Intangible asset

Last updated

An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, reputation, R&D, know-how, as well as any form of digital asset such as software and data. This is in contrast to physical assets (machinery, buildings, etc.) and financial assets (government securities, etc.). [1]

Contents

Intangible assets are usually very difficult to value.They suffer from typical market failures of non-rivalry and non-excludability. [2] Today, a large part of the corporate economy (in terms of net present value) consists of intangible assets, [3] reflecting the growth of information technology and organizational capital. [4]

Definition in accounting

Intangible assets under the Corrado, Hultan and Sichel framework (source) Intangible assets under the Corrado, Hultan and Sichel framework.png
Intangible assets under the Corrado, Hultan and Sichel framework (source)

Intangible assets may be one possible contributor to the disparity between "company value as per their accounting records", as well as "company value as per their market capitalization". [5] Considering this argument, it is important to understand what an intangible asset truly is in the eyes of an accountant. A number of attempts have been made to define intangible assets:

The lack of physical substance would therefore seem to be a defining characteristic of an intangible asset. Both the IASB and FASB definitions specifically preclude monetary assets in their definition of an intangible asset. This is necessary in order to avoid the classification of items such as accounts receivable, derivatives and cash in the bank as an intangible asset. IAS 38 contains examples of intangible assets, including: computer software, copyright and patents.

Financial accounting

General standards

The International Accounting Standards Board (IASB) offers some guidance (IAS 38) as to how intangible assets should be accounted for in financial statements. In general, legal intangibles that are developed internally are not recognized and legal intangibles that are purchased from third parties are recognized. [2] Wordings are similar to IAS 9.

Under US GAAP, intangible assets [2] [9] are classified into: Purchased vs. internally created intangibles, and Limited-life vs. indefinite-life intangibles. [ citation needed ]

Expense allocation

Intangible assets are typically expensed according to their respective life expectancy. [2] [7] Intangible assets have either an identifiable or an indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, [10] whichever is shorter. Examples of intangible assets with identifiable useful lives are copyrights and patents. Intangible assets with indefinite useful lives are reassessed each year for impairment. If an impairment has occurred, then a loss must be recognized. An impairment loss is determined by subtracting the asset's fair value from the asset's book/carrying value. Trademarks and goodwill are examples of intangible assets with indefinite useful lives. Goodwill has to be tested for impairment rather than amortized. If impaired, goodwill is reduced and loss is recognized in the Income statement.

Research and development

Research and development (known also as R&D [2] ) is considered to be an intangible asset (about 16 percent of all intangible assets in the US), [11] even though most countries treat R&D as current expenses for both legal and tax purposes. [2] Most countries report some intangibles in their National Income and Product Accounts (NIPA).[ citation needed ] The contribution of intangible assets in long-term GDP growth has been recognized by economists. [12] Also of note, acquired "In-Process Research and Development" (IPR&D) is considered an asset under US GAAP. [13]

IAS 38 requires any project that results in the generation of a resource to the entity be classified into two phases: a research phase, and a development phase.

The classification of research and development expenditure can be highly subjective, and it is important to note that organizations may have ulterior motives in their classification of research and development expenditures.[ citation needed ]

Taxation

For personal income tax purposes, some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses. Treasury regulations in the USA generally require capitalization of costs associated with acquiring, creating, or enhancing intangible assets. [14] For example, an amount paid to obtain a trademark must be capitalized. Certain amounts paid to facilitate these transactions are also capitalized. Some types of intangible assets are categorized based on whether the asset is acquired from another party or created by the taxpayer. The regulations contain many provisions intended to make it easier to determine when capitalization is required. [15]

Given the growing importance of intangible assets as a source of economic growth and tax revenue, [12] and because their non-physical nature makes it easier for taxpayers to engage in tax strategies such as income-shifting or transfer pricing, [16] tax authorities and international organizations have been designing ways to link intangible assets to the place where they were created, hence defining nexus. Intangibles for corporations are amortized over a 15-year period, equivalent to 180 months.

