Intangible Assets: Definition, Composition, and Accounting Treatment

Posted on Oct 27, 2024 in Geology

Intangible Assets

I. Introduction

Intangible assets are traditionally difficult to treat due to their complex nature, which makes identification, recognition, and measurement challenging.

II. Definition and Composition

Intangible assets are non-monetary assets without physical substance that are susceptible to economic valuation. They are accounted for as non-current assets.

Characteristics:

  • Intangible nature, although sometimes represented by titles.
  • Recognition for accounting purposes occurs upon the initial economic disbursement.
  • Justification as an asset is based on its ability to generate future returns.
  • Amortized over their useful life, during which they generate benefits.

The inherent subjectivity necessitates establishing limits.

Elements:

  • Research (200)
  • Development (201)
  • Administrative Concessions (202)
  • Intellectual Property (203)
  • Goodwill (204)
  • Transfer of Rights (205)
  • Software Applications (206)
  • Advances for Intangible Assets (209)

Recognition and Measurement Criteria:

  • NRV 5: Intangible Assets
  • NRV 6: General Intangible Assets + Specific Intangible Assets

Recognition:

Initial recognition of an intangible asset occurs when it meets the identifiability criteria:

  • It is separable, meaning it can be sold.
  • It arises from legal or contractual rights.

III. Administrative Concessions

Costs incurred to obtain research rights granted by the state or other administrations.

  1. Grant of Concession:
    Dr. Administrative Concessions (202) Cr. Bank (572)
  2. Amortization:
    Dr. Amortization Expense (680) Cr. Accumulated Amortization (280)

IV. Industrial Property

Property rights granting the use or concession of different manifestations of industrial property. These can be acquired from third parties or developed internally.

a) Acquired from Third Parties:

  1. Grant of Concession:
    Dr. Industrial Property (203) Cr. Bank (572)
  2. Amortization:
    Dr. Amortization Expense (680) Cr. Accumulated Amortization (280)

b) Developed Internally (Research + Development):

  1. Research: Original and planned inquiry pursuing new knowledge and a superior understanding of existing knowledge. (Account 200)
  2. Development: Concrete application of research achievements to a specific plan. (Account 201)

The accounting treatment of R&D, preferably according to NRV 6, establishes research costs as expenses of the period. They are capitalized as intangible assets if they meet the following:

  • Clearly individualized projects with established costs, allowing for time distribution.
  • Reasonable grounds for commercial success and economic profitability of the project.

Amortized over their useful life, with a maximum term of 5 years for R&D.

Industrial Property (Accounting Entries):

  1. Expenses: Dr. Expenses (640, 620, 600) Cr. Bank (572)
  2. External Funding: Dr. Expenses (620) Cr. Bank (572)
  3. Capitalization: Dr. Intangible Asset (200, 201) Cr. Deferred Income (730)
  4. Registration: Dr. Industrial Property (203) Cr. Intangible Asset (200, 201)
  5. Impairment: Dr. Impairment Loss (67) Cr. Intangible Asset (200, 201)
  6. Amortization: Dr. Amortization Expense (680) Cr. Accumulated Amortization (280) (Max. 5 years for R&D)

V. Software Applications

Property rights for the use of software, whether acquired from third parties or developed internally. This also includes web pages. Maintenance costs are not capitalized. Accounting treatment is similar to R&D, but uses account (206).

VI. Value Adjustments (Impairment)

According to NRV 5, the initial value of intangible assets cannot be adjusted upwards. However, downward adjustments are required for amortization and impairment losses.

NRV 5 stipulates that companies must assess whether intangible assets have an indefinite or definite useful life. If indefinite, they are not amortized but are subject to impairment testing at least annually. If definite, they are amortized: Dr. Amortization Expense (680) Cr. Accumulated Amortization (280).

Impairment losses are calculated by comparing the carrying amount (book value less accumulated amortization) with the recoverable amount.

  • Impairment Loss: Carrying Amount – Recoverable Amount
  • Recoverable Amount: The higher of net realizable value and value in use.

Accounting Entry (Impairment): Dr. Impairment Loss (690) Cr. Accumulated Impairment (290)

Accounting Entry (Impairment Reversal): Dr. Accumulated Impairment (290) Cr. Impairment Reversal Gain (790)