Assets that have no physical substance like patents, trademarks, copyrights, franchise, trade names are called Intangible Assets.
Certain salient points need to be noted:
- The cost recorded is NOT the value of the intangible assets. Such costs recorded normally relates to legal fee to file the legal papers to protect the name and the actual cost you pay to buy the intangible asset.
- However, this is different from the VALUE of the intangible assets. One obvious example is the infamous Coca-Cola brand which has appreciated many fold in value over the years of operation but in the owner’s book this value is still not recorded in the books.
- Intangible assets are AMORTIZE similar to the depreciation of tangible fixed assets like plant and machinery, furniture & fitting
- Since intangible assets are rights often there are legal limits on how long we posses the rights hence the amortization is the shorter of:
- The LEGAL life
- The USEFUL life
- Say 30 years
- The amortization is recorded in a separate Accumulated Amortization Accounts similar to Accumulated Depreciation of fixed assets