Intangible asset

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".[2] 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:

• Prior to 2005 the Australian Accounting Standards Board issued the Statement of Accounting Concepts number 4 (SAC 4).[3] This statement did not provide a formal definition of an intangible asset but did provide that tangibility was not an essential characteristic of asset.
• International Accounting Standards Board standard 38 (IAS 38)[4] defines an intangible asset as: "an identifiable non-monetary asset without physical substance." This definition is in addition to the standard definition of an asset which requires a past event that has given rise to a resource that the entity controls and from which future economic benefits are expected to flow. Thus, the extra requirement for an intangible asset under IAS 38 is identifiability. This criterion requires that an intangible asset is separable from the entity or that it arises from a contractual or legal right.
• The Financial Accounting Standards Board Accounting Standard Codification 350 (ASC 350) defines an intangible asset as an asset, other than a financial asset, that lacks physical substance.

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.

Research and development (known also as R&D) is considered to be an intangible asset (about 16 percent of all intangible assets in the US),[5] even though most countries treat R&D as current expenses for both legal and tax purposes. Most countries report some intangibles in their National Income and Product Accounts (NIPA), yet no country has included a comprehensive measure of intangible assets. The contribution of intangible assets in long-term GDP growth has been recognized by economists.[6] Also of note, acquired "In-Process Research and Development" (IPR&D) is considered an asset under US GAAP.[7]

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. Less scrupulous directors may manipulate financial statements through misclassification of research and development expenditures.

An example of research (as defined as "the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding"): a company can carry a research on one of its products which it will use in the entity of which results in future economic income.

Development is defined as "the application of research findings to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services, before the start of commercial production or use."

Accounting treatment of expenses depends on whether they are classified as research or development. Where the distinction cannot be made, IAS 38 requires that the entire project be treated as research and expensed through the Statement of Comprehensive Income.

Research expenditure is highly speculative. There is no certainty that future economic benefits will flow to the entity. Prudence dictates that research expenditure be expensed through the Statement of Comprehensive Income. Development expenditure, however, is less speculative and it becomes possible to predict the future economic benefits that will flow to the entity. The matching principle dictates that development expenditure be capitalized, as the expenditure is expected to generate future economic benefit to the entity.

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.[9] 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.[10]

Given the growing importance of intangible assets as a source of economic growth and tax revenue,[6] and because their non-physical nature makes it easier for taxpayers to engage in tax strategies such as income-shifting or transfer pricing,[11] 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".[12]

• Cognitive assets
• Intellectual capital
• Intellectual property
  • Brand
  • Copyright
  • Patent
  • Patent valuation
  • Trademark
  • Trade secret
• Goodwill (accounting)
• Tangible common equity
• Tangible property

• National intangible capital NIC 2016 database / Findings and results for economic impacts of national intangible capital 2001 - 2016