An intangible asset is a non-physical asset that will be consumed over more than one accounting period. Examples of intangible assets are copyrights, patents, and licenses. The accounting for an intangible asset is to record the asset as a long-term asset and amortize the asset over its useful life, along with regular impairment reviews. The accounting is essentially the same as for other types of fixed assets. The key differences between the accounting for tangible and intangible fixed assets are:
- Amortization. If an intangible asset has a useful life, amortize the cost of the asset over that useful life, less any residual value. Amortization is the same as depreciation, except that amortization is applied only to intangible assets. In this context, useful life refers to the time period over which an asset is expected to enhance future cash flows.
- Asset combinations. If several intangible assets are operated as a single asset, combine them for the purposes of impairment testing. This treatment is probably not suitable if they independently generate cash flows, would be sold separately, or are used by different asset groups.
- Residual value. If any residual value is expected following the useful life of an intangible asset, subtract it from the carrying amount of the asset for the purposes of calculating amortization. Assume that the residual value will always be zero for intangible assets, unless there is a commitment from another party to acquire the asset at the end of its useful life, and the residual value can be determined by reference to transactions in an existing market, and that market is expected to be in existence when the useful life of the asset ends.
- Useful life. An intangible asset may have an indefinite useful life. If so, do not initially amortize it, but review the asset at regular intervals to see if a useful life can then be determined. If so, test the asset for impairment and begin amortizing it. The reverse can also occur, where an asset with a useful life is judged to now have an indefinite useful life; if so, stop amortizing the asset and test it for impairment. Examples of intangible assets that have indefinite useful lives are taxicab licenses, broadcasting rights, and trademarks.
- Useful life revisions. Regularly review the duration of the remaining useful lives of all intangible assets, and adjust them if circumstances warrant the change. This will require a change in the remaining amount of amortization recognized per period.
- Life extensions. It is possible that the life of some intangible assets may be extended a considerable amount, usually based on contract extensions. If so, estimate the useful life of an asset based on the full duration of expected useful life extensions. These presumed extensions may result in an asset having an indefinite useful life, which avoids amortization.
- Straight-line amortization. Use the straight-line basis of amortization to reduce the carrying amount of an intangible asset, unless the pattern of benefit usage associated with the asset suggests a different form of amortization.
- Impairment testing. An intangible asset is subject to impairment testing in the same manner as tangible assets. Recognize impairment if the carrying amount of the asset is greater than its fair value, and the amount is not recoverable. Once recognized, the impairment cannot be reversed.
- Research and development assets. If intangible assets are acquired through a business combination for use in research and development activities, initially treat them as having indefinite useful lives, and regularly test them for impairment. Once the related research and development activities have been completed or abandoned, charge them to expense.
In general, you should recognize costs as incurred when they are related to internally developing, maintaining, or restoring intangible assets that have any of the following characteristics:
- There is no specifically identifiable asset
- The useful life is indeterminate
- The cost is inherent in the continuing operation of the business