When do intangible assets appear on the balance sheet?

An intangible asset is a non-physical asset that has a multi-period useful life. Examples of intangible assets are patents, copyrights, customer lists, literary works, and broadcast rights. The balance sheet aggregates all of a company's assets, liabilities, and shareholders' equity. Since an intangible asset is classified as an "asset," it should appear in the balance sheet. However, this is not always the case.

The reason for the variable treatment of intangible assets is that the accounting standards mandate that a business cannot recognize any internally-generated intangible assets (with some exceptions), only acquired intangible assets. This means that any intangible assets listed on a balance sheet were most likely gained as part of the acquisition of another business, or they were purchased outright as individual assets.

For example, if a company conducts expensive research for many years and eventually creates a valuable patent from this research, all of the associated cost is charged to expense as incurred - no intangible asset can be capitalized. However, if the same organization were to buy the patent from another company, it could recognize the fair value of the patent in its balance sheet, because it bought the patent.

One effect of this accounting treatment is that many corporations that have spent inordinate amounts of cash over the years to develop valuable brands and patents have not capitalized any of the associated costs; their balance sheets do not reflect the real value of their intangible assets. This can be misleading when an outsider is trying to gain an understanding of the value of a business by perusing its financial statements.

Though intangibles do not appear on the balance sheet in many instances, this can also work in favor of a company. First, the entity does not have to absorb an ongoing amortization charge to reflect the ongoing consumption of the value of these assets, since the entire cost was charged to expense up front. Also, the accounting standards state that a sudden loss in the value of an asset can trigger an impairment charge, which can adversely impact profits. Again, since the cost of these assets was written off up front, the organiation has no intangible assets that could be subject to such a charge.