Analyzing Intangible Assets
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured. Intangible assets are created through time and effort, and are identifiable as a separate asset .
Analyzing Intangibles
How to Analyze Intangible Assets
Intangible assets are typically expensed according to their respective life expectancy. Intangible assets have either an identifiable or indefinite useful life. Those with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever one is shorter. Examples of intangible assets with identifiable useful lives include 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 or 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.
Capitalization
Some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses. Treasury regulations 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.
Research and Development
Research and development (R&D) costs are not in and of themselves intangible assets. R&D activities frequently result in the development of something that is patented or copyrighted (such as a new product, process, idea, formula, composition, or literary work). Many businesses spend considerable sums of money on research and development to create new products or processes, improve present products, and discover new knowledge that may be valuable.