Intangible asset

An intangible asset is an asset that lacks physical substance. Examples are patents, copyright,
franchises, goodwill, trademarks, and trade names, reputation, R&D, know-how, as well as any
form of digital asset such as software and data. This is in contrast to physical assets (machinery,
buildings, etc.) and financial assets (government securities, etc.).[1]

Intangible assets are usually very difficult to value.They suffer from typical market failures of
non-rivalry and non-excludability.[2] Today, a large part of the corporate economy (in terms of net
present value) consists of intangible assets,[3] reflecting the growth of information technology
and organizational capital.[4]

Definition in accounting

Intangible assets under the Corrado,

Hultan and Sichel framework (source
(https://www.wipo.int/web-publicatio
ns/world-intangible-investment-highli
ghts-better-data-for-better-policy/en/
world-intangible-investment-highlight
s.html) )

Intangible assets may be one possible contributor to the disparity between "company value as
per their accounting records", as well as "company value as per their market capitalization".[5]
Considering this argument, it is important to understand what an intangible asset truly is in the
eyes of an accountant. A number of attempts have been made to define intangible assets:

The Australian Accounting Standards Board included examples of intangible items in its
definition of assets in Statement of Accounting Concepts number 4 (SAC 4), issued in 1995.[6]
The statement did not provide a formal definition of an intangible asset, but did explain that
tangibility was not an essential characteristic of an asset.

The International Accounting Standards Board standard 38 (IAS 38)[7][8] defines an intangible
asset as: "an identifiable non-monetary asset without physical substance". This definition is in
addition to the standard definition of an asset which requires a past event that has given rise to
 a resource that the entity controls and from which future economic benefits are expected to
flow. Thus, the extra requirement for an intangible asset under IAS 38 is identifiability. This
criterion requires that an intangible asset is separable from the entity or that it arises from a
contractual or legal right.

The Financial Accounting Standards Board Accounting Standard Codification 350 (ASC 350)
defines an intangible asset as an asset, other than a financial asset, that lacks physical
substance.

The lack of physical substance would therefore seem to be a defining characteristic of an

intangible asset. Both the IASB and FASB definitions specifically preclude monetary assets in
their definition of an intangible asset. This is necessary in order to avoid the classification of
items such as accounts receivable, derivatives and cash in the bank as an intangible asset. IAS
38 contains examples of intangible assets, including: computer software, copyright and patents.

Financial accounting

General standards

The International Accounting Standards Board (IASB) offers some guidance (IAS 38) as to how
intangible assets should be accounted for in financial statements. In general, legal intangibles
that are developed internally are not recognized and legal intangibles that are purchased from
third parties are recognized.[2] Wordings are similar to IAS 9.

Under US GAAP, intangible assets[2][9] are classified into: Purchased vs. internally created
intangibles, and Limited-life vs. indefinite-life intangibles.

Expense allocation

Intangible assets are typically expensed according to their respective life expectancy.[2][7]
Intangible assets have either an identifiable or an indefinite useful life. Intangible assets with
identifiable useful lives are amortized on a straight-line basis over their economic or legal life,[10]
whichever is shorter. Examples of intangible assets with identifiable useful lives are 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
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.
Research and development

Research and development (known also as R&D[2]) is considered to be an intangible asset (about
16 percent of all intangible assets in the US),[11] even though most countries treat R&D as current
expenses for both legal and tax purposes. [2]Most countries report some intangibles in their
National Income and Product Accounts (NIPA). The contribution of intangible assets in long-term
GDP growth has been recognized by economists.[12] Also of note, acquired "In-Process Research
and Development" (IPR&D) is considered an asset under US GAAP.[13]

IAS 38 requires any project that results in the generation of a resource to the entity be classified
into two phases: a research phase, and a development phase.

The classification of research and development expenditure can be highly subjective, and it is
important to note that organizations may have ulterior motives in their classification of research
and development expenditures.

Taxation

For personal income tax purposes, some costs with respect to intangible assets must be
capitalized rather than treated as deductible expenses. Treasury regulations in the USA generally
require capitalization of costs associated with acquiring, creating, or enhancing intangible
assets.[14] 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.[15]

Given the growing importance of intangible assets as a source of economic growth and tax
revenue,[12] and because their non-physical nature makes it easier for taxpayers to engage in tax
strategies such as income-shifting or transfer pricing,[16] tax authorities and international
organizations have been designing ways to link intangible assets to the place where they were
created, hence defining nexus. Intangibles for corporations are amortized over a 15-year period,
equivalent to 180 months.

Definition of "intangibles" differs from standard accounting, in some US state governments.

