Financial Reporting of Intangible Assets

Intangible assets are those assets that have no physical substance such as patents, trademarks, franchises, and copyrights.

Intangible assets can have finite lives or indefinite lives. For assets with finite lives, the cost is amortized over the life of the asset. For assets with indefinite lives, there is no amortization. Instead a test of impairment is conducted at least once a year to check if the assets are impaired. If there is impairment, then the value of the asset is reduced and the reduction is recognized as a loss in income statement.

IFRS defines intangible assets as 'identifiable non-monetary assets without physical substance'. In order to be an identifiable intangible asset, an asset must meet the following three criteria:

1. Asset must be identifiable (Capable of being separated from the firm or arise from a contractual or legal right)
2. Asset is controlled by the firm.
3. Asset is capable of generating future economic benefit.

In addition, there are two recognition criteria: 1) It is probable that the expected future economic benefits of the assets will flow to the company. 1) The cost of the asset can be reliably measured.

The intangible assets are accounted for depending on how they are acquired. Intangible assets can be:

• Purchased
• Internally developed
• Acquired in a business combination

Internally Developed Assets

All costs to create intangible assets are expensed as incurred. A few exceptions are research and development costs and software development costs. The treatment of these exceptions is summarized below:

	IFRS	US GAAP
Research Costs	Expensed	Expensed
Development Costs	Capitalized	Expensed Exception: Software development costs
Software Development (Own Use)	Costs expensed till technical feasibility is established. (Capitalization criteria) Capitalized thereon.	Capitalized
Software Development (For sale)	Costs expensed till technical feasibility is established.Capitalized thereon.