Intangible Asset Accounting Policies
Companies invest in a variety of asset types, including current assets, fixed assets and intangible assets. Each asset type provides different benefits for the organization. Current assets provide the financial resources to meet current obligations. Fixed assets provide production or operational benefits for several years. Intangible assets allow the company to gain the exclusive right to certain symbols or processes. Intangible assets require the company to incorporate specific accounting policies.
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Definition of Intangible Assets
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Intangible assets refer to items the company owns that occupy no physical form. Intangible assets give the owner the legal right to benefit from the assets while excluding others from accessing those assets. For example, a copyright exists as an intangible asset that allows the owner to publish the content and denies everyone else that same right. Other examples of intangible assets include patents, goodwill and trademarks.
Capitalize Intangible Assets
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A company may create an intangible asset itself or it may purchase the asset from another entity. After acquiring the asset, the company capitalizes the asset, or records it in the financial records as an asset. If the company creates the asset itself, it needs to include the costs incurred to create the asset. Research and development fees incurred to create the asset are expensed during the period they are incurred and are not capitalized. Self-created intangible asset costs primarily consist of legal fees or filing fees. The company records the purchase of intangible assets using the purchase price and any legal or filing fees incurred.
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Amortization
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Some intangible assets need to be amortized over their useful life. Amortization requires the company to recognize a portion of the cost of the asset each year as an expense. The company determines the useful life of the asset by considering the remaining legal life of the asset and the number of years the asset will continue providing benefits. The company then divides the total cost of the asset by the years of useful life of the asset to calculate an annual amortization expense. At the end of the year, the company records an increase in Amortization Expense and a decrease in the asset balance by the annual amortization expense.
Impairment
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Some intangible assets, like goodwill, remain on the financial books until the company determines the value no longer remains the same. This is called impairment. At the end of each year, the company reviews these assets to determine their current value. If the value declines, the company records an increase to Loss Due to Impairment and a decrease to the asset balance by the amount of the decline in value.
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