The intellectual property of enterprises is becoming an increasingly expensive asset, the real value of which cannot always be reflected, even with the help of accounting. Unfortunately, inventions, trademarks, know-how belong to the type assets of the enterprise, which are often neglected when conducting financial analysis in order to reveal hidden reserves.
Having no tangible form, an intangible asset is still able to bring economic benefits. It is one of the types of non-current assets, except for the fact that it does not have a tangible (physical) form. Intangible assets can be identified separately from other accounting objects and the business itself and are present in the organization for the purpose of use for a period of more than one year/operating cycle for production, sales, administrative purposes, or leasing to others.
Intellectual property, for instance, is the result of the work of the human mind. Intellectual property includes inventions, work of artists and writers, names, and images used for commercial purposes. Legal systems allow these objects to be protected, for example, through patents copyright, and trademarks, which enable people to gain recognition or receive financial rewards for their inventions or works.
This concept should be perceived as a set of rights of the author and other rightsholders, allowing to dispose of these intangible assets, to prohibit and permit their use by third parties who have such intentions. By balancing the interests of inventors and the general public, the intellectual property system fosters an environment for creativity and innovation to flourish. Two groups of intellectual property rights are distinguished:
- industrial property rights
- rights related to science, literature, and art.
Industrial property is exclusive rights to the results of intellectual activity used in production: inventions, models, industrial designs, selection achievements, trademarks. Patent law is established to protect industrial property rights. Rights related to science, literature, and art are subject to copyright.
Here are examples of objects that fall under the definition of an intangible asset and which are often found in the accounting records of businesses:
- a computer program, website, or database created by the business using its own resources;
- a computer program, website, or database made by a third party for the business or acquired with the transfer of exclusive property rights to it with a corresponding agreement;
- acquired licenses to carry out certain types of activities, for example, the provision of specific services. Licenses do not have to be printed on paper, but simply exist in appropriate systems;
- rights to service and trademarks;
- property rights that include the rights to use natural resources and the rights to use property;
- registered patents, certificates for own developments, inventions, plant varieties, animal breeds, etc.
- goodwill, which is the excess of the cost of a company over the market value of its net assets.
This list is obviously not exhaustive and there are many other examples of intangible assets that you can come across in real life. However, this list gives you an idea of what to look for. As you can see, intangible assets are, first of all, certain exclusive rights, which in no case can be displayed as tangible objects or information carriers.
In addition to the above types of intangible assets, they also include the reputation and authority of the business. However, you should be aware that intangible assets do not include certain qualities of the company’s employees, their accreditation, and the ability to carry out the activities of the enterprise. This is due to the fact that these factors are a single whole in aggregate with their carriers, and their use separately from these individuals is impossible as in comparison to the use of software or patent separately from their creators.
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For accounting purposes, assets are recognized as intangible assets only when the right to use them was acquired from other entities, or those self-created intangible assets that can be sold, i.e. those that are identifiable separately from other accounting objects and embody economic benefits.
Accounting for intangible assets is carried out in relation to each object by groups. A group of intangible assets is a set of intangible assets of the same type in terms of purpose and conditions of use. In accounting and financial reporting, intangible assets are divided according to several criteria.
For instance, they can be divided based on whether they were created by the business itself or acquired from outside, further grouping the assets depending on how they were acquired (e.g. cash in exchange for other assets, as a result of a merger, etc.). Intangible assets can also be grouped based on how the company is using them. For instance, an intangible asset might allow a business to make exclusive products or provide specific services. Another type might be helpful outside the manufacturing and instead, be used by the marketing or sales department.
Just like fixed assets, intangible assets are depreciated or rather amortized over their useful life, typically using the straight-line method. For instance, if you have a license that costs $36,900 and will expire in 6 years, the amortization will equal $6,150 per year. The only exception to amortization is goodwill. Instead, the company checks if it is still worth what the books say and, if necessary, writes it down.
Author: Charles Lutwidge