Definition of "intangibles" differs from standard accounting, in some US state governments. These governments may refer to stocks and bonds as "intangibles". [17]

Value of intangible assets

The most valuable firms, spanning high-tech, pharmaceutical, automotive and financial services industries, derive their competitiveness and market value from intangible rather than physical, that is to say, "tangible" capital. Among companies in the S&P 500, intangibles including intellectual property account for 90% of the total market value. [18] [19]

Intangible assets, though not always visible, play a crucial role in shaping the success of companies and countries in today's competitive environment. Investing in these assets helps businesses attract skilled talent, build customer loyalty, achieve market success, foster innovation and growth. [20] [21] These assets also contribute to improved economic opportunities, higher-paying jobs, enhanced product quality. According to WIPO's World IP Report (2017), intellectual property (IP) and other intangibles contribute on average twice as much value as tangible capital to products manufactured and traded along value chains. [22]

The fastest growing types of intangible asset over 2011-2021 have been software and data, followed by brands, organizational capital, and new financial products. Intangible investment by asset type annual growth rate (%25), 2011-2021.png
The fastest growing types of intangible asset over 2011–2021 have been software and data, followed by brands, organizational capital, and new financial products.

Recent estimates from Brand Finance used in the Global Innovation Index (GII) suggest that the global value of intangibles has been growing rapidly over the last 25 years to reach around USD 62 trillion in 2023. [23] [21]

In 2023, intangible investment accounted for over 16 percent of GDP in highly intangible-intensive economies like Sweden, the United States of America (US) and France. [20] A trend showing intangible investment growing faster than tangible investment at country level. India was the country that experienced the fastest growth in intangible investment from 2011 to 2020. [20]

Software and data and brands are the two fastest growing types of intangible assets, both growing three times faster than R&D between 2011–2021. [20]

Valuing intangible assets is nevertheless a challenge. There is no single methodology to value them. Depending on the type of asset at hand, context and data availability, often a combination of different approaches is used. In most cases, the value of intangibles can be estimated considering the future economic benefits associated with the asset, like projected cash flows. However, for many intangibles in practice this can be difficult. The cost to repurchase or recreate an asset or comparison with transactions involving similar assets are also common methods to determine value. [21]

Intangible asset finance, also known as IP finance, is the branch of finance that uses intangible assets such as intellectual property (legal intangible) and reputation (competitive intangible) to gain access to credit. Intangible assets can for example be used in equity finance. For example, many Swiss companies use equity finance to support their growth, particularly Venture capital. The information gathered through interviews indicates that a supportive IP portfolio, particularly when reinforced by robust patents, plays a crucial role as a contributing factor. Without these rights, investors are reluctant to engage with startups. [24] [25] In China, pledge-backed lending is the earliest type of IP financing developed and the fastest growing one. In 2022, the registered amount of patent and trademark pledged lending in China reached CNY 486.9 billion, up 57.1 percent year-on-year. Twenty-eight thousand projects from 26,000 chinese businesses received loans, both increasing about 65.5 percent year-on-year. [26] [25]

See also

Related Research Articles

<span class="mw-page-title-main">Intellectual property</span> Ownership of creative expressions and processes

Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, copyrights, trademarks, and trade secrets. The modern concept of intellectual property developed in England in the 17th and 18th centuries. The term "intellectual property" began to be used in the 19th century, though it was not until the late 20th century that intellectual property became commonplace in most of the world's legal systems.

Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people, the value relating to its relationships, and everything that is left when the employees go home, of which intellectual property (IP) is but one component. It is the sum of everything everybody in a company knows that gives it a competitive edge. The term is used in academia in an attempt to account for the value of intangible assets not listed explicitly on a company's balance sheets. On a national level, intellectual capital refers to national intangible capital (NIC).

In financial accounting, a balance sheet is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as government or not-for-profit entity. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". It is the summary of each and every financial statement of an organization.

In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. A typical example is the machinery used in a factory. At the macroeconomic level, "the nation's capital stock includes buildings, equipment, software, and inventories during a given year."

In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be tangible book value.

A tax deduction or benefit is an amount deducted from taxable income, usually based on expenses such as those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. The difference between deductions, exemptions, and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.

In finance, valuation is the process of determining the value of a (potential) investment, asset, or security. Generally, there are three approaches taken, namely discounted cashflow valuation, relative valuation, and contingent claim valuation.

