Identify Your Intangible Assets

Accounting rules around the world require companies to record the values of certain intangible assets obtained from an acquired entity.  There are two types of intangible assets, those that need to be separately valued and recorded on financial statements and those that fall under a broad umbrella of goodwill.  There is no shortage of guidance on how to identify which intangible assets require individual analysis.

Critical guidance on separating individual intangibles from goodwill can be found in Accounting Standard Codification (“ASC”) Topic 805.  An intangible asset is recorded separately if it:

  • arises from contractual or other legal rights, regardless of whether those rights are transferable, and, if they are transferable, regardless of whether the acquirer intends to transfer them; and/or
  • is separable. This means that the asset can be transferred, licensed, or rented individually or in combination with a related contract, asset, or liability, regardless of whether the acquirer intends to transfer, license, or rent it.

The accounting guidance provides several examples of such intangible assets including technology, customers, contracts, and artistic-related assets.  Most of them you can see, touch, or hear.  You can see software code and corporate logos.  You can touch contracts and patents.  Intangibles such as corporate culture or geographic location cannot be seen or touched.  They belong to goodwill.

Customer relationships take many different forms.  From long term contractual commitments to retail store foot traffic, customers may or may not satisfy the requirements for being separately identified and recorded on the balance sheet.

Follow these links to see examples of intangible assets recognized in Application Software, On-Line Gaming, and Bio-Pharmaceutical industries.

More Updates

Technology Valuation: US GAAP View

It is hard to underestimate the importance of technology in modern enterprises.  From legacy manufacturing to artificial intelligence and life science breakthroughs, technology plays an ever-increasing role.  However, the need to assign a specific value to it may arise only when the enterprise is faced with a strategic transition.  A merger or an acquisition is one such event.

Your Valuation Needs Income Approach

The value of any business is defined by the amount of future cash flows it can generate.  The three basic valuation methods are the income approach, the market approach, and the cost approach.   Only the income approach directly addresses the question of value.  It is the first on the list of recommended methods in all guideline literature.  In fact, the

Intellectual Property, Goodwill, and Other Intangible Assets

The predominant amount of S&P 500 value comes from intangible assets and goodwill (“Intangibles”) of the underlying companies. It is no surprise that patents and brands are more valuable than desks. Understanding the components of intangible value is of great relevance to tax authorities and financial stakeholders.

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