Intangible assets are identifiable nonmonetary resources controlled by firms. Examples include patents, copyrights, franchises, goodwill, trademarks, trade names, secret processes, property rights, and organization costs.

Valuation

Measurement models are the same as described for PP&E.

• IFRS: revaluation model or cost model.
• GAAP: cost model only.

"Cost" includes purchase price, legal fees, and other expenses that make the intangibles ready for use. For example, fees paid to obtain a license or franchise, expenditures on patents and copyrights purchased from another party.

Amortization

For each intangible asset, a company assesses whether its useful life is finite or infinite.

• with a finite useful life: amortized over the best estimate of its useful life. The useful life estimate is reviewed annually.
• with an infinite useful life: not amortized. Reviewed for impairment whenever changes in events or circumstances indicate that the carrying amount of an asset may not be recoverable.

Example

Torch, Inc. has developed a new device. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees. The device has a useful life of 5 years. The legal life is 17 years. At the end of year 1, what is Torch's amortization expense?

Use the shorter of economic life (5 years) or legal life (17 years): Amortization = Cost / Useful Life = $3,000 / 5 = $600.

Intangible Assets Developed Internally

For internally generated intangible assets, it is difficult to measure costs, benefits, and economic lives. Generally, internally generated assets (such as costs of R&D, patents and copyrights, brands and trademarks, and advertising and secret processes) must be expensed in the period incurred.

One exception is research and development (R&D) expenditures which add risk to investment with uncertain future economic benefits. As a result, they must be expensed as incurred in most countries (including the U.S.). SFAS 86 requires that all R&D costs to establish the technological and/or economic feasibility of software must be expensed. Subsequent costs that are beyond the point of technological feasibility can - but don't have to - be capitalized as part of product inventory and amortized based on revenues or on a straight-line basis. The point of technological feasibility is the point when a software prototype has been proven to be technologically feasible, as evidenced by the existence of a working model of the software.

IFRS also requires research costs be expensed but allows development costs to be capitalized under certain conditions.

As you can see, managers have considerable discretion in making decisions, such as whether or when to capitalize these costs and by how much. For software development costs, one particular risk is that capitalized costs will not be realized and a future write-down may be needed.

If companies apply different approaches to capitalizing software development costs, adjustments can be made to make the two comparable.

Presentation and Disclosures

IAS 38 provides a considerable set of disclosure requirements for intangible assets. For each class of intangibles, and distinguishing between internally generated and other assets, the financial statements must disclose:

• whether the useful lives are indefinite or finite and, if finite, the length of the useful lives or the amortization rates used.
• the amortization methods used for intangible assets with finite useful lives.
• the gross carrying amount and any accumulated amortization (aggregated with accumulated impairment losses) at the beginning and end of the period.
• the line item(s) of the statement of comprehensive income in which any amortization of intangible assets is included.
• detailed reconciliation of the carrying amount at the beginning and end of the period (showing, for example, additions, amortization, impairment losses, revaluation information, foreign currency translation impacts, and so on).

Under U.S. GAAP, a company is required to disclose the gross carrying amounts and accumulated amortization, the aggregated amortization expense for the period, and the estimated amortization expense for the next 5 years.