A fixed asset, also known as long-lived assets or property, plant and equipment (PP&E), is a term used in accounting for assets and property that may not easily be converted into cash. Fixed assets are different from current assets, such as cash or bank accounts, because the latter are liquid assets. In most cases, only tangible assets are referred to as fixed.

A capital asset is defined as property of any kind held by an assessee. It need not be connected to the assesse’s business or profession. The term encompasses all kinds of property, movable or immovable, tangible or intangible, fixed or circulating. Land and building, plant and machinery, motorcar, furniture, jewellery, route permits, goodwill, tenancy rights, patents, trademarks, shares, debentures, mutual funds, zero-coupon bonds are some examples of what is considered capital assets.

<span class="mw-page-title-main">Collateral (finance)</span> Borrowers pledge of property to a lender to be owed if a loan cant be repaid

In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan. The collateral serves as a lender's protection against a borrower's default and so can be used to offset the loan if the borrower fails to pay the principal and interest satisfactorily under the terms of the lending agreement.

In accounting, amortization is a method of obtaining the expenses incurred by an intangible asset arising from a decline in value as a result of use or the passage of time. Amortization is the acquisition cost minus the residual value of an asset, calculated in a systematic manner over an asset's useful economic life. Depreciation is a corresponding concept for tangible assets.

<span class="mw-page-title-main">Capital formation</span> Concept in macroeconomics, national accounts and financial economics

Capital formation is a concept used in macroeconomics, national accounts and financial economics. Occasionally it is also used in corporate accounts. It can be defined in three ways:

Intellectual property assets such as patents are the core of many organizations and transactions related to technology. Licenses and assignments of intellectual property rights are common operations in the technology markets, as well as the use of these types of assets as loan security. These uses give rise to the growing importance of financial valuation of intellectual property, since knowing the economic value of patents is a critical factor in order to define their trading conditions.

In accounting, goodwill is an intangible asset recognized when a firm is purchased as a going concern. It reflects the premium that the buyer pays in addition to the net value of its other assets. Goodwill is often understood to represent the firm's intrinsic ability to acquire and retain customer business, where that ability is not otherwise attributable to brand name recognition, contractual arrangements or other specific factors. It is recognized only through an acquisition; it cannot be self-created. It is classified as an intangible asset on the balance sheet, since it can neither be seen nor touched.

Intellectual property valuation is a process to determine the monetary value of intellectual property assets. IP valuation is required to be able to sell, license, or enter into commercial arrangements based on IP. It is also beneficial in the enforcement of IP rights, for internal management of IP assets, and for various financial processes.

A financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and participations in companies' share capital. Financial assets are usually more liquid than tangible assets, such as commodities or real estate.

In tax law, amortization refers to the cost recovery system for intangible property. Although the theory behind cost recovery deductions of amortization is to deduct from basis in a systematic manner over an asset's estimated useful economic life so as to reflect its consumption, expiration, obsolescence or other decline in value as a result of use or the passage of time, many times a perfect match of income and deductions does not occur for policy reasons.

Intangible asset finance, also known as IP finance, is the branch of finance that uses intangible assets such as intellectual property and reputation to gain access to credit. Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time.

In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything that can be used to produce positive economic value. Assets represent value of ownership that can be converted into cash . The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business. Total assets can also be called the balance sheet total.

A patent box is a special very low corporate tax regime used by several countries to incentivise research and development by taxing patent revenues differently from other commercial revenues. It is also known as intellectual property box regime, innovation box or IP box. Patent boxes have also been used as base erosion and profit shifting (BEPS) tools, to avoid corporate taxes.

