Wikipedia

Intangible asset

Anintangible assetis anassetthat lacks physical substance. Examples arepatents,copyright,franchises,goodwill,trademarks,andtrade names,reputation,R&D,know-how,organizational capitalas well as any form ofdigital assetsuch assoftwareand data. This is in contrast to physical assets (machinery,buildings,etc.) andfinancial assets(government securities, etc.).[1]

Intangible assets are usually very difficult tovalue.They suffer from typicalmarket failuresof non-rivalryand non-excludability.[2]Today, a large part of the corporate economy (in terms ofnet present value) consists of intangible assets,[3]reflecting the growth of information technology (IT) and organizational capital.[4]Specifically, each dollar of IT has been found to be associated with and increase in firm market valuation of over $10, compared with an increase of just over $1 per dollar of investment in other tangible assets.[5]Furthermore, firms that both make organizational capital investments and have a large computer capital stock have disproportionately higher market valuations.[6]

Definition in accounting

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Intangible assets under the Corrado, Hultan and Sichel framework (source)

Intangible assets may be one possible contributor to the disparity between "company value as per their accounting records", as well as "company value as per their market capitalization".[7]Considering this argument, it is important to understand what an intangible asset truly is in the eyes of an accountant. A number of attempts have been made to define intangible assets:

  • TheAustralian Accounting Standards Boardincluded examples of intangible items in its definition ofassetsin Statement of Accounting Concepts number 4 (SAC 4), issued in 1995.[8]The statement did not provide a formal definition of an intangible asset, but did explain that tangibility was not an essential characteristic of an asset.
  • TheInternational Accounting Standards Boardstandard 38 (IAS 38)[9][10]defines an intangible asset as: "an identifiable non-monetary asset without physical substance". This definition is in addition to the standard definition of an asset which requires apast eventthat has given rise to a resource that the entitycontrolsand from whichfuture economic benefitsare expected to flow. Thus, the extra requirement for an intangible asset under IAS 38 isidentifiability.This criterion requires that an intangible asset is separable from the entity or that it arises from a contractual or legal right.
  • TheFinancial Accounting Standards BoardAccounting Standard Codification 350 (ASC 350) defines an intangible asset as an asset, other than a financial asset, that lacks physical substance.

The lack of physical substance would therefore seem to be a defining characteristic of an intangible asset. Both the IASB and FASB definitions specifically preclude monetary assets in their definition of an intangible asset. This is necessary in order to avoid the classification of items such as accounts receivable, derivatives and cash in the bank as an intangible asset. IAS 38 contains examples of intangible assets, including: computer software, copyright and patents.

Financial accounting

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General standards

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TheInternational Accounting Standards Board(IASB) offers some guidance (IAS 38) as to how intangible assets should be accounted for infinancial statements.In general, legal intangibles that are developed internally are not recognized and legal intangibles that are purchased from third parties are recognized.[2]Wordings are similar to IAS 9.

Under US GAAP, intangible assets[2][11]are classified into: Purchased vs. internally created intangibles, and Limited-life vs. indefinite-life intangibles.[citation needed]

Expense allocation

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Intangible assets are typically expensed according to their respective life expectancy.[2][9]Intangible assets have either an identifiable or an indefinite useful life. Intangible assets with identifiable useful lives areamortizedon a straight-line basis over their economic or legal life,[12]whichever is shorter. Examples of intangible assets with identifiable useful lives are copyrights and patents. Intangible assets with indefinite useful lives are reassessed each year for impairment. If an impairment has occurred, then a loss must be recognized. An impairmentlossis determined by subtracting the asset's fair value from the asset's book/carrying value. Trademarks and goodwill are examples of intangible assets with indefinite useful lives. Goodwill has to be tested for impairment rather than amortized. If impaired, goodwill is reduced and loss is recognized in the Income statement.

Research and development

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Research and development(known also as R&D[2]) is considered to be an intangible asset (about 16 percent of all intangible assets in the US),[13]even though most countries treat R&D as current expenses for both legal and tax purposes.[2]Most countries report some intangibles in their National Income and Product Accounts (NIPA).[citation needed]The contribution of intangible assets in long-term GDP growth has been recognized by economists.[14]Also of note, acquired "In-Process Research and Development" (IPR&D) is considered an asset under US GAAP.[15]

IAS 38 requires any project that results in the generation of a resource to the entity be classified into two phases: a research phase, and a development phase.

