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Intangible Assets: Recognition and Amortization

Intangible assets are non-physical, non-financial resources that provide future economic benefits to a business.


They include assets like trademarks, patents, copyrights, customer relationships, software, licenses, and goodwill.


They are often key to a company’s strategy, brand value, and innovation capacity — yet they are more complex to measure and account for than tangible assets.



Recognition Criteria

An intangible asset must meet two main criteria to be recognized on the balance sheet.

First, it must be identifiable, meaning it is either:


  • Separable: it can be sold, licensed, or transferred independently from the business;

  • Or it arises from contractual or legal rights, even if it cannot be sold separately.


Second, the entity must have control over the asset, meaning it can obtain the benefits and restrict others from accessing them.


Finally, there must be future economic benefits expected from the asset, such as increased revenue, reduced costs, or improved efficiency.

If all conditions are met, the asset is recognized initially at cost.



Internally Generated vs Acquired Intangibles

There is a major distinction between acquired and internally generated intangible assets.

When an intangible is purchased, either separately or as part of a business combination, it is recorded at its fair value.


For example, if a company acquires a software license for $100,000, that amount becomes the initial asset value.


In a business acquisition, the buyer may allocate part of the purchase price to intangibles like customer lists, brand names, or proprietary technology.


For internally generated intangibles, the accounting treatment is more conservative.

Research costs must be expensed as incurred, with no asset recognition.

Development costs may be capitalized only when specific conditions are met, including:


  • Technical feasibility of completion;

  • Intention and ability to complete and use/sell the asset;

  • Reliable measurement of costs;

  • Probable future benefits.


Example: A tech company building proprietary software for internal use may start capitalizing costs once it finishes the research phase and starts coding a functional product.



Amortization of Intangible Assets

After initial recognition, intangible assets are classified based on their useful life.

If the asset has a finite useful life, it is amortized over that period, typically on a straight-line basis.


Example: A license with a 5-year term and $50,000 cost will be amortized at $10,000 per year, unless another method better reflects usage.


The amortization period and method must be reviewed at least annually and adjusted if expectations change.


If the asset has an indefinite useful life — for instance, a trademark renewable every 10 years without major cost or limitation — it is not amortized, but must be tested for impairment annually.



Impairment of Intangible Assets

An intangible asset is impaired when its carrying amount exceeds its recoverable amount.


For finite-lived assets, impairment is tested when indicators arise — such as legal disputes, declining performance, or market shifts.


For indefinite-lived assets and goodwill, the company must conduct an annual impairment test.


Example: If a company has goodwill of $300,000 allocated to a reporting unit that now has a fair value of $250,000, a $50,000 impairment loss must be recognized.

Impairment losses cannot be reversed under U.S. GAAP.



Disclosure Requirements

Companies must disclose the following for intangible assets:

  • Gross carrying amount and accumulated amortization;

  • Amortization method and period;

  • Amortization expense for the period;

  • Details about intangible assets not subject to amortization (like trademarks or goodwill);

  • Description and amounts of research and development expenditures.


This transparency helps users of financial statements understand the nature and valuation of these critical resources.



Practical Applications

Understanding intangible assets is essential in many practical contexts:

  • Due diligence during mergers and acquisitions;

  • Valuation modeling for startups with mostly intangible value;

  • Financial reporting for tech, media, and pharma companies;

  • Tax planning, especially where amortization affects deferred taxes.


In tech-heavy businesses, intangible assets often represent the majority of enterprise value, yet require constant judgment to assess impairment, useful life, and fair value.


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Intangible assets are a core part of modern business value, but they require careful recognition, accurate measurement, and regular reassessment.



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