Thursday 20 December 2018

Intangible Assets: definition and characteristics

Intangible Assets

What is mean by intangible asset?

A legal claim to some future benefit, typically a claim to future cash. Simply put, an intangible asset is an asset that is not physical in nature. This definition is in line with the two main asset requirement are:

  1. The sacrifices made and

  2. Future economic benefits.

Intangible asset is also known for its intellectual assets, intellectual capital, intellectual property, or knowledge capital. Examples include copyrights, patents, intellectual property, goodwill, brands, trademarks, ideas, and relationships.

This list can easily be expand to include elements such as creativity, innovation, professionalism, and loyalty. Intangible assets are generally having two main characteristics, namely:

  1. The lack of physical existence and

  2. A high level of uncertainty associate with the future benefits.

In-depth discussions that have been conduct show that. The absence of a physical existence, as the characteristics of intangible assets, is not a criterion. Bank deposits, accounts receivable, long-term investments and also meet the criteria of the lack of physical existence, but are treat as tangible assets.


Accountants generally put forward the characteristics of the latter as the main criteria of intangible assets. The last major of an intangible asset is the high degree of uncertainty concerning the future benefits that are to be receive from its employment.

The intangible assets are distinguish based on four characteristics are:

  1.  Identifiability

  2. Manner of acquisition

  3. The expected period of benefit, and

  4. Separability from an entire enterprise.

The parallels with the treatment of tangible assets, intangible assets should be record at cost. This indicates that intangible assets are records in the accounting system. When preceded by the existence of a transaction of acquisition.

Confirms if intangible assets are acquire for stocks or in exchange for other assets. The cost of the intangible is the fair market value of the consideration given. It is the fair market value of the intangible receive. Whichever is more clearly evident.

On behalf of the reliability, at the expense of intangible assets. The relevancy is develop by the company are not report in the financial statements. In fact, intangible assets develop by the company often is an important factor determining the value of the company.


One type of intangible assets that earn a large enough portion of the study. Perhaps the most compare to the others, is goodwill.

What's goodwill?

Goodwill is part of the assets in the balance sheet that reflects the excess payment for assets that the company comparable with the market value.

Alternatively, intangible assets represent an amount greater than the book value paid by a company to acquire another company. Theoretically, goodwill is the excess of the present value of profits of an enterprise in the foreseeable future (Wikipedia, 2008).

Economic benefits

Goodwill can arise from acquisitions. Goodwill arising in consequence of the acquisition reflects the payments made by the acquirer in anticipation of the economic benefits that will accrue in the future. These economic benefits may result from synergy between the acquire assets. These benefits may also arise from assets that do not meet the requirements to be recognize in the financial statements, but the acquirer was willing to pay for it.

At the time of the acquisition, a book may not reflect the recognize goodwill economic benefits in the future for the acquirer. This can occur because the negotiations have been conduct since the decline against the expectations of future cash flows of the acquire assets.

Cost of acquisition

The acquisition transactions can occur in negative goodwill. If the cost of the acquisition is lower than the fair value of the acquirer of the interest over the assets and liabilities that can be identify on the date of the transaction, then the reasonable value of non-monetary assets acquire should be lower proportionally to the entire difference is eliminate.

If a reasonable value of non-monetary assets already handed down entirely, but it turns out that there is still the rest of the difference that has not been eliminate, then the rest of the difference is recognize as negative goodwill and are treat as defer income. The amount amortize systematically over a period of not less than twenty years.

Benefits of goodwill

With the passage of time the benefits of goodwill will be reduce. This reflects the declining ability of the goodwill to contribute to the future income. Therefore, goodwill amortize and is enter as a burden systematically during the period of benefit.

According to the principles of Financial accounting standards in amortize goodwill use method of straight lines, unless there are other methods that are consider more appropriate in certain circumstances. Goodwill amortization period of not more than five years. If there is a justifiable basis, goodwill amortization period may be longer, but no more than twenty years.

Given the goodwill is economic benefits and synergy of results, then it's often difficult to estimate the period of benefit.

The factors to be consider in estimate era benefits goodwill includes:

  1. The forecast business elements or industry concern;

  2. Influence of the wear and tear of the product, changes in demand, and other economic factors;

  3. The remainder of work expectations of managers or groups of employees who run the important effort;

  4. Anticipating the actions of competitors or would-be competitors; and

  5. The provisions of law, regulations, or rules that affect the contractual era benefits goodwill. Balance of goodwill

  6. Who are not yet amortize should be evaluate at each balance sheet date.

When there are indications that the number of fully or in part cannot be restore from the expectations of economic benefits in the future, then it is append as a direct part of the burden in the period concern. Any decline in the value of goodwill should not be raise again at the next period. Value of goodwill impairment can be cause by a variety of factors, such as unfavorable economic trends, changes in the situation and competition law, and regulation.

A decrease in the amount of cash flow generate can be use as an indicator of deciding to declare the onset of impairment the goodwill value has. In such circumstances the goodwill balance immediately lower and recognize as expense.

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