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”.
Types of Intangible assets and their recognition IAS 38 What are Intangible Assets other than Goodwill?
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.
Under IFRS the internally developed intangible assets are reported on the financial statements only if:
- it is probable that the expected future economic benefits attributable to the asset will flow to the entity, and
the cost attributable to the asset can be measured reliably.
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: 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 copy right protection. IAS 38 What are Intangible Assets other than Goodwill?
Patents: 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. IAS 38 What are Intangible Assets other than Goodwill?
- 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. IAS 38 What are Intangible Assets other than Goodwill?