Interactive Guide to Intangible Assets
An Exploration of U.S. GAAP for Finite-Lived Intangibles
What Are Intangible Assets?
This guide explores the accounting rules for a specific category of assets: finite-lived intangibles. This section provides a foundational overview of what these assets are and their significance in business operations according to U.S. GAAP.
Intangible assets are long-lived, non-physical assets that grant legal rights or competitive advantages to a business. They are acquired for use in operations and are expected to provide benefits over several accounting periods. This guide focuses on those with a determinable, or "finite," useful life.
Common examples include:
- Patents: Exclusive rights to produce and sell an invention.
- Copyrights: Legal rights to publish, sell, or distribute a creative work.
- Franchises: Rights to operate a business under another company's brand.
- Purchased Software: Software acquired for internal use.
Understanding how to account for these assets—from acquisition to amortization and potential impairment—is a critical skill. Use the navigation above to explore each stage of the asset's lifecycle.
Acquisition: How Assets Get on the Books
The first step in the lifecycle is recording the asset. Under U.S. GAAP, the accounting treatment depends entirely on how the asset was acquired: either purchased from an external party or developed internally. This distinction is crucial as it determines whether costs are capitalized or expensed.
🛒 Purchased Assets
When an intangible asset is acquired from another company or individual, its cost is recorded as an asset on the balance sheet.
What's Capitalized:- Cash paid or the fair value of other assets given up.
- The present value of any liabilities incurred.
- Direct legal and registration fees to obtain the asset.
💡 Internally Developed Assets
Costs to create an intangible asset internally are generally expensed as they are incurred. This is because U.S. GAAP prohibits capitalizing research and development costs.
What Can Be Capitalized (Exceptions):- Legal fees for a successful defense of the asset.
- Registration or consulting fees.
- Design costs (e.g., for a trademark).
- Other direct costs to secure the asset.
Amortization: Spreading the Cost
Because finite-lived intangibles have a limited period of benefit, their cost must be systematically allocated to expense over their useful life. This process is called amortization. It is the intangible asset equivalent of depreciation for tangible assets. Below, you can calculate the annual expense for a given asset.
Interactive Amortization Calculator
Impairment: Testing for Loss of Value
Sometimes, events or circumstances indicate that the value of an intangible asset has declined, and its carrying amount on the books may no longer be recoverable. U.S. GAAP requires a two-step test to determine if an impairment loss has occurred. This interactive tool walks you through the process.
Interactive Impairment Test
Compare the asset's carrying value to the total undiscounted cash flows it's expected to generate.
Visual comparison of asset values
Specific Asset Types
While the general principles of acquisition, amortization, and impairment apply broadly, some intangible assets have unique accounting rules. This section provides a brief overview of the specific treatments for common types you might encounter. Click on a tab to learn more.
Franchisee Accounting
Accounting for a franchise involves two types of fees:
- Initial Franchise Fees: The present value of the amount paid by the franchisee is capitalized as an intangible asset and amortized over the franchise's expected life.
- Continuing Franchise Fees: These are ongoing payments (royalties) for services from the franchisor. They are expensed in the period they are incurred.
Purchased Software and Cloud Computing Arrangements (CCA)
The rules for technology-related intangibles distinguish between standard software and cloud-based services.
- Purchased Software: If software is purchased for internal use, its cost is capitalized and amortized over its economic life.
- Cloud Computing Arrangements (CCA): These are treated as service contracts. Costs incurred during the application development phase (e.g., implementation, configuration, coding) are capitalized and amortized over the term of the arrangement. Preliminary project and post-implementation training/maintenance costs are expensed as incurred.
Start-up Costs
Start-up costs are one-time expenses associated with organizing a new entity, opening a new facility, or introducing a new product. This includes organizational costs like legal fees for incorporation.
Under U.S. GAAP, all start-up and organizational costs must be expensed as they are incurred. They are NOT capitalized as an intangible asset.