What Are Intangible Assets?
Intangible assets are non-physical assets that lack substance but provide long-term economic benefits to a business. Unlike tangible assets such as machinery or buildings, intangible assets derive their value from legal rights, intellectual property, or competitive advantages. Common examples include patents, trademarks, copyrights, customer lists, franchise agreements, and software developed for internal use.
Under IFRS (IAS 38) and US GAAP (ASC 350), intangible assets are classified as either identifiable or unidentifiable. Identifiable intangible assets can be separated from the business and sold, transferred, or licensed — patents and trademarks fall into this category. Unidentifiable intangible assets, such as goodwill, cannot be separated from the business as a whole and are accounted for differently under IFRS 3 and ASC 805.
Initial Recognition of Intangible Assets
An intangible asset is recognized when it is probable that future economic benefits will flow to the entity and the cost can be measured reliably. The initial recognition depends on how the asset was acquired:
Purchased Intangible Assets
When a company purchases an intangible asset outright (e.g., buying a patent from a third party), it records the asset at its purchase price plus any directly attributable costs such as legal fees and registration costs.
| Dr. Patent (Intangible Asset) | $53,000 | |
| Cr. Cash | $53,000 |
Internally Generated Intangible Assets
Internally generated intangibles — such as software developed for in-house use or research leading to a patentable invention — follow stricter recognition rules. Under IAS 38, costs are split into a research phase and a development phase:
- Research costs: Expensed as incurred. No asset is recognized because the entity cannot demonstrate that future economic benefits are probable.
- Development costs: Capitalized only if the entity can demonstrate all six recognition criteria under IAS 38, including technical feasibility, intention to complete, and ability to use or sell the asset.
| Dr. Research Expense | $80,000 | |
| Dr. Software (Intangible Asset) | $120,000 | |
| Cr. Cash/Accounts Payable | $200,000 |
Intangible Assets Acquired in a Business Combination
In a business combination, identifiable intangible assets are recognized separately from goodwill at their fair value on the acquisition date, regardless of whether the acquiree had previously recognized them. This often reveals significant intangible value — such as brand names, customer relationships, and technology — that was not on the acquiree's balance sheet.
| Dr. Customer List (Intangible Asset) | $200,000 | |
| Dr. Technology (Intangible Asset) | $350,000 | |
| Cr. Cash/Consideration Payable | $550,000 |
Amortization of Intangible Assets
Intangible assets with a finite useful life are amortized over their estimated useful life. The amortization method should reflect the pattern in which the asset's economic benefits are consumed — straight-line is most common, but accelerated methods may be appropriate if benefits are front-loaded.
Unlike tangible assets, intangible assets generally have no residual value unless there is a commitment from a third party to purchase the asset at the end of its useful life or an active market exists for it.
Straight-Line Amortization Journal Entry
| Dr. Amortization Expense | $5,300 | |
| Cr. Accumulated Amortization — Patent | $5,300 |
Accumulated amortization is a contra-asset account that reduces the carrying amount of the intangible asset on the balance sheet, similar to accumulated depreciation for tangible assets.
Indefinite-Life Intangible Assets
Intangible assets with an indefinite useful life (e.g., certain trademarks or broadcast licenses) are not amortized. Instead, they are tested for impairment at least annually. If circumstances indicate the asset may be impaired, the test is performed more frequently. Goodwill is the most common example — see our article on journal entries for goodwill impairment for a detailed walkthrough.
Impairment of Intangible Assets
When the carrying amount of an intangible asset exceeds its recoverable amount, an impairment loss must be recognized. Under IAS 36, the recoverable amount is the higher of fair value less costs of disposal and value in use (the present value of future cash flows).
| Dr. Impairment Loss | $15,000 | |
| Cr. Accumulated Impairment — Trademark | $15,000 |
For more detailed treatment of impairment accounting, including cash-generating units and reversal rules, see our article on journal entries for impairment loss.
Derecognition of Intangible Assets
An intangible asset is derecognized on disposal or when no future economic benefits are expected from its use. The gain or loss on disposal is calculated as the difference between net disposal proceeds and the carrying amount.
| Dr. Cash | $25,000 | |
| Dr. Accumulated Amortization — Patent | $30,000 | |
| Cr. Patent (Intangible Asset) | $50,000 | |
| Cr. Gain on Sale of Patent | $5,000 |
Summary Table: Intangible Asset Categories
| Type | Recognition | Amortization | Impairment |
|---|---|---|---|
| Purchased (finite life) | At cost + attributable costs | Over useful life | Test when indicators exist |
| Internally generated | Development costs only (if criteria met) | Over useful life | Test when indicators exist |
| Acquired in business combination | At fair value at acquisition date | Over useful life | Test when indicators exist |
| Indefinite life | At cost or fair value | No amortization | Test at least annually |
Understanding the accounting for intangible assets is essential for any business that invests in intellectual property, software, customer relationships, or brand development. The distinction between research and development costs, the determination of useful lives, and the impairment testing process all require professional judgment. For a comprehensive overview of related accounting topics, see our complete guide to journal entries and our article on journal entries for R&D expenses.
