Shalin Bhansali

FADM - INTANGIBLE ASSETS

I. Meaning of Intangible Assets:

Assets that a) lack physical existence; and b) are not monetary assets (assets that can be readily converted
to fixed or precisely determinable amounts of cash)

II. Categories of Intangible Assets:

Marketing-related (Trademarks), Customer-related (Customer Lists), Art-related (Copyright), Contract-

related (Franchise & Licensing agreements, permits, broadcast rights), Technology-related (Patents),
Goodwill (arises during acquisitions)

III. Which intangible assets are recorded on the balance sheet?

Only identifiable intangible assets are recorded on the balance sheet

(identifiable = arising out of contractual agreements or legal rights + separable from the company and can be
sold)

Examples of intangible assets not recorded on balance sheet: brand name, exceptional management,
desirable location, good customer relations, skilled employees, high-quality of products, internally generated
goodwill

Examples of intangible assets recorded on balance sheet: goodwill (arising out of an acquisition), patents,
trademarks, copyrights, any intangible asset acquired from outside at a given price

General rule: Intangible assets are recognized on the balance sheet only when they are purchased (either
direct purchase, or indirect purchase via M&A). If they are internally generated, then recognize those costs as
an expense in P&L

E.g. If a company spends money on advertising for creation of brand value, then that advertising cost is
expensed in P&L and not considered as an intangible asset. Hence, that brand value is not reflected in the
intangible assets on the balance sheet.

However, if the company purchases a brand from another company, then that brand is recognized as an
intangible asset on the balance sheet at the value of purchasing it

(Exception to the General rule: development costs under IFRS/IndAS and software development costs are
capitalized under US GAAP – read more in V.)

IV. At what value to record Intangible assets?

Purchase price + legal fees + other incidental expenses to bring the intangible asset to its intended use

V. How to treat Research & Development (R&D) costs?

Research costs1: Expensed under US GAAP, IFRS, and IndAS

Development costs2:

a) US GAAP: Expensed in P&L (except software development costs after achieving technical feasibility,
which are capitalized as an intangible asset)
b) IFRS & IndAS: Capitalize the development costs once project is economically viable or technical
feasibility can be demonstrated
1Research: Planned search or critical investigation aimed at discovery of new knowledge
2
Development: Translation of research findings or other knowledge into a plan or design for a new product or
process or for a significant improvement to an existing product or process whether intended for sale or use
 Shalin Bhansali
FADM - INTANGIBLE ASSETS

Some common R&D costs:

▪ Salaries and benefits for researchers and developers

▪ supplies needed to conduct the research
▪ licensing fees for intellectual property or software used in the R&D process
▪ third-party payments to collaborators at other firms and universities
▪ laboratory and other equipment
▪ property and buildings to be used as research facilities + depreciation on the same

VI. What to do once you capitalize a cost and recognize it as an intangible asset?

a. Amortization (similar to depreciation): allocation of the cost of intangible asset over its useful life
▪ Only intangible assets with a limited life are amortized; if estimated useful life can’t be
estimated, it is indefinite (e.g. Goodwill) – hence, do not amortize such assets (just like Land)
▪ Either use straight line method, or use some other reasonable basis if given in the question (in
the proportion of number of units produced each year, etc.)
▪ Amortization expense will be reported in P&L (just like depreciation) – often included in Selling,
General, & Admin expenses (SG&A)
▪ Amortization gets added to Accumulated Amortization on the balance sheet, thus reducing the
Net Book Value of intangible assets
▪ Journal entry: Amortization Dr., Accumulated Amortization Cr.

b. Impairment (similar to impairment of PP&E): one-time reduction in the value of the intangible asset
▪ When is an asset considered to be impaired? – when its Net Book Value (Cost – Amortization till
date) is greater than the Recoverable Amount*
*Recoverable Amount = higher of (fair value – disposal cost) or value-in-use
▪ Intangible are tested for impairment annually (both types of intangible assets - those with definite
lives and indefinite lives)
▪ If an asset is considered to be impaired, reduce it to its Recoverable Amount
▪ The impairment loss is recognized in P&L and gets added to Accumulated Amortization on the
balance sheet, thus reducing the Net Book Value of intangible assets
▪ Journal entry: Loss due to impairment Dr., Accumulated Amortization Cr.
c. Sale of intangible asset:
▪ Recognize the profit or loss on sale in P&L
▪ Journal entry:

Cash Dr. → Assets+

Accumulated Amortization Dr. → Assets +
Loss on Sale Dr. → P&L, Loss
To Intangible Asset Cr. → Assets -
To Gain on Sale Cr. → P&L, Gain

VII. When is Goodwill recognized?

Scenario: You plan to acquire a company which has Net Assets (Fair value of Assets – Fair value of Liabilities)
of X

Case 1: You pay more than X to acquire the company. The amount of extra payment is considered to be the
goodwill arising from the acquisition and is recorded on your balance sheet.

Case 2: You pay less than X to acquire the company. The amount of difference between Net Assets and the
purchase consideration (amount paid to acquire the company) leads to a reduction in goodwill.
 Shalin Bhansali
FADM - INTANGIBLE ASSETS
 Shalin Bhansali
FADM - INTANGIBLE ASSETS