Intangible asset
Encyclopedia
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset. There are two primary forms of intangibles - legal intangibles (such as trade secret
Trade secret
A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers...

s (e.g., customer lists), copyright
Copyright
Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...

s, patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....

s, and trademark
Trademark
A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or...

s) and competitive intangibles (such as knowledge activities (know-how, knowledge
Knowledge
Knowledge is a familiarity with someone or something unknown, which can include information, facts, descriptions, or skills acquired through experience or education. It can refer to the theoretical or practical understanding of a subject...

), collaboration activities, leverage activities, and structural activities). Legal intangibles are known under the generic term intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...

 and generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price. Human capital
Human capital
Human capitalis the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience...

 is the primary source of competitive intangibles for organizations today. Competitive intangibles are the source from which competitive advantage flows, or is destroyed. The area of finance that deals with intangible assets is known as Intangible Asset Finance
Intangible asset finance
Intangible Asset Finance is the branch of finance that deals with intangible assets such as patents and reputation . Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time.- Basic principles :In 2003, one estimate put the economic...

.

The Uniform Commercial Code
Uniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...

 (Section 9-102(a)(42)) defines "general intangibles" as
"any personal property
Personal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...

...other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter of credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software."

Intangible Assets vs. Goodwill

While goodwill
Goodwill (accounting)
Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps because the reputation the firm...

 is technically an intangible asset, it is usually listed as a separate item on a company's balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

. As a distinct type of intangible asset, goodwill typically comes into play only in an acquisition, and represents the amount of money a company has paid or would pay over the fair value of the net assets to acquire another company.

Research & Development

Millions are spent each year by corporations to research and develop new intangible assets. To protect their research and development
Research and development
The phrase research and development , according to the Organization for Economic Co-operation and Development, refers to "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of...

 (R&D) efforts, corporations generally rely on intellectual property law.

General standards

The International Accounting Standards Board
International Accounting Standards Board
The International Accounting Standards Board is an independent, privately funded accounting standard-setter based in London, England.The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee...

 (IASB) offers some guidance (IAS 38) as to how intangible assets should be accounted for in financial statement
Financial statement
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...

s. In general, legal intangibles that are developed internally are not recognized and legal intangibles that are purchased from third-parties are recognized. Wordings are similar to IAS 9.

Under US GAAP, intangible assets are classified into: Purchased vs. internally created intangibles, and Limited-life vs. indefinite-life intangibles.

Expense recognition

Intangible assets are typically expensed according to their respective life expectancy. Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized
Amortization
Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...

 on a straight-line basis over their economic or legal life, whichever is shorter. Examples of intangible assets with identifiable useful lives include copyrights and patents. Intangible assets with indefinite useful lives are reassessed each year for impairment. If an impairment has occurred, then a loss must be recognized. An impairment loss
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...

 is determined by subtracting the asset's fair value from the asset's book/carrying value. Trademarks and goodwill are examples of intangible assets with indefinite useful lives. Goodwill has to be tested for impairment rather than amortized. If impaired, goodwill is reduced and loss is recognized in the Income statement.

Taxation

For personal income tax purposes, some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses. Treasury regulations generally require capitalization of costs associated with acquiring, creating, or enhancing intangible assets. For example, an amount paid to obtain a trademark must be capitalized. Certain amounts paid to facilitate these transactions are also capitalized. Some types of intangible assets are categorized based on whether the asset is acquired from another party or created by the taxpayer. The regulations contain many provisions intended to make it easier to determine when capitalization is required.

Definition of "intangibles" differs from standard accounting, in some US state governments. These governments may refer to stocks and bonds as "intangibles."

See also

  • Intellectual capital
    Intellectual capital
    The value of an enterprise is made of physical assets, various financial assets and, finally, intangible assets, i.e., intellectual capital . The term intellectual capital conventionally refers to the difference in value between tangible assets and market value. ....

  • Intellectual property
    Intellectual property
    Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...

    • Copyright
      Copyright
      Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...

    • Patent
      Patent
      A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....

    • Trademark
      Trademark
      A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or...

    • Trade secret
      Trade secret
      A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers...

  • Goodwill (accounting)
    Goodwill (accounting)
    Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps because the reputation the firm...

  • Triple Accounting
  • Tangible common equity
    Tangible Common Equity
    Tangible Common Equity refers to the subset of shareholders' equity that is not preferred equity and not intangible assets.TCE is an uncommonly used measure of a company’s financial strength. It indicates how much ownership equity owners of common stock would receive in the event of a company’s...

  • Value networks
  • Value network analysis
    Value network analysis
    Value network analysis is a methodology for understanding, using, visualizing, optimizing internal and external value networks and complex economic ecosystems. The methods include visualizing sets of relationships from a dynamic whole systems perspective...

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
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