Welcome to 2 part series of Intangible Assets tutorial. Here in this first part, you will learn:
- Definition of Intangible Assets
- Example of Intangible Assets in Accounting
- Patents in Accounting
- Copyright in Accounting
Intangible assets are considered as the rights, privileges, and competitive advantages which resulted from the ownership of long term assets having no physical substance. The intangibles assets prove their existence in the form of contracts or licenses. The Intangible assets are basically arising from some sources. For example:
- (1) Government grants, such as Patent, Copyrights and trademark .
- (2) Acquisition of another business, in which the purchase price includes a payment for the company™s favorable attributes that is called as Goodwill and
- (3) Private monopolistic arrangements which arises from contractual agreements, such as Franchising and leases.
Companies record intangible assets at their cost price. Intangibles are categorized according to the period of their life because these intangible assets will have a limited life or an indefinite life. If an intangible has a limited life, then the company will allocate its cost over the asset™s useful life using a process which is similar to the process depreciation. The process of allocating the cost of intangible assets is referred to as amortization. But the cost of intangible assets with indefinite lives will not be amortized. A company increases (debits) Amortization Expense, and decreases (credits) the specific intangible asset in order to record amortization of an intangible asset. The amortization process of Intangible assets are usually done or calculated on a straight-line basis method. For example, a patent has a useful life of 10years. Then the company amortizes the cost of a patent over its 10-year life or its useful life, whichever is shorter between the two. There is a difference between intangible assets and plant assets in determining the cost. For example in case of plant assets, cost consists of both the purchase price of the asset and the costs that are incurred in designing and constructing the asset. But in case of intangible assets costs will only include the purchase price. (Companies expense any costs incurred in developing an intangible asset.)
Patents:
A ‘ patent basically an exclusive right which is issued by the U.S. Patent Office. This office provides the right to the recipient to manufacture sell or otherwise organize a development for a period of 20 years from the date of the grant. A patent is nonrenewable but companies can lengthen the legal life of a patent if they acquire new patents for improvements or for making any changes in the basic design of the patent. The initial cost of a patent is the cash or cash equivalent price that is paid to obtain the patent.’ Many patents are related with the legal action. An owner incurs legal cost for effectively protecting a patent in a contravention suit is measured necessary to establish the patent™s validity. The owner will add those costs to the account of patent, and amortizes the costs of patent over the remaining useful life of the patent. The patent holder amortizes the cost of a patent over its 10-year legal life or its useful life, whichever is shorter between the two. Generally obsolescence and inadequacy are considered or measured by the companies for determining the useful life of the patent. These factors could lead a patent to become economically unproductive before the end of its legal life.
Copyrights:
Copyrights are approved by the federal government .copyrights means the owner has the exclusive right to reproduce and sell an artistic or published work. Copyrights extend for the life of the creator plus 70 years. The cost of a copyright is consists of both the cost of acquiring it and the cost for defending it. This cost could be very minimal which is paid to the U.S. Copyright Office or the costs could be higher if there is an infringement suit is involved. The useful life of a copyright generally is shorter than its legal life. Therefore, copyrights usually are amortized over its useful life.
Don’t Miss the Second Part of Intangible Assets tutorial series.
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