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11.4 Describe Accounting for Intangible Assets and Record Related Transactions

Intangible Assets​

Intangible assets are non-physical assets that provide future economic benefits.

Types of Intangible Assets​

Finite Life Intangibles:

  • Patents (legal life, usually 20 years)
  • Copyrights (author's life + 70 years, but business use shorter)
  • Franchises (contract term)
  • Software licenses (license term)

Indefinite Life Intangibles:

  • Goodwill
  • Trademarks (can be renewed indefinitely)

Amortization​

Amortization is the process of allocating the cost of an intangible asset over its useful life.

Similar to Depreciation:

  • Allocation process
  • Matches cost with periods
  • Reduces asset value

Difference:

  • Amortization for intangibles
  • Depreciation for tangibles

Finite Life Intangibles​

Amortization:

  • Amortize over useful life
  • Usually straight-line
  • Similar to depreciation

Example: Patent

  • Cost: €50,000
  • Useful Life: 10 years
  • Annual Amortization: €50,000 ÷ 10 = €5,000

Journal Entry:

650000 Amortization Expense        €5,000
251000 Accumulated Amortization                €5,000
To record patent amortization

PCN Accounts:

  • 650000: Amortization Expense (Class 6)
  • 251000: Accumulated Amortization (Class 2 - Contra-Asset)

Indefinite Life Intangibles​

No Amortization:

  • Not amortized
  • Tested for impairment annually
  • Written down if impaired

Example: Goodwill

  • Purchased in business acquisition
  • Not amortized
  • Tested for impairment

Purchasing Intangible Assets​

Example: Purchase Patent

  • Patent purchase: €50,000

Journal Entry:

211000 Patents                     €50,000
510000 Cash (or 400000 Payable)                €50,000
To record patent purchase

PCN Account:

  • 211000: Patents (Class 2 - Intangible Assets)

Internally Developed Intangibles​

Research and Development:

  • Research costs: Usually expensed
  • Development costs: May be capitalized if criteria met

Luxembourg Rules:

  • Generally, R&D costs are expensed
  • Some development costs may be capitalized
  • Must follow specific criteria

Luxembourg Compliance Note​

Intangible assets in Luxembourg:

  • Must be properly classified (PCN Class 2)
  • Finite life: Amortize
  • Indefinite life: Test for impairment
  • Must be disclosed in financial statements
  • Must comply with accounting standards
  • Must maintain proper documentation

Think It Through​

Why are some intangible assets amortized while others are not? What determines whether an intangible asset has a finite or indefinite life?