Intangible Assets

Recognition turns on how the asset was obtained. An intangible bought separately is capitalised at purchase price plus directly attributable costs of preparing it for use, because the exchange price itself evidences probable future economic benefit. An intangible acquired in a business combination is recognised at fair value at the acquisition date if it is identifiable, meaning it is separable from the entity or arises from contractual or legal rights; anything not separately identifiable falls into goodwill.

Internally generated intangibles face the strictest gate. IFRS splits the project into a research phase, whose costs are expensed, and a development phase, whose costs are capitalised only once technical feasibility, intent and ability to complete, probable future benefits, and reliable cost measurement are all demonstrated. US GAAP expenses most internal development, with narrow exceptions such as software developed for sale after technological feasibility and certain internal-use software costs.

After recognition, the critical classification is whether the useful life is finite or indefinite. A finite-life intangible is amortised over the shorter of its economic and legal life, using a pattern that reflects the consumption of benefits; straight line is the default when that pattern cannot be determined reliably. Residual value is normally assumed to be zero unless there is a committed third-party purchase or an active market. Useful life, amortisation method and residual value are reviewed each period, and changes are treated as changes in estimate applied prospectively.

An indefinite-life intangible, such as a broadcast licence renewable at negligible cost, is not amortised. Instead it is tested for impairment at least annually and whenever indicators arise, as are intangibles not yet available for use. This distinction is the main reason two firms holding economically similar assets can report very different operating expense profiles.

IFRS permits either the cost model or, where an active market exists, a revaluation model that carries the asset at fair value less subsequent amortisation and impairment; revaluation surpluses go to other comprehensive income. US GAAP allows only the cost model, so upward revaluation never appears.

Impairment mechanics also diverge. Under IFRS a single step compares carrying amount with recoverable amount, defined as the higher of fair value less costs of disposal and value in use, the latter based on discounted cash flows. Under US GAAP, a finite-life intangible is first screened by comparing carrying amount with undiscounted expected cash flows, and only if that test fails is the loss measured against fair value. Because undiscounted cash flows are a higher hurdle to breach, US GAAP recognises impairments later and, once recognised, prohibits reversal. IFRS permits reversal for intangibles other than goodwill.

Read the intangibles note for the gross carrying amount, accumulated amortisation, useful lives, additions from acquisition versus internal development, and the split between finite and indefinite-life balances. Capitalisation shifts spending out of operating expense and into the investing section of the cash flow statement, so it raises current earnings, operating cash flow, total assets and equity while depressing future earnings through amortisation. Expensing does the reverse and produces a leaner asset base.

To compare firms across regimes, a candidate should be able to reverse capitalised development costs into expense, remove the related amortisation, and reclassify the cash outflow as operating. Expect the adjustment to lower ROA, ROE and asset turnover for the capitalising firm and to reveal how much of reported growth in the asset base is genuine rather than accounting choice.