Intangible assets are assets that have no physical substance. Examples of these assets are patents, trademarks, copyrights, and customer lists. Organizations that have invested large sums to establish brands may find that the value of their intangible assets greatly exceed the value of their physical assets. However, an intangible asset cannot typically be used as collateral on a loan, since it is not easily liquidated to compensate the lender.
In order to record an intangible asset in the accounting records, it must be purchased (not developed internally) and have a useful life of longer than one accounting period. Once recorded as an asset, an intangible asset is amortized over its useful life, typically using the straight-line method of amortization. Amortization is the same as depreciation, with the intent of gradually reducing the carrying amount of the asset to zero, thereby accounting for the gradual consumption of the asset.
If an intangible asset is considered to have an indeterminate life, it is not amortized at all. Instead, it is periodically tested to see if the recorded cost of the asset has been impaired. Impairment occurs when the fair value of the asset declines below its carrying amount. If there is impairment, the difference between the fair value and carrying amount is charged to the asset, resulting in a reduction of the carrying amount to its fair value.
An intangible asset is recorded at its acquisition cost. Thus, if a patent is purchased from a third party, the price paid for the patent is recorded as the intangible asset. If a patent is acquired as part of a business acquisition, the patent is recorded by the acquirer at the allocated cost assigned to the patent, which is derived from its fair value on the acquisition date.