Intangible Assets

Intangible assets

Intangible assets are non-physical assets in the form of legal rights, privileges and competitive advantages which are relatively long lived. They are not intended for sale, but are intended to be used by the firm. The following are examples of intangible assets:

(a) Patents

A patent represents a temporary monopoly which is granted to an inventor and which is protected by law during its duration. It gives the inventor the exclusive right to sell or to use his invention for a fixed period of years. Whilst the cost of registering a patent at the Patent Office is relatively small, firms often pay large sums to inventors for the purchase of patents. The cost of development and registration, or the cost of acquisition, whichever is appropriate, is shown as an asset on the balance sheet for it represents a valuable right.

(b) Trade-marks

Firms often market their products under a trade-mark, which is a distinguishing mark for their products. 'St. Michael', for example, has become a world-wide trade-mark for the products of Marks and Spencers. Trade-marks are a form of guarantee that the product is a genuine product of the firm in question. The firm's reputation for quality is associated in the public mind with its trade-marks. Trade-marks are registered and may not be used by another firm. The costs associated with registering trade-marks are shown as assets on the balance sheet.

(c) Copyrights

Copyrights are similar to patents and trade-marks, but apply to literary and artistic works. Authors, artists and designers enjoy the exclusive right to use, sell or license their work for a fixed period of years.

Where rights such as patents or copyrights are licensed in favour of another, a royalty is paid to the owner of the right. The export of knowledge in the form of licensing patent and copyrights has become a way of trading, where owing to circumstances a firm has been unable or unwilling to establish a manufacturing base in a foreign country. In such cases, the foreign company manufactures the product under licence, and pays a royalty on an agreed basis. Industrial and chemical products and processes are often produced or employed under licence.

(d) Franchises

A franchise is a monopoly right to trade in a particular area or as regards a particular activity. Franchises are common in the motor trade, for example, where distribution networks are based on accredited dealers who are sole selling agents for particular makes. Another typical franchise is the monopoly right granted by a government to a corporation to operate a public transport system. The costs of negotiating and acquiring the franchise should be capitalized.

(e) Organization costs

The costs involved in setting up a business entity are regarded as constituting intangible assets. They comprise all preliminary expenses such as the legal costs associated with company formation and registration, and other legal, underwriting and accounting fees. It is the practice to write them off as soon as possible.

(f) Research and development costs

Accounting procedures with regard to the treatment of research and development costs pose an issue which is common to all intangible assets-to what extent should theoretical concepts of intangible assets be tempered by practical considerations? SSAP 13 'Accounting for Research and Development' illustrates these problems in its attempt to produce a prescription for the treatment of research and development expenditures in accordance with the four concepts on which SSAP 2 is based namely, going concern, accruals, consistency and prudence.

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Read on: General Criticism of the LCM Rule

The LCM rule has long been criticized primarily on the basis of its inherent inconsistency. Thus, if current replacement cost is objective, definite, verifiable and more useful when it is lower than acquisition cost it also possesses these attributes when it is higher than acquisition cost (Sprouse and Moonitz, 2015). The conservatism reflected in the LCM rule for asset valuations in one period results in an over-statement of income in the subsequent period. The consequence of recognizing decreases in value but not increases in value occurring prior to sale is reflected in a shifting effect in periodic... see: General Criticism of the LCM Rule