Intangible property is also known as incorporeal property. It is something that a person or business can own and transfer to another person or corporation but does not have any physical substance, such as brand name or intellectual property. It usually relates to legal creations like copyright, trademarks, and patents. Real property (land, buildings, and fittings) and personal property are excluded (ships, automobiles, tools, etc. Intangible property differs from tangible property.
Apple and Google, for example, have a lot of intangible assets to keep track of. These businesses have a lot of intangible assets on their books, from product patents and intellectual property to proprietary software and business systems, licencing, and brand names. Because the intellectual manpower and creativity represented by this intangible property is the major product that these businesses deliver, safeguarding these assets is vital to their continued existence.
These designs would be considered intangible property if you were in the creative sector and decided to start selling clothes patterns that you designed and wrote. You’d have to safeguard them for the sake of your brand, as well as for legal and accounting reasons.
There are two types of intangible assets : identifiable and non-identifiable.
Intangible assets that can be separated from other assets and sold by the corporation are known as identifiable intangible assets. The majority of these assets are generated through government registration or contracting. The following are some of the most common categories of identified intangible assets.
Patent- A unique right to create a product or use a process that is protected for 17 years by a legal body.
Patent License- A patent licence gives you the right to make a product or use a process that has been patented by someone else.
Copyright- Copyright refers to the exclusive right to profit from a creative work such as a song, film, artwork, photograph, or accounting textbook.
Domestic and international laws both protect registered copyrights. In addition to 50 years, copyrights in the United States are valid throughout the lifetime of the creator.
Trademark (also known as a trade name or a service mark)- The exclusive right to use a word or an emblem to identify a company, product, or service. When a trademark is registered, it is protected by law as long as the word does not become accepted in common parlance as describing all similar things.
Leasehold- Long-term leasing contracts provide you the exclusive right to utilise another party’s tangible asset.
Franchise- A contract that grants you the exclusive right to utilise another party’s intangible asset, such as a trademark; it may also include other benefits, such as training or national advertising campaigns. The term “franchise” is sometimes used to denote government-granted rights for private businesses to provide public services, such as restaurants in public buildings or mass transit networks.
Organization costs- A unique right to function as a business entity is gained by government registration, payment of permit and legal fees, and the issuing of securities. Other observable intangibles could exist. When the prerequisites are met, the items listed above appear as assets on balance sheets.
Intangible assets that cannot be physically removed from the company are known as unidentifiable intangible assets. Goodwill is the most prevalent unidentified intangible asset. Internally generated goodwill is never reported as an asset and is always expensed. When a corporation buys or merges with another company and pays more than its fair worth, externally produced goodwill might be recognised as an asset. Goodwill is recorded as the difference.
Unlike PP&E, such an asset is not depreciated. It is, however, periodically evaluated for impairment. If a corporation believes the value of its goodwill has declined from its reported book value, it will record an impairment loss.
Branding and reputation are another important unquantifiable asset. While a firm can sell its trademarks, logos, and other assets, separating good branding and reputation from a solid company can be challenging. Nonetheless, the company’s brand awareness and reputation are projected to generate positive financial returns in the future.
Expense for Amortization
Intangible assets are amortised when PP&E is depreciated (except for goodwill). These assets are depreciated over their useful lives. The straight-line expense approach is commonly used to amortise intangible assets. It is not amortised if an intangible asset has an everlasting life. As a result, if an intangible asset has a useful life but can be quickly and inexpensively replenished, it is termed permanent and is not amortised.
Example– Two intangible assets belong to McRonald’s. The first is a patent worth $25,000,000 with a 50-year useful life. The patent is no longer valid and cannot be renewed. The second is a trademark worth $1,000,000 with a 10-year useful life before it expires. The trademark, on the other hand, can be renewed for a small fee. What is McRonald’s annual amortisation cost?
The trademark is not amortised because it has an indefinite lifespan. The patent, on the other hand, is amortised over a 50-year period on a straight-line basis. The amortisation cost of $25,000,000 divided by 50 equals $500,000. As a result, McRonald’s amortisation expense is $500,000.
Goodwill- Goodwill cannot be identified or separated. However, goodwill is still considered an intangible asset and is classified as such. The primary distinction between goodwill and other intangibles is that goodwill is never amortised. The difference between the purchase price of a business and the fair value of its assets, net of liabilities, is known as goodwill in accounting.
The difference, in essence, shows how much the buyer is ready to pay for the business as a whole, rather than just the worth of its separate assets. For example, if XYZ Company bought $50 million for a sporting goods company and the value of its assets net of liabilities was $10 million, goodwill would be $40 million. Only companies that have purchased another business can have goodwill on their balance sheets.
Government Assistance- Finally, government handouts are a sort of intangible asset. Governments at all levels may opt to grant financial help to enterprises that engage in certain activities for a variety of reasons. The net approach or the gross method are the two accounting treatments for grants. The net approach subtracts the grant from the asset’s book value to arrive at the asset’s carrying amount, whereas the gross method registers the asset at its full purchase price and records the grant as deferred income.
Government grants might take the form of a specific grant with specified restrictions and limitations, such as minimum employment levels or environmental control standards. If these conditions are not followed, the company may be required to repay the grants. In some cases, government subsidies may include forgiving loans if enterprises meet certain criteria.
The loan does not have to be repaid, as the term implies. Government grants should only be recognised if they meet the following criteria: The entity will follow the conditions and procedures related to the awards, and the grants will be received.
Pure intangibles (such as debts, intellectual property rights, and goodwill) and documentary intangibles (which get their character through the medium of a document) are historically divided in English law and other Commonwealth legal systems (such as a bill of lading, promissory note or bill of exchange). The difference between pure intangibles and documented intangibles has been blurred by the recent proliferation of electronic documents.
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