Initial recognition and subsequent measurement

This chapter covers how intangible assets are initially recorded and later measured (amortization and the definite- vs. indefinite-life distinction). That groundwork is needed for impairment, which is covered in a later chapter.

Just like property, plant and equipment, the general accounting for intangible assets can be broken down into:

• Initial recognition
• Subsequent measurement, which includes:
  • Periodic amortization, if applicable
  • Impairment

Goodwill is discussed separately from other types of intangibles because, despite being an intangible asset itself, the requirements for goodwill are covered by a separate subtopic of the Codification (ASC 350-20), while other intangibles fall under ASC 350-30.

Initial recognition of intangible assets

The initial recognition of intangible assets mirrors that of property, plant and equipment discussed in the previous section. They are initially recorded at acquisition cost plus incidental costs necessary to make the asset ready for use. This may vary depending on the type of asset being accounted for so initial recognition accounting is best discussed per type of intangible asset. This discussion is combined in the table presented in the next section.

Watch out: Purchased intangibles and the legal fees to obtain them are capitalized. Under U.S. GAAP, costs to internally develop an intangible - including R&D - are expensed as incurred, not capitalized. IFRS differs: qualifying development costs can be capitalized, and a revaluation model is allowed. These differences are covered in a later chapter.

Subsequent measurement of intangible assets

The subsequent measurement of intangible assets depends on whether the asset has a definite life or an indefinite life.

• Definite-life intangible assets are carried at cost less accumulated amortization and impairment.

• Indefinite-life intangible assets are carried at cost less impairment only, since they are not amortized until their useful life becomes finite.

An intangible asset is considered to have an indefinite life when there are no legal, regulatory, contractual, competitive, or economic factors that limit its continued use. However, indefinite does not mean infinite. If circumstances change such that the useful life can be determined, the company must begin amortizing the asset accordingly.

In practice, amortization methods may vary depending on the type of intangible asset, but the accounting treatment is conceptually the same as depreciation: the expense is systematically allocated and recorded through a journal entry that mirrors depreciation charges.

Watch out: A useful-life reassessment is a prospective change in estimate - prior periods aren’t restated.

Example: reassessing useful life

A trademark’s $\$50,000$ carrying value is reassessed from an indefinite life to a definite 5-year life.

Answer: First, test the trademark for impairment (ASC 350-30-35-17). Then amortize the post-test carrying value prospectively: $\$50,000÷5=\$10,000$ per year; prior periods aren’t restated.

Cost, useful life and amortization

The table below summarizes common intangible asset types, their capitalized costs, useful life, and amortization treatment.

Intangible asset	Costs capitalized	Useful life	Amortization
Patent	Purchase price and legal fees to obtain it; R&D to develop it is expensed	Definite - lesser of legal life (20 yrs) or useful life	Straight-line over useful life
Trademark / trade name	Purchase price or registration fees	Often indefinite - renewable indefinitely	Not amortized; impairment-tested
Copyright	Purchase price plus registration and legal fees; R&D to develop it is expensed	Definite - lesser of legal life (author’s life + 70 years) or useful life	Straight-line over useful life
Franchise / license	Initial franchise fee and directly related costs	Definite if term-limited; indefinite if perpetual	Amortized over the term if definite; not amortized (impairment-tested) if indefinite

Journal entry

This entry reduces the asset’s carrying value over time while recognizing the expense in the income statement.

Account	Debit	Credit	Financial statement element
Amortization expense	XXX		Expense
Accumulated amortization - intangible asset		XXX	Contra-asset
To record amortization of intangible asset

The journal entry typically is credited to the contra-asset account because we need to track the cost of the intangible asset. Effectively, the presentation in the balance sheet is as follows: