Intangible are assets that do not have physical form and are considered major drivers of corporate value and growth for corporations through the benefits derived from their possession. Intangible assets are classified as follows:

Identifiable or unidentifiable and externally acquired or internally developed. Examples of identifiable assets are: Patents, franchises, licenses, leasehold, improvements, copyrights, and trademarks. An intangible asset is identifiable when is separable, which means capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract or arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

Externally acquired Externally intangible can be acquired:

by separate purchase
as part of a business combination
by a government grant
by exchange of assets

Intangible assets internally developed are also called self-creation (internal generation). Both intangible assets acquired externally and intangible assets internally developed have different accounting treatment.

Accounting Treatment

Intangible assets acquired externally initially are initially recognized and measured based on fair value, except those acquired in a business combination. If acquired as a group of assets, the cost is allocated to individual assets based on their relative fair values, without recognizing goodwill.

Initially, internally developed intangibles are expensed as incurred as long as they are not specifically identifiable and have indeterminate lives. These costs are the costs of internally developing, maintaining, or restoring intangible assets.

It is important to note that intangible assets with a finite life are amortized over their useful lives. Useful live is the period over which the asset is expected to contribute directly or indirectly to future cash flows of the organization. The amortization period is the best estimated of the useful life of an intangible and it should reflect the pattern in which the economic benefits are used up. If no determination is available, then, the straight-line amortization should be used.

An intangible asset with indefinite useful life is not amortized but it has to be tested each year for impairment, according with the terms of the SFAS 142. This is especially true for goodwill.

When intangible assets are subject to amortization, an important part of the disclosure in the financial statement is the total amount assigned to any major asset class, any significant residual value, and the weighted-average amortization period in total and by intangible asset class. For intangible assets no subject to amortization, the disclosure refers to the amount assigned to any major intangible assets class.

SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This statement requires goodwill to be periodically reviewed for impairment rather than amortized, beginning on January 1, 2002. SFAS No. 142 superseded APB Opinion No. 17, “Intangible Assets”.