Understanding intangible assets on the balance sheet

Intangible assets are those identifiable assets which has no physical substance and is not a financial instrument. This means you can not touch it. Intangible assets are disclosed under the head non-current assets on the company’s balance sheet as these are long-term resources of the organization. It’s the opposite to tangible or physical assets such as plant, land, building, computers, machinery, cars, furniture and fixtures.

Followings are important example of intangible assets;

  • Patents
  • Copyrights
  • Trademarks
  • Franchises and licenses

Patent: Exclusive right to use a product or process. Patents are intended to promote innovation by ensuring that the company that discovers and applies new knowledge reaps the benefits of its efforts.

Copyrights: Exclusive right to use artistic or literary works.

Trademark: Words, symbols or other distinctive elements used to identify a particular firm’s products.

Franchises and licenses: Right to market a particular product or services or to engage in a particular activity.

How intangible assets are recorded on the balance sheet

A company can create or acquire intangible assets. Value of intangible assets is different than the cost that is recorded in the books of accounts. In books, you only record the amount that has been spent to acquire it.

In case patent is developed internally, cost incurred to develop such separately identifiable patent is capitalized. For example, if a company has applied for patent and incurred Rs 5,00,000 as cost which includes legal expenses, government charges etc, then Rs 5,00,000 would be the amount to be capitalized as intangible asset. Over the years the value of the patent may go up, but in balance sheet only the cost will be shown.

However, if its acquired from others, its recorded at their historical cost. For instance, if a company acquires patent for Rs 50,00,000 by paying cash, following entry has to be posted;

AccountsDebitCredit
PatentsRs 50,00,000
Cash/Bank Rs 50,00,000

This means, Rs 50,00,000 will be shown as cost of the patent in balance sheet.

Based on the life of intangible assets company need to record the amortization in the account. To record amortization for patent following entry can be posted assuming life of the patent is 17 years:

AccountsDebitCredit
Patent expensesRs 2,94,118
Patent   Rs 2,94,118

Certain intangible assets like goodwill, brand images has no limited life or the company does not know how long it can be used. Therefore, these are not amortized.

Below is a list of different types of intangible assets:

  • Patent
  • Computer software
  • Databases
  • Trade secrets
  • Trademarks
  • Internet domains
  • License
  • Franchise agreement
  • Marketing rights
  • Goodwill
  • Brand names
  • Customer relationships
  • Distribution networks