The classification of research and development expenditure can be highly subjective, and it is important to note that organizations may have ulterior motives in their classification of research and development expenditures.[citation needed]

Taxation

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For personal income tax purposes, some costs with respect to intangible assets must be capitalized rather than treated asdeductible expenses.Treasury regulations in the USA generally require capitalization of costs associated with acquiring, creating, or enhancing intangible assets.[16]For example, an amount paid to obtain atrademarkmust be capitalized. Certain amounts paid to facilitate these transactions are also capitalized. Some types of intangible assets are categorized based on whether the asset is acquired from another party or created by the taxpayer. The regulations contain many provisions intended to make it easier to determine when capitalization is required.[17]

Given the growing importance of intangible assets as a source of economic growth and tax revenue,[14]and because their non-physical nature makes it easier for taxpayers to engage in tax strategies such asincome-shiftingortransfer pricing,[18]tax authorities and international organizations have been designing ways to link intangible assets to the place where they were created, hence defining nexus. Intangibles for corporations areamortizedover a 15-year period, equivalent to 180 months.

Definition of "intangibles" differs from standard accounting, in some US state governments. These governments may refer to stocks and bonds as "intangibles".[19]

Value of intangible assets

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The most valuable firms, spanning high-tech, pharmaceutical, automotive and financial services industries, derive their competitiveness and market value from intangible rather than physical, that is to say, "tangible" capital. Among companies in theS&P 500,intangibles including intellectual property account for 90% of the totalmarket value.[20][21]

Intangible assets, though not always visible, play a crucial role in shaping the success of companies and countries in today's competitive environment. Investing in these assets helps businesses attract skilled talent, build customer loyalty, achieve market success, foster innovation and growth.[22][23]These assets also contribute to improved economic opportunities, higher-paying jobs, enhanced product quality. According toWIPO'sWorld IP Report(2017),intellectual property(IP) and other intangibles contribute on average twice as much value as tangible capital to products manufactured and traded along value chains.[24]

The fastest growing types of intangible asset over 2011–2021 have been software and data, followed by brands, organizational capital, and new financial products.

Recent estimates from Brand Finance used in theGlobal Innovation Index(GII) suggest that the global value of intangibles has been growing rapidly over the last 25 years to reach around USD 62 trillion in 2023.[25][23]

In 2023, intangible investment accounted for over 16 percent ofGDPin highly intangible-intensive economies likeSweden,theUnited States of America(US) andFrance.[22]A trend showing intangible investment growing faster than tangible investment at country level.Indiawas the country that experienced the fastest growth in intangible investment from 2011 to 2020.[22]

Software and data and brands are the two fastest growing types of intangible assets, both growing three times faster than R&D between 2011–2021.[22]

Valuing intangible assets is nevertheless a challenge. There is no single methodology to value them. Depending on the type of asset at hand, context and data availability, often a combination of different approaches is used. In most cases, the value of intangibles can be estimated considering the future economic benefits associated with the asset, like projectedcash flows.However, for many intangibles in practice this can be difficult. The cost to repurchase or recreate an asset or comparison with transactions involving similar assets are also common methods to determine value.[23]

Intangible asset finance,also known as IP finance, is the branch offinancethat uses intangible assets such asintellectual property(legal intangible) andreputation(competitive intangible) to gain access tocredit.Intangible assets can for example be used inequity finance.For example, manySwisscompanies use equity finance to support their growth, particularlyVenture capital.The information gathered through interviews indicates that a supportiveIPportfolio, particularly when reinforced by robustpatents,plays a crucial role as a contributing factor. Without these rights, investors are reluctant to engage withstartups.[26][27]InChina,pledge-backed lendingis the earliest type ofIPfinancing developed and the fastest growing one. In 2022, the registered amount ofpatentandtrademarkpledged lending in China reached CNY 486.9 billion, up 57.1 percent year-on-year. Twenty-eight thousand projects from 26,000 chinese businesses receivedloans,both increasing about 65.5 percent year-on-year.[28][27]

