Intangible assets are non-physical assets that have value to a business, such as patents, trademarks, copyrights, and intellectual property. These assets are often difficult to value, and as such, accounting for them can be a complex process. In this article, we will provide an overview of how a business accounts for intangible assets.
Identify intangible assets
The first step in accounting for intangible assets is to identify the assets that are owned by the business. This may include things like patents, trademarks, copyrights, and other intellectual property. In order to properly identify intangible assets, it is important to conduct a thorough review of the business’s operations and assets.
Determine the cost of intangible assets
The next step in accounting for intangible assets is to determine their cost. This can be a challenging task, as the value of intangible assets is often difficult to measure. In many cases, the cost of an intangible asset is the amount of money that the business paid to acquire the asset, such as the cost of obtaining a patent or trademark.
Record the intangible assets on the balance sheet
Once the cost of the intangible assets has been determined, the assets should be recorded on the company’s balance sheet. This is typically done by creating a separate category for intangible assets, and listing the individual assets and their corresponding costs.
Depreciate intangible assets
Unlike physical assets, which typically depreciate over time due to wear and tear, intangible assets often have an indefinite useful life. As such, they are typically not depreciated on the balance sheet. However, if an intangible asset has a limited useful life, such as a patent that will expire after a certain number of years, it may be necessary to depreciate the asset over its useful life.
Review intangible assets regularly
It is important to regularly review the intangible assets owned by the business, in order to ensure that they are still relevant and valuable to the business. This may involve conducting a review of the business’s operations and assets, as well as considering any changes in the market or industry that may affect the value of the intangible assets.
Disclose intangible assets in financial statements
In addition to recording intangible assets on the balance sheet, it is also important to disclose them in the company’s financial statements. This may include providing information about the nature and cost of the intangible assets, as well as any significant changes in their value.
Consider impairment of intangible assets
If the value of an intangible asset declines significantly, it may be necessary to impair the asset on the balance sheet. This involves reducing the value of the asset to reflect its current fair market value, and can have a negative impact on the company’s financial performance.
Monitor changes in accounting standards
Finally, it is important to monitor changes in accounting standards and regulations that may affect the accounting for intangible assets. As the accounting for intangible assets can be complex, it is important to stay up-to-date on any changes that may affect the way that these assets are recorded and disclosed on the balance sheet.
In conclusion, accounting for intangible assets can be a complex process, but it is an important aspect of managing a business’s finances. By carefully identifying, valuing, and recording intangible assets, businesses can ensure that they are properly accounted for and disclosed in the company’s financial statements.