Financial Statements

Intangible Assets: Meaning, Types, Reporting In On The Balance Sheet

Updated on April 12, 2022 · By Ahmad Nasrudin Tag: Assets, Intangible Assets

You are here: Home / Finance / Financial Statements / Intangible Assets: Meaning, Types, Reporting In On The Balance Sheet

Apple, for example, is one of the premium brands in the electronics industry. The company leverages its strong brand equity to develop various products, from laptops to mobile phones. Although pricey, customers are still enthusiastic about buying, even queuing to get it.

Trademark

The company uses a trademark (a combination of words, symbols, or phrases) to differentiate its products from competitors’ brands. Besides, the other party couldn’t use it.

Trademarks create positive relationships with customers. They can easily identify a product and associate it with the product’s attributes, such as quality and price.

Copyright

Copyright protects intellectual property to prevent other parties from publishing, copying and distributing the company’s works. That allows money to keep flowing to the company.

If competitors can sell it easily without problems, then they can exploit it to generate sales. That means money will move from the company to the competitor.

Patent

Patents give the company the exclusive right to monetize its inventions. And as long as it is still valid, other parties cannot use it without obtaining permission from the company.

Franchising and Licensing

Franchising gives the other party the right to operate the business using the franchisor’s brands and products. Licensing is also similar to franchising, where other parties can use the intellectual property or goods belonging to the licensor.

Both flow money to the franchisor and the licensee through royalty payments and profit-sharing, depending on the agreement. The owner can immediately grow his business more quickly and in a shorter period than competitors.

How companies report intangible assets in financial statements

Under IFRS, a company reports an intangible asset, whether obtained from the acquisition or from internal development, as long as the asset provides economic benefits to the company and its cost can be measured reliably. In this case, the company cannot recognize the intangible assets that arise at the research stage. Thus, expenses incurred at the research stage must be recognized as expenses when they are incurred. Meanwhile, expenditures incurred during the development stage can be recognized as assets only if they meet the criteria.

Under US GAAP, most of the internally generated intangible assets are not recorded on the balance sheet. The company only recognizes intangible assets that are acquired from other companies or purchased individually. Even though unrecognized on the balance sheet, you can estimate the success of developing internal intangible assets by evaluating its long-term growth rate of income, margins, and cash flow. Meanwhile, all research and development expenditures must be recorded as an expense in the income statement and not recorded as assets on the balance sheet.

The company recognizes intangible assets from the acquisition at the purchase price. They fall into two categories:

• Intangible assets with limited useful lives, such as patents. They are amortized and must undergo regular impairment testing. The amortization method is the same as when you would calculate the depreciation of property, plant, and equipment (PP&E), using the straight-line method.
• Intangible assets with unlimited useful lives, such as goodwill, trademarks, and perpetual franchises. They are unamortized but are tested for impairment annually.

Goodwill case example

Goodwill consists of two, namely accounting goodwill and economic goodwill. The first happens when the company acquires another company and pays higher than the fair value of the target company’s net assets (total assets minus total liabilities). Economic goodwill derived from internal development and are not reflected on the balance sheet of the company.

For example, suppose a company acquires a target company with net assets of Rp50 million. The acquirer paid Rp60 million, considering that the target has a strong position in the market due to strong brand equity, customer loyalty, and strategic location. Hence, after the acquisition, the acquirer would report Rp10 million’s goodwill under its long-term assets of the balance sheet.

The company capitalizes the accounting goodwill. Because of having an indefinite useful life, the company does not amortize it but must test it for impairment annually.