INTANGIBLE ASSETS
Intangible asset is defined as a capital asset having no physical existence, its value being dependent on the rights that possession confers upon the owner. Intangible assets are expected to benefit the firm beyond the current operating cycle of the business. It implies that they are non-current assets. Intangibles are not basically different from other non-monetary assets as they are expected to benefit the owner beyond the current operating cycle of the business. But like other non-monetary assets, intangibles asset has no physical existence. Thus, intangibles are assets which cannot be seen, touched and have no volume like tangibles but have right to future benefits.
However, not all assets which lack physical substance are regarded as intangible assets i.e., account receivables, short-term pre-payment etc., are of non-physical nature but classified as current assets.
Though intangibles provide future benefits, there is a high degree of uncertainty regarding the value of the future benefits to be received. Some intangibles relate to the development and manufacture of a product, such as, patents, copyrights, etc. while some others relate to the creation and maintenance of the demand for the product such as, trade marks.
Accounting Standard (AS) 26 Intangible Assets issued by the Institute of Chartered Accountants of India deals with meaning and valuation of intangible assets. According to this Accounting Standard, an intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
To understand this definition, the meaning of non-monetary asset must be clear. An asset is a resource (a) controlled by an enterprise as a result of past events; and (b) from which future economic benefits are expected to flow to the enterprise. Monetary assets are money held and assets to be received in fixed or determinable amounts of money. Non-monetary assets are assets other than monetary assets.
Following are the features of intangible assets :
(i) It is non-physical in nature.
(ii) It gives the specific rights to the holders over several future years.
(iii) It is possible for multiple uses at the same time.
(iv) It creates future value.
(v) It is identifiable as non-monetary asset.
(vi) It has limited ability to protect property rights.
(vii) Investment in intangible assets is basically risky.
Enterprises frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licences, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas,franchises, customer or supplier relationships, customer loyalty, market share and marketing rights. Goodwill is another example of an item of intangible nature which either arises on acquisition or is internally generated.
Not all the items described in the above paragraph will meet the definition of an intangible asset, that is, identifiably, control over a resource and expectation of future economic benefits flowing to the enterprise. If an item covered by AS-26 does not meet the definition of an intangible asset, expenditure to acquire it or generate it internally is recognised as an expense when it is incurred. However, if the item is acquired in an amalgamation in the nature of purchase, it forms part of the goodwill recognised at the date of the amalgamation.
Some intangible assets may be contained in or on a physical substance such as a compact disk (in the case of computer software), legal documentation (in the case of a licence or patent) or film (in the case of motion pictures).
The cost of the physical substance containing the intangible assets is usually not significant. Accordingly, the physical substance containing an intangible asset, though tangible in nature, is commonly treated as a part of the intangible asset contained in or on it.
In some cases, an asset may incorporate both intangible and tangible elements that are, in practice, inseparable. In determining whether such an asset should be treated Fixed Assets, or as an intangible asset under AS 26, judgement is required to assess as to which element is predominant.
The definition of an intangible asset requires that an intangible asset be identifiable. To be identifiable, it is necessary that the intangible asset is clearly distinguished from goodwill. Goodwill arising on an amalgamation in the nature of purchase represents a payment made by the acquirer in anticipation of future economic benefits.
An intangible asset can be clearly distinguished from goodwill if the asset is separable. An asset is separable if the enterprise could rent, sell, exchange or distribute the specific future economic benefits attributable to the asset without also disposing of future economic benefits that flow from other assets used in the same revenue earning activity. But separability is not a necessary condition for identifiability since an enterprise may be able to identify an asset in some other way.
An enterprise controls an asset if the enterprise has the power to obtain the future economic benefits flowing from the underlying resource and also can restrict the access of others to those benefits.
Market and technical knowledge may give rise to future economic benefits. An enterprise controls those benefits if, for example, the knowledge is protected by legal rights such as copyrights, or a restraint of trade agreement (where permitted).
The future economic benefits flowing from an intangible asset may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the enterprise. For example, the use of intellectual property in a production process may reduce future production costs rather than increase future revenues.