Intangible Asset Accounting

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Intangible Asset Accounting

An intangible asset is a non-physical asset having a useful life greater than one year. You should initially measure an intangible asset that is acquired either alone or with a group of assets at its fair value. You can measure fair value at the more reliably measurable of either the fair value of the consideration paid or the fair value of the net assets acquired.

An intangible asset's fair value is based on the assumptions that market participants would use to price the asset. If the entity does not intend to use the asset at its highest and best use, you should still measure it at its fair value.

If an intangible asset has a finite useful life, then you should amortize it over that period, less any residual value. The correct amortization period is the interval over which the asset is expected to contribute either directly or indirectly to the entity’s future cash flows. The amortization method should reflect the pattern of economic benefits that you expect from the intangible asset; if there is no way to reliably determine the benefits pattern, then amortize using the straight-line method.

For example, ABC Corporation acquires a patent that will expire in eight years. ABC actively markets a product that is protected by the patent, from which ABC expects to receive significant cash flows for at least eight years. ABC has accepted a firm offer from a competitor to sell it the patent in five years. ABC should amortize the patent asset over its five-year useful life.

You can estimate an intangible asset’s useful life based on a review of all of the following factors:

The asset’s expected use.
The expected useful life of a related asset.
Any legal, regulatory, or contractual provisions that may limit its useful life, or enable its renewal or extension.
The effects of obsolescence, demand, competition, and other economic factors on the asset.
The amount of maintenance expenditures needed to obtain the expected amount of future cash flows from the asset.

You should periodically evaluate the intangible asset’s remaining useful life to determine whether it is necessary to revise the remaining amortization period. If you do change the amortization period, then amortize the asset’s remaining carrying value over the remainder of the revised useful life.

If there are no legal, regulatory, contractual, competitive, economic, or other factors limiting the life of an intangible asset, then it has an indefinite useful life, and you should not amortize it. If conditions change and there are no longer any limiting factors on the life of an intangible asset that was previously amortized, you can stop amortizing the remaining carrying amount of the asset.