2. Introduction
“Intangible assets are all the elements of a
business enterprise that exist in addition to
working capital and tangible assets. They
are the elements, after working capital and
tangible assets, that make the business
work and are often the primary contributors
to the earning power of the enterprise. Their
existence is dependent on the presence, or
expectation, of earnings”
2
3. Characteristics of intangible assets
They are capable of legal enforcement and also of
legal transfer of ownership
They are capable of producing revenues in their
own right
The assets are capable of generating additional
resources / cash flows / profits over and above
those which the business would otherwise make if
it did not own the rights in question
They are often separable from the underlying
business
The asset can be regarded as a capital asset
rather than a carryover of recent expenditure 3
4. Importance of Intangibles
PwC research shows that total intangible assets comprise,
on average, some 80% of companies’ value.
Intangible assets may be the only thing of significant value
in the business.
This is because:
- They provide barriers to entry
-They differentiate products (even commodities)
- They provide a more stable and profitable earnings
stream
- They can have a long life (e.g. brands / trademarks)
- They may provide international recognition
4
5. Objectives of Intangible Accounting
Identification of Intangibles requirement
Measuring the cost on Intangibles
Collection of data
Amortization of cost
Reflecting the same in financial statement
Interpreting the result thereon
5
6. 6
Common Types of Intangibles
Patents,
Copyrights,
Franchises,
Trade names,
Trademarks,
Goodwill etc..
7. 7
Valuation of Intangibles
Intangibles are recorded at cost and
are also reported at cost at the end of
an accounting period.
Intangibles with limited life are subject
to amortization and possible
impairment test.
Intangibles with indefinite life are only
subject to impairment test at least
annually.
8. 8
Costs of Intangibles
Costs of Intangibles include acquisition
costs plus any other expenditures
necessary to make the intangibles ready
for the intended uses (i.e., purchase price,
legal fees, filing fees etc).
Essentially, the accounting treatment of
valuation for intangibles closely parallels
that followed by tangible assets.
9. 9
Intangibles Assets with Finite lives
Patents (20 years), copyrights (the life
of the creator plus 70 years), franchise
and license (the contractual life).
The costs are subjected to amortization
(a process of cost allocation) over the
shorter of the legal or useful life, not to
exceed 40 years.
10. 10
Amortization of Intangibles
The impairment test needed only when
events indicate that the book value may
not be recoverable.
Amortization Method: Straight-line
method.
Other method can be applied if it is more
appropriate than the S-L method.
Residual value: Usually zero.
11. Summary of the Chapter
Intangible Legal Life Amortization
Patent 20 The shorter of useful or
legal life
Copyrights Life of creator + 70
years
The shorter of useful or
legal life not to exceed
40 years
Franchises or
Licenses
Contractual
agreements
The shorter of
contractual Life or
useful life
Trade Names &
Trademarks
Unlimited (renewed
every 10 years)
Impairment test only
(at least annually)
In-Process R&D Unlimited Impairment test only
Goodwill Unlimited Impairment test only
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13. Introduction to Brand
“A name, term, design, symbol or any other
feature that identifies one seller’s good or
service as distinct from those of other
sellers.”
Intangible Assets 13
14. Brand as a Strategic Assets
It Creates goodwill in the market
Brand enhances the market share
Brand generates huge revenue as other
assets
It creates competitive position in the market
It is an intangible asset
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15. Need for Brand Accounting
Collection of data and cost of Brand creation
Allocation and apportionment of cost on
various centers
Valuation of brand and life
Amortization of cost of brand
Reflection on financial statement
Interpreting on the financial statement
Intangible Assets 15
16. Valuation of Brands
Homegrown Brands
The total cost incurred in order to develop
the brand
Acquired Brands
Total cost paid to purchase the brand
Intangible Assets 16
17. Practice
Intangible Assets 17
In Australia Rupert Murdoch’s News Corporation
included a valuation of some of its magazines on
its balance sheets in 1984.
British firms used brand values primarily to boost
their balance sheets.
In the United States, generally accepted
accounting principles (blanket amortization
principles) mean that placing a brand on the
balance sheet would require amortization of that
asset for up to 40 years. Such a charge would
severely hamper firm profitability; as a result,
firms avoid such accounting maneuvers.
18. General Approaches
Intangible Assets 18
In determining the value of a brand in an
acquisition or merger, firms can choose from
three main approaches:
Cost approach: Brand equity is the amount of money
that would be required to reproduce or replace the
brand
Market approach: The present value of the future
economic benefits to be derived by the owner of the
asset
Income approach: The discounted future cash flow
from the future earnings stream for the brand
