Intangible Asset

An intangible asset is an asset without physical substance that is expected to bring economic benefits to its owner. Common examples are computer software, patents, copyrights, trademarks, licences, franchise rights, customer lists, databases and goodwill arising when one company buys another. Many of the world's most valuable companies hold most of their worth in intangibles rather than in factories or equipment.

The intangible asset is the counterpart of the tangible asset. Accounting standards treat intangibles cautiously because their value is harder to verify. Under IFRS the main standard is IAS 38 Intangible Assets, with goodwill handled under IFRS 3 and IAS 36; in the United States the rules sit in ASC 350. Much of what is legally protected as intellectual property is an intangible asset, but the accounting category is wider, and many valuable intangibles never appear on a balance sheet at all.

Think of a popular local coffee shop. Its espresso machine and chairs are physical. Yet much of what makes it worth buying is invisible: the name everyone recognizes, the loyalty-card list of regular customers, the lease on a busy corner and the barista's secret recipe. Those things bring in money year after year, even though none of them can be picked up.

The difficulty is putting a price on them. A machine has a receipt; a reputation does not. That is why accountants usually record intangibles only when a business has paid someone else for them, and are wary of letting firms value their own.

IAS 38 lets a company recognize an intangible asset only if it is identifiable (separable or arising from contractual or legal rights), controlled by the company, and expected to produce future economic benefits that can be measured reliably. Several consequences follow:

• Purchased intangibles are recorded. A bought licence, a purchased patent or software acquired from a vendor goes on the balance sheet at cost.
• Acquired intangibles are recorded at fair value. In a takeover, the buyer must identify brands, customer relationships and technology of the target and value them separately, which is one reason mergers and acquisitions create large intangible balances.
• Internally created brands are not recorded. IAS 38 prohibits recognizing internally generated brands, mastheads, publishing titles and customer lists.
• Research and development is split. Under IFRS, research costs are expensed, while development costs are capitalized once strict criteria on feasibility and intent are met. US GAAP generally expenses R&D, with exceptions such as some software development costs.

Intangibles with a finite useful life, such as a ten-year licence, are written down through amortization, the intangible-asset equivalent of depreciation. Intangibles with an indefinite life, such as some trademarks, are not amortized but are tested for impairment every year.

Goodwill is the excess of the price paid for a business over the fair value of its identifiable net assets. It reflects things like expected synergies and the assembled workforce. Under IFRS and for US public companies, goodwill is not amortized but tested at least annually for impairment; the US stopped requiring goodwill amortization in 2001. Since 2014 US private companies may elect to amortize goodwill over ten years or less. Large goodwill write-downs often follow acquisitions that disappoint, and analysts strip goodwill out when calculating tangible book value.

Economists see intangibles as central to modern growth. Investment in software, data, design, training and organizational know-how helps explain gains in productivity and total factor productivity. Because intangibles can be copied and used at almost no extra cost, they create economies of scale and, together with the network effect, can produce winner-takes-all markets.

Statistical agencies have adapted. In its 2013 comprehensive revision, the US Bureau of Economic Analysis began treating research and development and entertainment originals as investment in GDP rather than as intermediate costs, which raised measured US GDP. Haskel and Westlake's book Capitalism Without Capital (2017) argued that the rise of intangibles helps explain slow investment, rising inequality between firms and the difficulty of financing knowledge-based companies with conventional bank loans.

Intangibles are hard to use as collateral because they are specific to one business and may lose most of their value if it fails. Knowledge-heavy start-ups therefore rely more on venture capital and equity than on secured lending.

Their mobility also makes them central to international tax planning. Patents and trademarks can be moved to low-tax jurisdictions and licensed back to group companies, a practice targeted by transfer pricing rules and by the OECD's base erosion and profit shifting work. Critics argue that accounting rules leave too much intangible value off balance sheets, making financial statements less useful; others reply that recognizing self-created intangibles would invite manipulation, because their values cannot be checked against an arm's-length price.

• IFRS Foundation: IAS 38 Intangible Assets
• IFRS Foundation: IAS 36 Impairment of Assets