Intangible Assets: Recognition, Measurement, and Amortization

Intangible assets—such as patents, trademarks, copyrights, customer lists, and software—are nonphysical resources that can generate substantial economic benefits for an entity. Proper recognition, measurement, amortization, and disclosure of intangible assets are critical for presenting an accurate financial position and ensuring comparability across entities. US GAAP (ASC 350) and IFRS (IAS 38) provide comprehensive guidance on the accounting for these assets, distinguishing between acquired and internally developed intangibles.

Recognition and Initial Measurement

An intangible asset is recognized when, and only when, it is probable that the expected future economic benefits attributable to the asset will flow to the entity, and the cost of the asset can be measured reliably.

• Acquired intangible assets: These include assets purchased individually, in business combinations, or via government grants. They are recognized at fair value on acquisition.

• Internally generated intangible assets: Recognition is restricted, especially for research and development (R&D) expenditures. Only development costs meeting specific criteria may be capitalized under IFRS; under US GAAP, most R&D costs are expensed as incurred.

Examples of Intangible Assets

• Patents and copyrights: Legal rights to inventions and original works.

• Trademarks and brand names: Distinctive identifiers with legal protection.

• Customer lists and relationships: Acquired in business combinations or direct purchase.

• Software: Purchased or internally developed for sale or use.

Goodwill, though an intangible asset, is accounted for separately and only arises in business combinations.

Subsequent Measurement: Amortization and Impairment

• Finite-lived intangibles: Amortized over their useful lives using a method that reflects the pattern of economic benefits (typically straight-line). Estimated useful lives must be reviewed at least annually.

• Indefinite-lived intangibles: Not amortized but tested annually for impairment or more frequently if indicators arise.

Impairment:

• Under US GAAP, an impairment loss is recognized if the carrying amount exceeds fair value.

• Under IFRS, the recoverable amount is the higher of fair value less costs to sell and value in use.

Amortization and impairment losses are recognized in the income statement.

Example: Amortization Journal Entry

A company acquires a patent for $100,000 with a 10-year useful life.

Annual amortization expense:

$100,000 / 10 = $10,000

Entry:

 Dr. Amortization Expense .......... $10,000

  Cr. Accumulated Amortization – Patent ......... $10,000

Derecognition

An intangible asset is derecognized upon disposal or when no future economic benefits are expected. Any resulting gain or loss is recognized in the income statement.

Disclosure Requirements

Required disclosures include:

• Useful lives and amortization methods

• Gross carrying amount and accumulated amortization

• Impairment losses and reversals, if any

• Nature and carrying amounts of significant individual intangibles

• Reconciliation of opening and closing balances

Relevant Accounting Standards

• US GAAP: ASC 350 – Intangibles—Goodwill and Other

• IFRS: IAS 38 – Intangible Assets

Both frameworks distinguish between finite-lived and indefinite-lived intangibles and require detailed disclosure.

Summary Table: Intangible Asset Accounting

Type	Amortization	Impairment Test	Recognition
Acquired finite-lived	Yes (over useful life)	If indicators of impairment	At cost or fair value
Acquired indefinite-lived	No	At least annually	At cost or fair value
Internally developed	Rare, only if strict criteria (IFRS)	Yes	Usually expensed (GAAP); some development costs (IFRS)

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