How is goodwill different from other intangible assets? An asset, which has no physical existence such as corporate intellectual properties (patents, trademarks, business methodologies and copyrights), trademarks, patents, software, goodwill and brand recognition are known to be an “Intangible asset”. So goodwill is and is not an intangible asset. Goodwill is a residual, unidentifiable, not separable asset. Intangibles are not that but…. How is goodwill different from other intangible assets
Separate identifiable intangible assets acquired
That is because identifiable intangible assets acquired in a business combination are recognised separately from goodwill [IFRS 3 B31]. An intangible asset is ‘identifiable’ if it arises from contractual or other legal rights or if it is separable [IAS 38 12]. Under certain criteria also internally generated intangible assets can be capitalised, see below. How is goodwill different from other intangible assets
Goodwill, however, is recognised only in a business combination and is measured as a residual or the unidentifiable premium paid in a business combination after the consideration paid has been allocated to:
- identifiable tangible and monetary/financial assets acquired (that were previously reported in the acquired entity, sometimes at other values (carrying value versus fair value at acquisition)), plus How is goodwill different from other intangible assets
- identifiable intangible assets acquired (that were not previously reported in the acquired entity), such as marketing-related, customer-related, artistic-related and contract-based intangibles (see examples below), less
- identifiable monetary/financial liabilities assumed (that were previously reported in the acquired entity, sometimes at other values (carrying value versus fair value at acquisition)). How is goodwill different from other intangible assets
Examples identifiable intangible assets acquired
Customer relationship (Contractual-legal criterion)
Company H acquires Company I, a supplier of small auto parts. Company I has an agreement in place to supply its product to Customer A for an established amount of time. Both Companies H and I believe that Customer A will renew the product supply agreement at the end of the current contract term. The supply agreement cannot be sold or transferred separately from Company I.
Intangible asset recognition:
The supply agreement (whether cancellable or not) meets the contractual-legal criterion for identification as a separate intangible asset. Additionally, because Company I establishes its relationship with Customer A through a contract, the customer relationship also meets the contractual-legal criterion for identification as an intangible asset. Therefore the customer relationship intangible asset is also recognised separately apart from goodwill provided its fair value can be measured reliability. How is goodwill different from other intangible assets
Database used in a supporting activity (Separability criterion)
Company Q acquired Company R, a retailer. Company R owns a database, used in managing its loyalty scheme, which captures information on customer demographics, preferences, relationship history and past buying patterns. The database can either be sold or licensed. However, Company R has no intentions to do so because it will negatively impact its operations.
Intangible asset recognition:
In this situation, the database does not arise from a contractual or legal right. Thus, an assessment of its separability is required. The database and content were generated from one of Company R’s supporting activities (ie management of the loyalty scheme) and could be transferred independently of the rest of the business. The actual intention not to transfer the database does not affect the assessment. The separability criterion is met and the database is recognised as an intangible asset in the business combination. How is goodwill different from other intangible assets
Licensed use of patent (Contractual-legal criterion)
Company D owns a technology patent. It has licensed that patent to others for their exclusive use outside the domestic market, receiving a specified percentage of future foreign revenue in exchange. How is goodwill different from other intangible assets
Intangible asset recognition:
The acquirer of Company D would recognise an intangible asset for both the technology patent and the related license agreement. The technology patent is protected legally and therefore meets the contractual-legal criterion. Additionally, the license agreement would meet the contractual-right criterion for recognition separately from goodwill even if selling or exchanging the two intangible assets separately from one another would not be practical. How is goodwill different from other intangible assets
Types of intangible assets and their recognition How is goodwill different from other intangible assets?
Intangible assets of the business are either acquired through a business combination or are developed internally. In most of the cases if the asset is acquired through an acquisition or a merger than it is recorded at its fair value while if the assets are generated internally than it is accounted for according to the amount of the costs incurred during the development phase of the asset.
Internally developed intangible assets
Under IFRS the internally developed intangible assets are reported on the financial statements only if: How is goodwill different from other intangible assets
- it is probable that the expected future economic benefits attributable to the asset will flow to the entity, and How is goodwill different from other intangible assets
- the cost attributable to the asset can be measured reliably.
Examples of intangible assets
There are many types of intangible assets, some of the major examples are explained below:
Goodwill and Brand recognition
Goodwill is a form of intangible asset, which is accounted for when an entity acquires another entity. It is the additional cost or the premium paid by the acquiring company above the fair value of the company’s identified assets or the market value of the shares of the business. For example, Acacia Ltd. acquired the Beta Ltd. for a lump sum amount of $ 100 million. The fair value of Beta Ltd. net assets is $75 million at the time of acquisition. The difference or the premium paid by the Acacia Ltd. above the $75 million fair value of the Beta’s assets can be distributed to the goodwill or brand recognition, which in this scenario is $25 million. Goodwill or brand reputation of $ 25 million is the intangible asset and represents the Beta’s business reputation.C
Copyrights grant a business the sole proprietorship rights and authority to produce and sale an intellectual property such as software, magazine, book and a journal etc. Copyright protection is available to the persons or organizations that produce original works of authorship in any kind of tangible medium of expression. It means that a person who seeks the copyright protection must be the original writer and has to write record or publish the concept in such a way that it can be reproduced. In order to better understand let’s consider Company Alpha produces artistic works such as novels, poems, lyrics of songs, photographs, movies, musical compositions, plans for constructing the buildings and sound recordings. Similarly, a company Beta deals in IT industry and makes computer software applications, computer software codes for the websites, software codes for managing the database and codes for software applications and programming tools. Moreover, the database, architectural plans, the complete writings of business plans and marketing plans, annual reports, business proposals, letter or email correspondence of the company with the client and lastly the manual guides of operation of equipment or machinery used in the daily operations of the both organizations are subject to the copyright protection.
Patents protect the rights of a manufacturing and research company by giving the company control over the production, use, and sale of a particular drug, particular design in manufacturing process, a code, etc. There are three main types of the patents namely utility patent, design patent and plant patent which the inventor can use as a protection. The three types are further explained below:
- Utility patent: A utility patent is issued by entities to the companies for any new or useful manufacturing, processes, machines, and compositions of matter or any new and beneficial advances and developments thereof.
- Design patent: A design patent is issued to an organization or any person who has designed or invented a brand new or non-obvious ornamental design to manufacture an article.
- Plant patent: As implied by its name, a plant patent issued by the entities to organizations that have designed, innovated, discovered and asexually produced and created any different and new class and variety of a plant.
See also: The IFRS Foundation