List of Intangible Assets in Accounting

An intangible asset is an identifiable, non-monetary asset that lacks physical substance. Unlike a company’s buildings or equipment, you cannot touch or see an intangible asset, yet it can be a source of a company’s value and competitive advantage. Much of a business’s worth is tied to its intellectual property, customer relationships, and overall market presence. These non-physical assets are what differentiate many modern companies and drive their profitability.

Core Categories of Intangible Assets

Accounting standards classify intangible assets into several categories based on their nature and how they contribute to a company’s operations. The main groups include assets related to marketing, customers, artistic works, contracts, and technology, along with goodwill.

Marketing-Related Assets

Marketing-related intangible assets are resources used to promote products or services, deriving their value from consumer recognition and positive association. Examples include:

• Trademarks, which are legally protected symbols, names, or slogans that identify a company or its products.
• Trade names, which are the official names under which companies do business.
• Brand names that carry a reputation with consumers.
• Trade dress, the unique visual identity of a product, including its color, shape, or packaging design.
• Internet domain names, which represent a company’s online address and brand presence.

Customer-Related Assets

Customer-related intangible assets arise from relationships a company has with its customers and represent the future economic benefits expected from those relationships. Examples include:

• Customer lists, particularly detailed ones with a history of transactions and relationships.
• Order or production backlogs, which represent confirmed orders that will generate future revenue.
• Customer contracts that provide a legal basis for an ongoing business relationship.
• Noncontractual customer relationships that are expected to continue and contribute to future cash flows.

Artistic-Related Assets

Artistic-related intangible assets stem from the rights to creative works, typically protected by copyright laws. Examples include:

• Copyrights on books, magazines, and other literary works.
• Musical works, such as compositions and song lyrics.
• Pictures and photographs.
• Rights to motion pictures, music videos, and television programs.

Contract-Based Assets

Contract-based intangible assets are rights that arise from contractual agreements, giving a company specific rights or privileges that have value. Examples include:

• Licensing and royalty agreements that allow a company to use another party’s intellectual property in exchange for payment.
• Franchise agreements, which grant the right to operate a business under an established brand.
• Broadcast rights that allow a media company to air specific content.
• Non-compete agreements, where one party agrees not to compete with another for a certain period.
• Service or supply contracts if their terms are favorable compared to current market rates.

Technology-Based Assets

Technology-based intangible assets arise from innovation and technological advancements and can provide a competitive edge. These assets are often the result of research and development activities. Examples include:

• Patented technology, as a patent grants the owner exclusive rights to an invention for a limited period.
• Computer software, whether it is developed for internal use or for sale to customers.
• Trade secrets, which include confidential formulas, processes, or recipes that give a company a business advantage.
• Unpatented technology if it is unique and provides value.

Goodwill

Goodwill is an intangible asset recognized only in a business acquisition, representing the amount paid for a company that exceeds the fair value of its identifiable net assets. It captures the value of synergies, reputation, and other factors that are not separately identifiable and cannot be sold or licensed independently from the business.

For public companies, goodwill has an indefinite life and is not amortized but must be tested for impairment annually. Private companies have the option to amortize goodwill on a straight-line basis for up to 10 years. If this option is taken, impairment testing is only required when an event indicates the business’s fair value may have fallen below its carrying amount.

Recognition and Initial Measurement

For an intangible asset to appear on a company’s balance sheet, it must meet specific recognition criteria. The distinction in accounting for intangible assets lies in whether they are acquired from another party or generated internally.

An acquired intangible asset, whether purchased individually or as part of a business combination, is recorded at its fair value on the date of acquisition. Fair value is the price that would be received to sell an asset in an orderly transaction. This applies to assets like purchased patents, customer lists from an acquired company, or brand names that are part of a merger.

In contrast, the accounting for internally generated intangible assets is much different. Costs incurred to create intangible assets internally, such as building a brand name through advertising or cultivating a customer base, are expensed as they are incurred. This means these costs are recorded as an expense on the income statement in the period they happen.

The rationale for this treatment is the inherent uncertainty in determining the future economic benefits of these expenditures. It is difficult to directly link costs like marketing or research to the creation of a specific, identifiable asset with a measurable value. Therefore, accounting rules mandate a more conservative approach of expensing these costs.

Accounting After Initial Recognition

Once an intangible asset is recorded, its accounting treatment depends on whether its useful life is determined to be finite or indefinite. This distinction dictates whether the asset’s cost is systematically reduced over time or periodically tested for a decline in value.

For intangible assets with a finite useful life, such as patents and copyrights, the process of amortization is applied. Amortization is the systematic allocation of the asset’s cost over its estimated useful life. The amortization expense is recorded on the income statement each period, reducing the asset’s carrying value on the balance sheet.

Intangible assets with an indefinite useful life, such as trademarks and brand names, are not amortized. An indefinite life means there is no foreseeable limit on the period over which the asset is expected to generate cash flows.

Instead of amortization, these assets must be tested for impairment at least annually, or more frequently if events indicate that the asset might be impaired. An impairment loss is recognized when the asset’s carrying amount on the balance sheet exceeds its fair value. This loss is reported on the income statement, reducing the asset’s carrying value.

Items Commonly Mistaken for Intangible Assets

While many non-physical items create value for a business, not all can be recognized as intangible assets on financial statements. Accounting standards require several types of expenditures to be treated as expenses, even though they may generate future benefits.

A primary example is research and development (R&D) costs. Companies invest in R&D to discover new knowledge and create new technologies. While these activities can lead to the creation of patents or trade secrets, the costs associated with the R&D phases are expensed as incurred due to the uncertainty of future economic benefits.

Other examples of expenditures that are not capitalized as intangible assets include start-up costs and employee training expenses. Start-up costs, which are incurred in the formation of a new business, are expensed as they occur. Similarly, the costs of training employees, while enhancing the value of the workforce, are treated as period expenses.