Are Intangible Assets Classified as Fixed Assets?

Businesses rely on a variety of resources to generate income and operate effectively. These resources, known as assets, represent economic benefits controlled by the business that are expected to provide value in the future. Assets are broadly categorized based on their characteristics and how they contribute to the business’s operations.

Understanding Fixed Assets

Fixed assets, also referred to as property, plant, and equipment (PP&E), are tangible resources a company uses in its operations. They are acquired not for resale, but to support long-term activities and generate revenue over an extended period.

Fixed assets have a long useful life, typically extending beyond one accounting period. Examples include land, buildings, machinery, vehicles, and office equipment. They are listed in the noncurrent asset section of a company’s balance sheet.

Understanding Intangible Assets

Intangible assets are non-physical resources that provide economic benefits to a business. They lack physical form and cannot be touched. These assets are long-term, used in business operations, and contribute to a company’s value and future earnings. Their value stems from legal rights, intellectual property, or competitive advantages.

Common examples of intangible assets include patents, copyrights, trademarks, brand recognition, goodwill, and customer lists. Goodwill often arises when one company acquires another for a price exceeding the fair value of its identifiable assets. These assets can be acquired externally or internally developed.

Distinguishing Fixed and Intangible Assets

While both fixed assets and intangible assets are long-term resources that contribute to a business’s operations, their fundamental difference lies in tangibility. Fixed assets are physical, measurable items, whereas intangible assets are non-physical concepts or rights.

Intangible assets are classified as a distinct category of long-term assets on the balance sheet. Therefore, intangible assets are generally not considered fixed assets. This separate classification allows stakeholders to differentiate between physical infrastructure and valuable non-physical resources that drive a company’s success.

Accounting for Intangible Assets

Accounting for intangible assets involves specific principles for their recognition and subsequent expensing. When an intangible asset is acquired, it is initially recorded on the balance sheet at its cost. For assets acquired as part of a business combination, they are recorded at their fair value at the acquisition date.

Most intangible assets with a finite useful life are expensed over that life through a process called amortization. Amortization allocates the asset’s cost over its expected period of benefit, similar to how tangible assets are depreciated. Some intangibles, such as goodwill, may have an indefinite useful life and are not amortized; instead, they are subject to annual impairment tests.