References

  1. ↑ "World Intangible Investment Highlights – Better Data for Better Policy – World Intangible Investment Highlights". World Intangible Investment Highlights – Better Data for Better Policy. Retrieved 27 September 2024.
  2. 1 2 3 4 5 6 Webster, Elisabeth; Jensen, Paul H. (2006). "Investment in Intangible Capital: An Enterprise Perspective." The Economic Record, Vol. 82, No. 256, March, 82–96.
  3. ↑ Moberly, Michael D. (2014). Safeguarding Intangible Assets. Butterworth-Heinemann. p. 16. ISBN   978-0-12-800516-3.
  4. ↑ Brynjolfsson, Erik; Hitt, Lorin M.; Yang, Shinkyu (2002). "Intangible assets: Computers and organizational capital". Brookings Papers on Economic Activity. 2002 (1): 137–181. doi:10.1353/eca.2002.0003. JSTOR   1209176.
  5. ↑ Lev, Baruch; Daum, Juergen (2004). "The dominance of intangible assets: consequences for enterprise management and corporate reporting" (PDF). Measuring Business Excellence. 8 (1): 6–17. doi:10.1108/13683040410524694. Archived from the original (PDF) on 4 March 2016. Retrieved 19 December 2012.
  6. ↑ "SAC 4: Definition and Recognition of the Elements of Financial Statements" (PDF). Australian Accounting Standards Board. Retrieved 19 December 2012.
  7. 1 2 "IAS 38". International Accounting Standards Board. Retrieved 19 December 2012.
  8. ↑ "IFRS – IAS 38 Intangible Assets". www.ifrs.org. Retrieved 27 September 2024.
  9. ↑ "What are intangibles?". www.royaltyrange.com. Retrieved 8 March 2023.
  10. ↑ For international legal lives by class of intangible asset, see the table in Tax amortization lives of intangible assets
  11. ↑ Bureau of Economic Analysis (2013). Preview of the 2013 Comprehensive Revision of the National Income and Product Accounts. https://www.bea.gov/scb/pdf/2013/03%20March/0313_nipa_comprehensive_revision_preview.pdf Archived 2017-07-02 at the Wayback Machine
  12. 1 2 Corrado, Carol. Charles Hulten, and Daniel Sichel (2006). Intangible Capital and Economic Growth. Federal Reserve Board Discussion Paper N. 2006-24. April. http://www.federalreserve.gov/pubs/feds/2006/200624/200624pap.pdf
  13. ↑ "AICPA Issues Practice Aid on Acquired In-Process Research and Development Assets" (PDF). Defining Issues (14-4 ed.). KPMG, LLD. January 2014.
  14. ↑ Treas. Reg. § 1.263(a)-4.
  15. ↑ Donaldson, Samuel A. Federal Income Taxation Of Individuals: Cases, Problems and Materials (2nd ed.). St. Paul: Thomson West, 2007. p. 200.
  16. ↑ "Action Plan on Base Erosion and Profit Shifting." (2013) Organisation for Economic Co-operation and Development (OECD). http://www.oecd.org/sti/inno/46349020.pdf
  17. ↑ "Florida Intangible Tax". Archived from the original on 16 May 2015. Retrieved 2 October 2010.
  18. ↑ "Intangible Asset Market Value Study". Ocean Tomo. Retrieved 27 September 2024.
  19. ↑ Banker, Rajiv D.; Huang, Rong; Natarajan, Ramachandra (Ram); Zhao, Sha (2015). "Market Reaction to Intangible Asset Value: Evidence on SG&A Expenditure". SSRN Electronic Journal. doi:10.2139/ssrn.2589319. ISSN   1556-5068.
  20. 1 2 3 4 "World Intangible Investment Highlights – Better Data for Better Policy – World Intangible Investment Highlights". World Intangible Investment Highlights – Better Data for Better Policy. Retrieved 27 September 2024.
  21. 1 2 3 "Intangible Assets and Intellectual Property". intangible-assets. Retrieved 27 September 2024.
  22. ↑ World Intellectual Property Organization (WIPO) (2017). World Intellectual Property Report 2017 – Intangible Capital in Global Value Chains. World Intellectual Property Report (WIPR). World Intellectual Property Organization. doi:10.34667/tind.28219. ISBN   978-92-805-2895-4 . Retrieved 27 September 2024.{{cite book}}: |website= ignored (help)
  23. ↑ "Global Innovation Index 2023: Innovation in the face of uncertainty". global-innovation-index. Retrieved 27 September 2024.
  24. ↑ "Unlocking IP-backed Financing Series. Country Perspectives. Switzerland's Journey" (PDF). wipo.int. 2023. p. 13.
  25. 1 2 "Unlocking Intellectual Property-backed Financing – Country Perspectives". www.wipo.int. Retrieved 27 September 2024.
  26. ↑ "Unlocking IP-backed Financing Series. Country Perspectives. China's Journey" (PDF). wipo.int. 2023. p. 14.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.