization rules.

  • Clear disclosures are required for valuation, impairment, and accounting policies.


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