Accounting for Intangible Asset
As an asset which is not solid, a company may consume an intangible asset throughout more than an accounting period, just like what will happen in tangible assets. Copyrights, licenses and patents are some common instances of intangible assets. The purpose of intangible assets accounting is to document them as long-term assets and amortise them over their useful life. Usually, this is associated with periodic impairment reviews (Also see Procedures of Asset Impairment). Basically, the accounting of intangible assets and the accounting for other fixed assets are the same. Below are some points regarding intangible asset accounting:
If there are useful lives for intangible assets, you should amortise the price of those assets over their useful lives, minus any salvage value. Amortisation and depreciation are the same, just that you should only apply amortisation to an intangible asset. From this perspective, you may define a useful life as the period that you expect an asset to boost cash flows in the future.
Like tangible assets, intangible assets need to undergo impairment testing too. You should recognise impairment if the asset’s carrying value has exceeded its fair value, and the sum cannot be recovered. Once you have recognised it, you cannot reverse the impairment.
If you predict that an asset has any salvage value at the end of its useful life (Also see Accounting – Disposal of Business Fixed Assets), minus the amount from its carrying value so that you can calculate amortisation. Keep in mind that you should always suppose that the salvage value is zero for all intangible assets, except if there is another party which states that it will purchase the assets from you when their useful lives have ended. If that happens, you can identify the salvage value by referring to the transactions in a current market. You may predict that the market is going to exist at the end of the asset’s useful life.
There is a possibility that intangible assets have an unlimited useful life. In this case, you should not amortise it at first. What you should do is to analyse the asset regularly and see if you can identify its useful life. If you can, you can carry out an impairment test on that asset and start amortising it. Another situation which may occur is that there is a judgement which states that an asset possesses an unlimited useful life. In such a case, you should not continue amortising the asset. What you should do is to carry out the impairment test for it now. Trademarks and broadcasting rights are some instances for intangible assets which possess indefinite useful life.
Useful life revision
You should review how long is the useful lives left for all your intangible assets, as well as make adjustments if the situation will undoubtedly cause the change. You will have to change the leftover amount of amortisation per period that you have recognised before this.
There is a possibility for you to extend the lives of certain intangible assets significantly, typically according to the extensions of the agreements. If this occurs, you should predict the asset’s useful life by looking at the entire duration of its extensions of useful life that you expect. These assumed extensions can cause an asset to possess an unlimited useful life, and this prevents them from amortisation.
If you use a few intangible assets as one asset, you should merge them for impairment testing. However, such a way may not be suitable if different asset categories utilise them, they produce cash flows (Also see Accounting – 4 Rules for Managing Business Cash Flow) separately, or you will sell them individually.
Generally, you need to identify costs as those you have incurred if they play a role in the development, maintenance, or restore of intangible assets which possess any traits which are listed below:
- The absence of clearly recognisable asset
- It has an indefinite useful life
- It has an inherent cost as long as the firm continues operating
It is normal if you find the facts above difficult to understand if you are not familiar with accounting. Thus, you should engage an accounting firm in Singapore to help you with the accounting regarding your assets so that you can have peace of mind when you are running your business.