Saturday, 3 September 2011

Intangible Fixed Assets

Intangible assets may be defined as a special class of irrelevant fixed assets of which brands, copyrights, formulas, franchises, good will, patents and trade-marks are leading examples. The chief common characteristics of intangible assets are:
1. They are usually directly related to the future earnings of a business.
2. Their value is generally dependent upon the "going-concern" concept of business enterprise. They attach to the enterprise as a whole. Although exceptions exist, like copyrights and patents, intangible assets evince a tendency to be inseparable from the business which owns them. Goodwill is an outstanding example.
The test of the value of intangibles is earning power. To clothe intangibles with accounting value a business should have earning power large enough to cover satisfactorily not only its net tangible assets but its intangibles as well. Thus, intangible assets should be capitalized only when they have a genuine present value defensible by the test of earnings yet to be realized. When so capitalized, debits to intangible asset accounts may include reasonable costs to purchase, develop and defend.
Intangibles of definite life should be amortized over their commercial useful life by periodic charges to operations. There is a tendency on the part of some accountants to value intangibles of indefinite life at cost, with never any deduction of amortization.
However, accounting valuations for intangible assets of definite and indefinite lives are warranted only by the test of the present life of future earning power.
The inauguration of intangible assets with significant account balances raises practical problems of accounting valuations. At best, many of the valuations attending the intangible assets of actual business are characterized by transience and uncertainty. In the interest of financial conservatism, many companies have written off their intangible assets. Lump sum write-offs of the values of intangible assets should be made by special debits to the comprehensive income account with current profit and loss. Credits are generally made to the asset accounts involved rather than to accounts with valuation reserves.
COPYRIGHTS
Copyrights have a legal life of twenty-eight years with privilege of renewal for a similar period. Because copyright revenues generally last only a few years, the copyright cost should be written off in proportion to gross revenues as nearly as it is possible to do so. Some companies go so far as to write off the entire cost against the gross revenue of the first year.
GOODWILL
Goodwill exists when the net income of a specific business unit is greater than the normal rate of return expected for the general business or industry of which the specific unit is a part. Goodwill is the valuation placed upon this extra earning power.
Goodwill may also be defined as follows: When a specific business unit has a value over and above the fair value of its net assets (excluding goodwill), the difference is goodwill.
Reasons advanced for the existence of goodwill include the following:
• Efficient and well-mannered organization
• Favourable customer attitude and buying habits
• Site
• Monopoly
• Quality of merchandise and service
• Possession of special privileges
• Reputation for fair dealing
PATENTS
Patents should be recorded on the books at cost. Cost includes:
Purchase price Fees (attorney and federal)
Developmental expenditures Cost of legal defense
Patents have a definite life of seventeen years without privilege of renewal. They should be amortized by writing off at least 1/17 of their cost each year to the operating account, Patents Expense, or Amortizations of Patents. However, if a patent has a commercial life of less than seventeen years, the write-offs should be proportionately greater. Ideally, the cost of a patent should be written off in proportion to the annual gross incomes earned on the patent.
TRADE-MARKS
This asset should be valued at cost to purchase, develop and defend. Because its legal life is without limit, a trade-mark is the permanent and exclusive property of its owner. Valuation of a trade-mark may therefore remain continuously at cost (i.e., without deduction for amortization). Many concerns, however, write-off such values as a matter of such conservatism, or carry them at a nominal valuation. In no case is there warrant for the retention of an accounting valuation for a trade-mark whose commercial value has expired.

For More Information:

Principles Of Accounting