These governments may refer to stocks and bonds as "intangibles".[17]
Value of intangible assets

The most valuable firms, spanning high-tech, pharmaceutical, automotive and financial services
industries, derive their competitiveness and market value from intangible rather than physical,
that is to say, “tangible” capital. Among companies in the S&P 500, intangibles including
intellectual property account for 90% of the total market value. [18][19]

Intangible assets, though not always visible, play a crucial role in shaping the success of
companies and countries in today's competitive environment. Investing in these assets helps
businesses attract skilled talent, build customer loyalty, achieve market success, foster
innovation and growth. [20][21]These assets also contribute to improved economic opportunities,
higher-paying jobs, enhanced product quality. According to WIPO’s World IP Report (2017),
intellectual property (IP) and other intangibles contribute on average twice as much value as
tangible capital to products manufactured and traded along value chains. [22]

The fastest growing types of

intangible asset over 2011-2021 have
been software and data, followed by
brands, organizational capital, and
new financial products.

Recent estimates from Brand Finance used in the Global Innovation Index (GII) suggest that the
global value of intangibles has been growing rapidly over the last 25 years to reach around USD
62 trillion in 2023. [23][21]

In 2023, intangible investment accounted for over 16 percent of GDP in highly intangible-
intensive economies like Sweden, the United States of America (US) and France. [20]A trend
showing intangible investment growing faster than tangible investment at country level. India
was the country that experienced the fastest growth in intangible investment from 2011 to
2020.[20]

Software and data and brands are the two fastest growing types of intangible assets, both
growing three times faster than R&D between 2011–2021.[20]

Valuing intangible assets is nevertheless a challenge. There is no single methodology to value

them. Depending on the type of asset at hand, context and data availability, often a combination
of different approaches is used. In most cases, the value of intangibles can be estimated
considering the future economic benefits associated with the asset, like projected cash flows.
However, for many intangibles in practice this can be difficult. The cost to repurchase or recreate
an asset or comparison with transactions involving similar assets are also common methods to
determine value. [21]

Intangible asset finance, also known as IP finance, is the branch of finance that uses intangible
assets such as intellectual property (legal intangible) and reputation (competitive intangible) to
gain access to credit. Intangible assets can for example be used in equity finance. For example,
many Swiss companies use equity finance to support their growth, particularly Venture capital.
The information gathered through interviews indicates that a supportive IP portfolio, particularly
when reinforced by robust patents, plays a crucial role as a contributing factor. Without these
rights, investors are reluctant to engage with startups. [24][25]In China, pledge-backed lending is
the earliest type of IP financing developed and the fastest growing one. In 2022, the registered
amount of patent and trademark pledged lending in China reached CNY 486.9 billion, up 57.1
percent year-on-year. Twenty-eight thousand projects from 26,000 chinese businesses received
loans, both increasing about 65.5 percent year-on-year. [26][25]

See also

Cognitive assets

Intellectual capital

Intellectual property
Brand

Copyright

Patent

Patent valuation

Trademark

Trade secret

Goodwill (accounting)

Real assets

Tangible common equity

Tangible property

Intangible asset finance

References

1. "World Intangible Investment Highlights - Better Data for Better Policy - World Intangible
Investment Highlights" (https://www.wipo.int/web-publications/world-intangible-investment
-highlights-better-data-for-better-policy/en/world-intangible-investment-highlights.html) .
World Intangible Investment Highlights - Better Data for Better Policy. Retrieved 27 September
2024.

2. Webster, Elisabeth; Jensen, Paul H. (2006). Investment in Intangible Capital: An Enterprise

Perspective. The Economic Record, Vol. 82, No. 256, March, 82-96.

3. Moberly, Michael D. (2014). Safeguarding Intangible Assets (https://www.sciencedirect.com/

book/9780128005163/safeguarding-intangible-assets) . Butterworth-Heinemann. p. 16.
ISBN 978-0-12-800516-3.

4. Brynjolfsson, Erik; Hitt, Lorin M.; Yang, Shinkyu (2002). "Intangible assets: Computers and
organizational capital" (https://www.jstor.org/stable/1209176) . Brookings Papers on
Economic Activity. 2002 (1): 137–181 – via JSTOR.

5. Lev, Baruch; Daum, Juergen (2004). "The dominance of intangible assets: consequences for
enterprise management and corporate reporting" (https://web.archive.org/web/201603040
35445/http://iioe.de/fileadmin/files/publications/Lev_Daum_Dominanance_of_IA_MBE_200
4.pdf) (PDF). Measuring Business Excellence. 8 (1): 6–17.
doi:10.1108/13683040410524694 (https://doi.org/10.1108%2F13683040410524694) .
Archived from the original (http://iioe.de/fileadmin/files/publications/Lev_Daum_Dominana
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6. "SAC 4: Definition and Recognition of the Elements of Financial Statements" (http://www.aa

sb.gov.au/admin/file/content102/c3/SAC4_3-95.pdf) (PDF). Australian Accounting
Standards Board. Retrieved 19 December 2012.

