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An intangible asset is an
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
that lacks physical substance. Examples are
patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an sufficiency of disclosure, enabling disclo ...
s,
copyright A copyright is a type of intellectual property that gives its owner the exclusive right to copy, distribute, adapt, display, and perform a creative work, usually for a limited time. The creative work may be in a literary, artistic, education ...
, franchises, goodwill,
trademark A trademark (also written trade mark or trade-mark) is a type of intellectual property consisting of a recognizable sign (semiotics), sign, design, or expression (language), expression that identifies Good (economics and accounting), product ...
s, and
trade name A trade name, trading name, or business name, is a pseudonym used by companies that do not operate under their registered company name. The term for this type of alternative name is a "fictitious" business name. Registering the fictitious name w ...
s, as well as
software Software is a set of computer programs and associated software documentation, documentation and data (computing), data. This is in contrast to Computer hardware, hardware, from which the system is built and which actually performs the work. ...
. This is in contrast to physical assets (machinery,
building A building, or edifice, is an enclosed structure with a roof and walls standing more or less permanently in one place, such as a house or factory (although there's also portable buildings). Buildings come in a variety of sizes, shapes, and funct ...
s, etc.) and financial assets (government securities, etc.). An intangible asset is usually very difficult to valuate. They suffer from typical market failures of non-
rivalry A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Rivalry is the "against each other" spirit between two competing sides. The relationship itself may also be called "a rivalry", and each participant ...
and non- excludability.Webster, Elisabeth; Jensen, Paul H. (2006). ''Investment in Intangible Capital: An Enterprise Perspective.'' The Economic Record, Vol. 82, No. 256, March, 82-96. Today, a large part of the corporate economy ( NPV) consists of intangible assets.


Definition

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". 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 The Australian Accounting Standards Board (AASB) is an Australian Government agency that develops and maintains Financial statement, financial reporting standards applicable to entities in the private and public sectors of the Economy of Austral ...
included examples of intangible items in its definition of ''assets'' in Statement of Accounting Concepts number 4 (SAC 4), issued in 1995. 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. *
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). It ...
standard 38 (IAS 38) 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 The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...
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.


Research and development

Research and development Research and development (R&D or R+D), known in Europe as research and technological development (RTD), is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existi ...
(known also as R&D) is considered to be an intangible asset (about 16 percent of all intangible assets in the US), even though most countries treat R&D as current expenses for both legal and tax purposes. Most countries report some intangibles in their National Income and Product Accounts (NIPA), yet no country has included a comprehensive measure of 93180859 assets. The contribution of intangible assets in long-term GDP growth has been recognized by economists. 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 Also of note, acquired "In-Process Research and Development" (IPR&D) is considered an asset under US GAAP. 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. Less scrupulous directors may manipulate financial statements through misclassification of research and development expenditures.


Related definitions

An example of research (as 93180859 as "the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding"): a company can carry a research on one of its products which it will use in the entity of which results in future economic income. Development is defined as "the application of research findings to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services, before the start of commercial production or use". Accounting treatment of
expenses An expense is an item requiring an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. Fo ...
depends on whether they are classified as research or development. Where the distinction cannot be made, IAS 38 requires that the entire project be treated as research and expensed through the Statement of Comprehensive Income. Research expenditure is highly speculative. There is no certainty that future economic benefits will flow to the entity. Prudence dictates that research expenditure be expensed through the Statement of Comprehensive Income. Development expenditure, however, is less speculative and it becomes possible to predict the future economic benefits that will flow to the entity. The
matching principle In accrual accounting, the matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned, and is associated with accrual accounting and the revenue recognition principle states tha ...
dictates that development expenditure be capitalized, as the expenditure is expected to generate future economic benefit to the entity.


Financial accounting


General standards

The
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). It ...
(IASB) offers some guidance (IAS 38) as to how intangible assets should be accounted for in
financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s. In general, legal intangibles that are developed internally are not recognized and legal intangibles that are purchased from third parties are recognized. Wordings are similar to IAS 9. Under US GAAP
intangible asset
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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. Intangible assets have either an identifiable or an indefinite useful life. Intangible assets with identifiable useful lives are
amortized In computer science, amortized analysis is a method for Analysis of algorithms, analyzing a given algorithm's Computational complexity, complexity, or how much of a resource, especially time or memory, it takes to Execution (computing), execute. ...
on a straight-line basis over their economic or legal life, 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.


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. 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. Given the growing importance of intangible assets as a source of economic growth and tax revenue, and because their non-physical nature makes it easier for taxpayers to engage in tax strategies such as income-shifting or transfer pricing, 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 In computer science, amortized analysis is a method for Analysis of algorithms, analyzing a given algorithm's Computational complexity, complexity, or how much of a resource, especially time or memory, it takes to Execution (computing), execute. ...
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".Florida Intangible Tax


See also

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Cognitive assets Cognitive assets are tangible and intangible assets, intangible organizational assets that constitute sources of the cognition that is necessary for action coordination. These assets allow for the integrity and efficiency of the multiple conversion ...
*
Intellectual capital Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people (human capital), the value relat ...
*
Intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, ...
** Brand **
Copyright A copyright is a type of intellectual property that gives its owner the exclusive right to copy, distribute, adapt, display, and perform a creative work, usually for a limited time. The creative work may be in a literary, artistic, education ...
**
Patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an sufficiency of disclosure, enabling disclo ...
**
Patent valuation Intellectual property assets such as patents are the core of many organizations and transactions related to technology. Licenses and assignments of intellectual property rights are common operations in the technology markets, as well as the use of t ...
**
Trademark A trademark (also written trade mark or trade-mark) is a type of intellectual property consisting of a recognizable sign (semiotics), sign, design, or expression (language), expression that identifies Good (economics and accounting), product ...
**
Trade secret Trade secrets are a type of intellectual property that includes formulas, best practice, practices, business process, processes, designs, legal instrument, instruments, patterns, or compilations of information that have inherent economic value be ...
*
Goodwill (accounting) In accounting, goodwill is an intangible asset recognized when ownership of a firm is transferred as a going concern. It represents the value of a firm's intrinsic ability to retain customer business, where that value is not otherwise attributable ...
* Real assets * Tangible common equity *
Tangible property In law, tangible property is literally anything that can be touched, and includes both real property and personal property (or moveable property), and stands in distinction to intangible property. In English law and some Commonwealth leg ...


References


External links

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National intangible capital NIC 2016 database / Findings and results for economic impacts of national intangible capital 2001 - 2016
{{DEFAULTSORT:Intangible Asset Asset