Other intangible assets

Core Description

• Other intangible assets are identifiable, non-physical resources that contribute long-term value to a business, excluding goodwill.
• These assets encompass items such as patents, trademarks, proprietary technologies, and copyrights, all of which are important for contemporary corporate strategy and investment analysis.
• Thorough understanding, accurate valuation, and proper management of other intangible assets are essential for investors, business leaders, and analysts.

Definition and Background

Other intangible assets are non-monetary resources without physical substance, excluding goodwill, that a company can identify, control, and from which it expects future economic benefits. Unlike tangible assets such as buildings or machinery, these assets include intellectual property or legal rights, like patents, trademarks, copyrights, proprietary software, customer lists, research data, and trade secrets. Recognition of other intangible assets is based on accounting standards: International Accounting Standards (IAS 38) and US GAAP (ASC 350) offer criteria for identification, measurement, and reporting.

These assets often arise from innovation or legal protections. For example, a pharmaceutical company's patented drug formula or a technology company's proprietary software systems can provide long-term economic benefits. In some cases, their value may exceed the value of physical capital. Unlike goodwill, which arises only from business combinations and is not separately identifiable or independently transferable, other intangible assets can be valued separately, amortized, sold, or licensed.

Accurate recognition and reporting of these assets are crucial as knowledge-driven industries place increasing emphasis on innovation and intellectual property. Investment decisions, mergers and acquisitions, and financial analysis often depend on an understanding of the real value of these assets.

Calculation Methods and Applications

Initial Recognition and Measurement

Other intangible assets are initially recognized at cost. Cost includes the purchase price plus directly related expenses, such as legal fees and registration costs. For internally developed assets, only certain development-phase expenses are capitalized, while research-phase spending is expensed.

Amortization

Finite-lived intangible assets are amortized over their useful life, matching the expense with the periods in which economic benefits are consumed. The straight-line method is widely used, allocating the cost evenly across years. Alternative methods, such as the units-of-production or usage-based approach, can be applied if they better reflect the pattern of benefits. For example, a USD 120,000 patent with a 12-year legal life is amortized at USD 10,000 per year, unless a different consumption pattern is more appropriate.

Impairment Testing

Standards require regular assessment for impairment. If the carrying amount exceeds the recoverable amount (the higher of fair value less selling costs or value in use), an impairment loss must be recognized. Forecasting cash flows or using valuation models can help estimate recoverable amounts, especially following legal or market changes.

Revaluation

If an active market exists, periodic revaluation to fair value is permitted. Increases above the carrying amount are credited to other comprehensive income. Reductions are recognized in profit or loss unless they reverse previous upward valuations.

Practical Application Example

Suppose a brokerage acquires proprietary trading software for USD 250,000, with an expected useful life of 5 years plus USD 25,000 in configuration costs. The annual amortization expense is USD 55,000. If after three years, changes in the market require a USD 40,000 impairment, the asset's book value must be reduced, ensuring the financial statements reflect its real economic value.

Comparison, Advantages, and Common Misconceptions

Comparison with Related Terms

• Goodwill vs. Other Intangible Assets: Goodwill is recognized in acquisitions as the excess of purchase price over the fair value of identifiable net assets and cannot be sold separately. Other intangible assets are identifiable, measurable, and often transferable.
• Tangible vs. Other Intangible Assets: Tangible assets have a physical form, while intangibles are legal or contractual rights.
• Financial vs. Other Intangible Assets: Financial assets are monetary claims. Other intangible assets are non-monetary, non-physical rights.

Advantages

• Support a business's competitive edge through innovation, proprietary technology, or brand influence.
• Enable scalability and business flexibility; software or licenses can be replicated or updated without the need for substantial physical investment.
• Enhance value during mergers, acquisitions, or IPOs, reflecting underlying economic value.

Disadvantages

• Valuation can be subjective and may differ between appraisers.
• Legal risks: disputes, rights expiry, or regulatory changes.
• Susceptibility to rapid obsolescence due to market or technological developments.

Common Misconceptions

• Not all intangibles generate direct revenue; assets like brands or trade secrets can provide indirect benefits.
• Legal lifespan may not match the economic lifespan; technology shifts can erode value ahead of legal expiry.
• Some assets, such as certain licenses, might not be transferable.

Practical Guide

Definitions and Steps

1. Identification: Classify the asset as a patent, copyright, trademark, proprietary technology, license, or other.
2. Recognition & Valuation: Record the initial acquisition cost or fair value, including implementation and legal expenses.
3. Amortization or Impairment: Expense the asset over its useful life and conduct impairment reviews as needed.
4. Reporting: Provide disclosures of the asset’s nature, value, amortization method, and risks in financial reports.

Use in Operations

• License intellectual property to partners for recurring revenue.
• Use customer lists for targeted marketing and cross-selling.
• Monetize proprietary technologies through joint ventures or partnerships.

Case Study

A global consumer electronics company holds a significant collection of design and technology patents. Through active licensing and collaboration in research and development, it generates recurring income from its intangible assets. This strategy allows for international growth with minimized physical investment and helps maintain competitive positioning.

Best Practices

• Register and protect all eligible intellectual property.
• Reassess asset value and legal status regularly.
• Educate staff about risks and regulatory updates.
• Align intangible asset management with overall business goals.

Resources for Learning and Improvement

• Books: "Intellectual Capital" by Thomas Stewart, "The End of Accounting" by Baruch Lev.
• Academic Journals: Journal of Intellectual Capital, Accounting, Organizations and Society.
• Accounting Standards: IAS 38 (Intangible Assets), US GAAP ASC 350.
• Online Courses: Courses on Coursera and edX on intangible asset management and finance.
• Professional Associations: IFRS, FASB, World Intellectual Property Organization (WIPO).
• Valuation Tools: Intellectual property management software, royalty calculators, and audit checklists.

FAQs

What are other intangible assets?
They are identifiable, non-physical assets (excluding goodwill) that create long-term value, such as patents, trademarks, copyrights, proprietary software, and customer lists.

How are other intangible assets different from goodwill?
They are separable and independently measurable, often transferable. Goodwill arises from acquisitions and represents the premium paid for future economic benefits beyond identifiable assets.

What assets typically appear in company reports?
Software, patents, technology, trademarks, customer relationships, and franchise rights are common intangibles included in financial statements.

How does a company measure or recognize these assets?
Recognition is at historical cost or fair value for acquisitions, following strict criteria. Amortization or impairment procedures apply for ongoing measurement.

Can you provide an example calculation?
A business buys a software license for USD 500,000 with implementation costs of USD 20,000 and a useful life of 5 years. Annual amortization is USD 104,000 (USD 520,000 divided by 5).

What are common risks?
Impairment, legal challenges, regulatory changes, and the potential for rapid obsolescence.

How do these assets affect investment analysis?
They can improve a firm's valuation and provide insight into its growth potential and risk profile.

What financial disclosures are required?
Disclosures about the asset’s nature, carrying amount, amortization method, useful lives, and any impairment must be included.

Conclusion

Other intangible assets play a crucial role in modern business value, especially in technology, pharmaceuticals, and creative industries. Accurate identification, valuation, amortization, and management are important for both company leaders and investors. Understanding the legal, accounting, and strategic considerations ensures that these assets are effectively managed and used to support sustainable business growth. As innovation and intellectual property become more central to the global economy, the significance of other intangible assets in shaping long-term outcomes continues to increase.