Long-Term Assets: Acquisition of Intangible Assets and Goodwill

What makes something "intangible?"

Yes. That's the idea of the word in a general sense. __Intangible assets__, also cannot be touched. This doesn't mean that they don't have value, though. A patent or a copyright can have significant value, but these are both intangible assets. They can also be sold, with ownership transferred; no problem.

No. Intellectual property is intangible, and yet quite valuable.

No. You can transfer ownership of something intangible, like the rights to use a song.

The idea of assets in an accounting sense are things that a company uses to generate future revenues. Same idea here: IFRS defines identifiable intangible assets as those which are specifically identifiable, under the control of the company, and are expected to generate future benefits. To be appropriately listed as assets, where do you think those benefits should flow?

That's right. If the company is saying "here is an asset of the company," it's only reasonable that any benefits go to the company. To recognize these assets, IFRS requires that this is probable, and that the asset's cost can be reliably measured. Both reasonable.

Not really. That wouldn't really make it a recognizable asset for another entity.

No, it does.

Intangible assets can be acquired in various ways. Maybe one company purchases another. Then assets are recorded at fair value, and anything left over is __goodwill__. This is basically a lump-sum overpayment after accounting for fair values. Does this satisfy the IFRS requirement of an identifiable intangible asset?

Actually, it doesn't.

Right!

Goodwill is not a specific, identifiable thing. Intangible, sure; but that's all. Any identifiable intangible assets are recorded at fair value under this __acquisition method__, and the rest is goodwill. Even if it's not the result of a business combination like an acquisition, if a company just buys a patent from another company, then the patent is recorded at fair value, and that should be the purchase price. Of course, some assumptions are involved with assigning fair values.

A company might also develop an asset internally. Before a young company gets too excited about building its brand, developing technology, and having an asset to show for it, these sorts of developments must be expensed. Advertising to build a brand? Expense. Research for a new product that will hopefully be patented? Expense. So if a company planned on gaining a new product, would the company have a higher net income at the end of the year purchasing the product idea, or using that money to develop one?

No. Developing the product would require expensing costs, and that wouldn't lead to a higher net income.

Exactly! Developing the product would force the company to expense all costs, lowering net income. But purchasing the intangible asset allows an exchange of one asset (cash) for another (the intangible asset), allowing net income to be higher.

Actually, it would. Think about the recording of assets or expenses in each case.

This doesn't last forever, though. Research costs are expensed, but IFRS allows the eventual capitalization of further costs once a more advanced stage is reached. When a company can show that the product is technically feasible, and there is an intent to sell, then it's close enough to an asset for costs to be capitalized. US GAAP is similar in these respects, but forces capitalization of certain software development costs. If the software is being produced as a product for sale, these are generally expensed unless the company can establish the technological feasibility of the product, at which point they are capitalized. If the software is used in-house, the cost of development can only be capitalized once it has been determined the product can be completed and used.

To summarize: [[summary]]

It has no value

It can't be physically held

There's no way to transfer ownership

To the company

To the asset's creator

It doesn't really matter where

No

Yes

Developing it

Purchasing it

It wouldn't matter

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