Intangible assets

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Intangible assets are the most important assets for many organisations.

Intangible assets include know-how, goodwill, patents, and many others.

Some intangible assets are recorded in organisations' balance sheets, but many of them are not.

1. Financial reporting.

For accounting and financial reporting purposes, intangible assets are ones that are considered to be long-term assets but are intangible in nature, such as the value of patents and goodwill generated by the business.

The principles for including this kind of intangible asset in an accounting balance sheet are that the asset must:

1. Have a cost that can be reliably measured; AND

2. Be likely to give rise to future economic benefits.

The accounting term for including such an item in a balance sheet is 'recognising' the asset.

Example 1: intangible assets recognised and not recognised

1. Orderbook

Not recognised, because it does not have a cost that can be reliably measured.

2. Employees

Not normally recognised, because there is not a cost that can be reliably measured.
Exceptions include star footballers, that have been bought. The transfer fees and other costs paid are recognised as intangible assets.

3. Intellectual property

If it has been bought, Yes - recognised.
If it is internally generated, No - not recognised.

Example 2: star players valuation

A 'home grown' star football player should be just as valuable to a club as one who has been bought-in.
But the balance sheet would only include the bought-in players, not the home grown ones.
A valuation of the company for sale or purchase should recognise the playing value of all talented players, regardless of whether they were bought-in or home grown.

Relevant accounting standards include IAS 38 and Sections 18 and 19 of FRS 102.

2. Assets.

More broadly, any non-physical asset, whether it is a short-term asset or a longer-term one.

See also