See also

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References

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  1. ^"World Intangible Investment Highlights – Better Data for Better Policy – World Intangible Investment Highlights".World Intangible Investment Highlights – Better Data for Better Policy.Retrieved27 September2024.
  2. ^abcdefWebster, Elisabeth; Jensen, Paul H. (2006). "Investment in Intangible Capital: An Enterprise Perspective."The Economic Record,Vol. 82, No. 256, March, 82–96.
  3. ^Moberly, Michael D. (2014).Safeguarding Intangible Assets.Butterworth-Heinemann. p. 16.ISBN978-0-12-800516-3.
  4. ^Brynjolfsson, Erik; Hitt, Lorin M. (2000)."Beyond Computation: Information Technology, Organizational Transformation and Business Performance".Journal of Economic Perspectives.14(4):23–48.doi:10.1257/jep.14.4.23.ISSN0895-3309.
  5. ^Brynjolfsson, Erik; Hitt, Lorin M.; Yang, Shinkyu (2002)."Intangible assets: Computers and organizational capital".Brookings Papers on Economic Activity.2002(1):137–181.doi:10.1353/eca.2002.0003.JSTOR1209176.
  6. ^Brynjolfsson, Erik; Hitt, Lorin M. (Lorin Moultrie); Yang, Shinkyu (2002)."Intangible Assets: Computers and Organizational Capital".Brookings Papers on Economic Activity.2002(1):137–198.doi:10.1353/eca.2002.0003.ISSN1533-4465.
  7. ^Lev, Baruch; Daum, Juergen (2004)."The dominance of intangible assets: consequences for enterprise management and corporate reporting"(PDF).Measuring Business Excellence.8(1):6–17.doi:10.1108/13683040410524694.Archived fromthe original(PDF)on 4 March 2016.Retrieved19 December2012.
  8. ^"SAC 4: Definition and Recognition of the Elements of Financial Statements"(PDF).Australian Accounting Standards Board.Retrieved19 December2012.
  9. ^ab"IAS 38".International Accounting Standards Board.Retrieved19 December2012.
  10. ^"IFRS – IAS 38 Intangible Assets".ifrs.org.Retrieved27 September2024.
  11. ^"What are intangibles?".royaltyrange.Retrieved8 March2023.
  12. ^For international legal lives by class of intangible asset, see the table inTax amortization lives of intangible assets
  13. ^Bureau of Economic Analysis (2013).Preview of the 2013 Comprehensive Revision of the National Income and Product Accounts.https:// bea.gov/scb/pdf/2013/03%20March/0313_nipa_comprehensive_revision_preview.pdfArchived2017-07-02 at theWayback Machine
  14. ^abCorrado, Carol.Charles Hulten, and Daniel Sichel (2006).Intangible Capital and Economic Growth.Federal Reserve Board Discussion Paper N. 2006-24. April.http:// federalreserve.gov/pubs/feds/2006/200624/200624pap.pdf
  15. ^"AICPA Issues Practice Aid on Acquired In-Process Research and Development Assets"(PDF).Defining Issues(14-4 ed.). KPMG, LLD. January 2014.
  16. ^Treas. Reg. § 1.263(a)-4.
  17. ^Donaldson, Samuel A. Federal Income Taxation Of Individuals: Cases, Problems and Materials (2nd ed.). St. Paul: Thomson West, 2007. p. 200.
  18. ^"Action Plan on Base Erosion and Profit Shifting." (2013) Organisation for Economic Co-operation and Development (OECD).http:// oecd.org/sti/inno/46349020.pdf
  19. ^"Florida Intangible Tax".Archived fromthe originalon 16 May 2015.Retrieved2 October2010.
  20. ^"Intangible Asset Market Value Study".Ocean Tomo.Retrieved27 September2024.
  21. ^Banker, Rajiv D.; Huang, Rong; Natarajan, Ramachandra (Ram); Zhao, Sha (2015)."Market Reaction to Intangible Asset Value: Evidence on SG&A Expenditure".SSRN Electronic Journal.doi:10.2139/ssrn.2589319.ISSN1556-5068.
  22. ^abcd"World Intangible Investment Highlights – Better Data for Better Policy – World Intangible Investment Highlights".World Intangible Investment Highlights – Better Data for Better Policy.Retrieved27 September2024.
  23. ^abc"Intangible Assets and Intellectual Property".intangible-assets.Retrieved27 September2024.
  24. ^World Intellectual Property Organization (WIPO) (2017).World Intellectual Property Report 2017 – Intangible Capital in Global Value Chains.World Intellectual Property Report (WIPR). World Intellectual Property Organization.doi:10.34667/tind.28219.ISBN978-92-805-2895-4.Retrieved27 September2024.{{cite book}}:|website=ignored (help)
  25. ^"Global Innovation Index 2023: Innovation in the face of uncertainty".global-innovation-index.Retrieved27 September2024.
  26. ^"Unlocking IP-backed Financing Series. Country Perspectives. Switzerland's Journey"(PDF).wipo.int.2023. p. 13.
  27. ^ab"Unlocking Intellectual Property-backed Financing – Country Perspectives".wipo.int.Retrieved27 September2024.
  28. ^"Unlocking IP-backed Financing Series. Country Perspectives. China's Journey"(PDF).wipo.int.2023. p. 14.
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