7. "IAS 38" (http://www.iasplus.com/en/standards/standard37) . International Accounting

Standards Board. Retrieved 19 December 2012.

8. "IFRS - IAS 38 Intangible Assets" (https://www.ifrs.org/issued-standards/list-of-standards/ia

s-38-intangible-assets/) . www.ifrs.org. Retrieved 27 September 2024.

9. "What are intangibles? | RoyaltyRange" (https://www.royaltyrange.com/home/blog/what-are

-intangibles) . www.royaltyrange.com. Retrieved 8 March 2023.

10. For international legal lives by class of intangible asset, see the table in Tax amortization
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11. Bureau of Economic Analysis (2013). Preview of the 2013 Comprehensive Revision of the
National Income and Product Accounts.
https://www.bea.gov/scb/pdf/2013/03%20March/0313_nipa_comprehensive_revision_previ
ew.pdf Archived (https://web.archive.org/web/20170702045919/https://www.bea.gov/sc
b/pdf/2013/03%20March/0313_nipa_comprehensive_revision_preview.pdf) 2017-07-02 at
the Wayback Machine

12. Corrado, Carol. Charles Hulten, and Daniel Sichel (2006). Intangible Capital and Economic
Growth. Federal Reserve Board Discussion Paper N. 2006-24. April.
http://www.federalreserve.gov/pubs/feds/2006/200624/200624pap.pdf

13. "AICPA Issues Practice Aid on Acquired In-Process Research and Development Assets" (http
s://assets.kpmg/content/dam/kpmg/pdf/2014/01/Defining-Issues-O-1401-04.pdf) (PDF).
Defining Issues (14-4 ed.). KPMG, LLD. January 2014.

14. Treas. Reg. § 1.263(a)-4.

15. Donaldson, Samuel A. Federal Income Taxation Of Individuals: Cases, Problems and
Materials (2nd ed.). St. Paul: Thomson West, 2007. pg. 200.

16. "Action Plan on Base Erosion and Profit Shifting." (2013) Organisation for Economic Co-
operation and Development (OECD). http://www.oecd.org/sti/inno/46349020.pdf

17. "Florida Intangible Tax" (https://web.archive.org/web/20150516034049/http://www.docsto

c.com/docs/28185447/The-Florida-Intangible-Tax) . Archived from the original (http://ww
w.docstoc.com/docs/28185447/The-Florida-Intangible-Tax) on 16 May 2015. Retrieved
2 October 2010.

18. "Intangible Asset Market Value Study" (https://oceantomo.com/intangible-asset-market-val

ue-study/) . Ocean Tomo. Retrieved 27 September 2024.

19. Banker, Rajiv D.; Huang, Rong; Natarajan, Ramachandra (Ram); Zhao, Sha (2015). "Market
Reaction to Intangible Asset Value: Evidence on SG&A Expenditure" (https://dx.doi.org/10.2
139/ssrn.2589319) . SSRN Electronic Journal. doi:10.2139/ssrn.2589319 (https://doi.org/1
0.2139%2Fssrn.2589319) . ISSN 1556-5068 (https://search.worldcat.org/issn/1556-506
8) .

20. "World Intangible Investment Highlights - Better Data for Better Policy - World Intangible
Investment Highlights" (https://www.wipo.int/web-publications/world-intangible-investment
-highlights-better-data-for-better-policy/en/world-intangible-investment-highlights.html) .
World Intangible Investment Highlights - Better Data for Better Policy. Retrieved 27 September
2024.

21. "Intangible Assets and Intellectual Property" (https://www.wipo.int/web/intangible-asset

s) . intangible-assets. Retrieved 27 September 2024.
22. "World Intellectual Property Report 2017 – Intangible Capital in Global Value Chains" (http
s://www.wipo.int/publications/en/details.jsp?id=4225) . www.wipo.int. Retrieved
27 September 2024.

23. "Global Innovation Index 2023: Innovation in the face of uncertainty" (https://www.wipo.int/
web/global-innovation-index/2023/index) . global-innovation-index. Retrieved
27 September 2024.

24. "Unlocking IP-backed Financing Series. Country Perspectives. Switzerland's Journey" (http
s://www.wipo.int/edocs/pubdocs/en/wipo-pub-rn2023-3-en-country-perspectives-switzerla
nd-s-journey.pdf) (PDF). wipo.int. 2023. p. 13.

25. "Unlocking Intellectual Property-backed Financing – Country Perspectives" (https://www.wip

o.int/publications/en/series/index.jsp?id=241) . www.wipo.int. Retrieved 27 September
2024.

26. "Unlocking IP-backed Financing Series. Country Perspectives. China's Journey" (https://ww
w.wipo.int/edocs/pubdocs/en/wipo-pub-rn2023-46-en-country-perspectives-china-s-journe
y.pdf) (PDF). wipo.int. 2023. p. 14.

External links

Media related to Intangible assets at Wikimedia Commons