Intangible resources are the nonphysical things a business runs on: brand, reputation, client relationships, trained staff, know-how. US financial reporting works with a narrower defined term, the intangible asset, an asset, not including a financial asset, that lacks physical substance, and it keeps goodwill deliberately outside that term (FASB Statement No. 141(R), paragraph 3(l)). Trademarks, customer lists, patents and software are the standard examples. Most of what a business would call an intangible resource never reaches its balance sheet, because two separate tests decide what gets recorded.
Examples of Intangible Resources
The business combinations standard sorts the identifiable ones into five classes and names examples in each (FASB Statement No. 141(R), paragraphs A29 to A51).
Marketing-related intangibles promote a product or service: trademarks, trade names, service marks, trade dress, internet domain names and noncompetition agreements.
Customer-related intangibles are the class a professional practice meets most often: customer lists, order or production backlog, customer contracts with the relationships attached to them, and noncontractual customer relationships.
Artistic-related intangibles are copyrighted output, among them literary works, musical works, photographs, and video and audiovisual material.
Contract-based intangibles are the value of rights arising from a contract, which takes in licensing and royalty agreements, service or supply contracts, leases, franchise agreements, servicing contracts and employment contracts.
Technology-based intangibles are patented technology, computer software, unpatented technology, databases, and trade secrets such as secret formulas, processes and recipes.
The Two Tests That Decide What Gets Recorded
An intangible resource has to be identifiable before it can be recorded apart from goodwill. An asset is identifiable if it either is separable, meaning capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, whether or not the entity intends to do so, or arises from contractual or other legal rights, whether or not those rights are transferable or separable from the entity (FASB Statement No. 141(R), paragraph 3(k)). Either limb is enough on its own, so the connector is or, not and.
What fails the test is absorbed rather than discarded. An acquirer subsumes into goodwill the value of an acquired intangible asset that is not identifiable at the acquisition date, and the standard’s own worked case is an assembled workforce, the collection of employees that lets a buyer keep operating the business (FASB Statement No. 141(R), paragraph A25). Goodwill is therefore a residual: the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized (FASB Statement No. 141(R), paragraph 3(j)).
The second test is how the resource arrived. Costs of internally developing, maintaining or restoring intangible assets, goodwill included, that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole are recognized as an expense when incurred (FASB Statement No. 142, paragraph 10). So a firm’s own reputation, its trained staff and the brand it built are real economic resources with no line on its own balance sheet, while those same things bought in an acquisition can carry one. Development spending sits on the same expensed side of that boundary, in research and development.
Where the Balance Sits, and What Happens to It
Under Regulation S-X, intangible assets have a balance sheet caption of their own, caption 15, where each class in excess of five percent of total assets is stated separately, and the accumulated amortization run against them carries the caption after it (17 CFR 210.5-02). The tangible side sits earlier in the same list, in fixed assets.
What happens next turns on useful life. An intangible asset with a finite useful life is amortized, its cost charged against income across that life, and one with an indefinite useful life is not (FASB Statement No. 142, paragraph 11). The one that is not amortized is tested for impairment instead, annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired, and an entity may first assess qualitative factors to decide whether the quantitative comparison of fair value with carrying amount is needed at all (FASB Accounting Standards Update 2012-02, paragraphs 350-30-35-18 and 35-18A).
What Intangible Resources Get Confused With
Goodwill is the first confusion, and one sentence separates them: everything in the five classes above is an identifiable asset recorded in its own right, while goodwill is only the remainder left after those have been.
The second confusion costs money. Carrying value on the books and basis on the return are two different numbers about the same asset, because the tax rules run their own list and their own clock, and acquired intangibles amortize under Internal Revenue Code section 197 on the schedule in how to value a CPA firm. The split preparers miss is self-creation. An amortizable section 197 intangible does not include one that both is created by the taxpayer and is not a government license or permit, a covenant not to compete, or a franchise, trademark or trade name, and that exclusion itself lifts where the intangible is created in connection with a transaction, or a series of related transactions, involving the acquisition of assets constituting a trade or business or a substantial portion of one (26 U.S. Code section 197(c)(2)).
The deduction is claimed in Part VI of Form 4562, the amortization part rather than the depreciation parts behind depreciated, and line 42 is completed only for costs whose amortization period begins during the tax year (IRS, Instructions for Form 4562).
How Many Intangible Assets Are There?
There is no fixed count, and the numbered lists that circulate are not drawn from any standard. The accounting classes above are explicitly not intended to be all-inclusive (FASB Statement No. 141(R), paragraph A29). The nearest thing to a closed list is the tax one, the intangibles the IRS names as amortizable under section 197 in the instructions to Form 4562 (IRS, Instructions for Form 4562).
Firms that would rather hand the intangible schedule and its amortization workpapers to someone else can run a real block of that work through a trial task before any client file depends on it.
