Intangible assets

Assets that do not have a definite existence are called intangible assets. They have neither a physical form nor give their owner definite financial rights.

Intangible fixed assets are shown separately on the balance sheet from tangible fixed assets.

Securities, financial instruments, bank deposits and debt are tangible assets not intangible, although, as they are often current assets, the distinction may not need to be made anyway.

Deferred tax assets, patents and copyrights and capitalised R & D are intangibles.

By the rules of IAS 38, an intangible asset, should be:

  • be identifiable
  • be controlled by the company
  • increase future profits

Different rules apply to goodwill. Although it is an intangible asset it has unique characteristics. It is covered in separate standard (IFRS 3).

In more detail:

An intangible asset should be separately identifiable (the company can sell it, licence it, etc).

Intangible assets can arise from a purchase (for example, through the purchase of a patent) or be generated within the organisation (for example, through expenditure on R & D). Something that can be purchased can obviously be identified. If a profit making enterprise purchases something it should be in the expectation that it will generate cash flows.

If an intangible is created within a company rather than purchased, the requirements are slightly more complicated. There are few intangibles than justify their cost being capitalised and shown on the balance sheet. Although companies talk of "investing" in brands, advertising and marketing expenditure go straight to the P & L for good reasons. The role such expenditure plays in generating cash flows is too indirect and uncertain to justify treating what it creates as an asset.

There are special rules for R & D costs.

It is usual to either amortise the cost of an intangible asset over each year of its life, or to carry our regular reviews and show impairment as and when necessary. The latter is the required treatment for goodwill. Amortisation is the required treatment for assets (such as patents) that have a limited life.

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