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Accounting for Intangible Assets

We define intangible assets as those identifiable and non-monetary assets which we cannot see, touch or physically measure. These are created through time and/or by effort and can be identified as separate assets.

Intangibles can be classified as:

1.合法的无形资产——这些组成的专利,copyrights, trademarks, patens and other trade secrets. The generic term intellectual property is used to describe these intangible assets and is used to generate legal property rights which are defensible in the court of law.

2.有竞争力的无形资产——这些e include the knowledge activities, leverage activities, collaboration activities and structural activities. They are non-own able legally and effect the productivity, efficiency, opportunity cost and wastage in an enterprise. They form the source of competitive advantage, which is mostly human capital.

Financial accounting or intangibles

Guidance is provided on how to account for intangible assets in financial statements by the international accounting standards board or the IASB. It recognizes the legal intangibles which are purchased from the third parties and does not recognize those which are developed internally (IAS38). The US GAAP classifies intangible assets into:

1.Purchase versus internally created intangibles, and

2.Limited life versus indefinite life intangibles

Recognition of expense

The expense of the intangible asset is based on their receptive life expectancy. The useful life can either be identifiable or indefinite. The indefinite useful life intangibles are reassessed each consecutive year for impairments and must be recognized if impairment has occurred. The intangible assets which have identifiable useful lives are amortized on the given straight line basis over the legal or economic life of the asset (whichever is shorter). Goodwill cannot be amortized and has to be tested for impairment and if it is found impaired, the income statement shows loss.

Taxation of intangible assets

The costs of intangible assets are to be capitalized and not treated as deductible expenses, for income tax purposes. The capitalization of costs is necessary for creating, acquiring or enhancing intangible assets, as per the treasury regulations. For example, the amount paid for obtaining a trademark must be capitalized, according to the regulations. Some amounts which are used for facilitating these transactions are also capitalized. Categorization of intangible assets is also made on the basis of whether they are crated by a taxpayer or acquired by another party. The cases and timings, where the capitalizations will be required, have also been stated clearly by the regulations.

Amortisatization

1.The amortization must occur over the estimated best useful life-period of the asset.

2.The rebuttable presumption is that the usefulness cannot exceed a time span of ten years.

3. There has to be persuasive evidence that justifies the life of more than ten years.

4. The amortization involving a time period of more than ten years requires the disclosure for the reasons for rebuttable presumption and the factors used for determining the useful life along with the annual impairment review.

If the asset is controlled by legal rights the useful life can only exceed the period of legal right if the legal rights are renewable in nature and the renewal is virtually certain. The methods for amortization include unit production method, reducing balance method and straight line method.

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