Intangible Assets

Intangible assets are long-lived assets without physical substance that represent legal rights or competitive advantages. Unlike PP&E, you cannot touch an intangible — but its value to the business can be enormous. Accounting treatment depends on whether the intangible has a finite or indefinite useful life.

Types of Intangible Assets

Intangible	Description	Typical Life
Patent	Exclusive right to manufacture, use, or sell an invention	Legal: 20 years
Copyright	Exclusive right to reproduce and sell artistic or literary works	Legal: creator's life + 70 years
Trademark / Trade name	Symbol, word, or phrase identifying a product or company	Indefinite (renewable)
Goodwill	Excess of purchase price over fair value of net identifiable assets in a business combination	Indefinite
Franchise	Right granted to operate a business under a franchisor's brand	Per contract term

info

The CPA exam focuses on how each type is measured, amortized (or not), and tested for impairment.

Purchased vs. Internally Developed Intangibles

Source	Treatment
Purchased (from a third party or in a business combination)	Capitalize at cost (or fair value in a combination)
Internally developed	Generally expensed as incurred — R&D, advertising, employee training

warning

Under U.S. GAAP, internally generated goodwill, brands, and customer lists are never capitalized. Only purchased intangibles are recognized as assets.

Example — Bear Co. Purchases a Patent

Bear Co. acquires a patent from an independent inventor for $120,000 and pays $5,000 in legal fees to register the patent.

Debit

Credit

Patent

$125,000

Cash

$125,000

The $125,000 total cost is amortized over the shorter of the patent's remaining legal life or its expected economic life.

Finite Life Intangibles — Amortization

Finite life intangibles are amortized on a straight-line basis (unless another pattern better reflects consumption of benefits) over the shorter of:

$$\text{Amortization Period} = \min(\text{Economic Life},\; \text{Legal Life})$$

Example — Gies Co.

Gies Co. purchases a patent with 16 years remaining on its legal life. Gies estimates the technology will be useful for only 8 years.

$$\text{Annual Amortization} = \frac{\$125{,}000}{8} = \$15{,}625$$

Debit

Credit

Amortization expense

$15,625

Accumulated amortization — patent

$15,625

tip

Unlike PP&E, intangibles typically have no salvage value — the entire cost is amortized.

Impairment of Finite Life Intangibles

Finite life intangibles follow the same two-step test as PP&E under ASC 360:

Example — MAS Inc. MAS Inc. holds a patent with a carrying value of $80,000. Due to a competitor's breakthrough, expected undiscounted future cash flows are $60,000 and fair value is $45,000.

• Step 1: $60,000 < $80,000 → impaired
• Step 2: Loss = $80,000 − $45,000 = $35,000

Debit

Credit

Impairment loss

$35,000

Accumulated amortization — patent

$35,000

danger

Under U.S. GAAP, impairment losses on intangibles held for use are never reversed.

Indefinite Life Intangibles

Certain intangibles have no foreseeable limit on the period over which they generate cash flows:

• Goodwill — arises only in business combinations
• Certain trademarks — when the entity intends (and has the ability) to renew indefinitely
• FCC broadcast licenses — renewable at negligible cost Indefinite life intangibles are not amortized. Instead, they are tested for impairment at least annually (or when a triggering event occurs).

Goodwill — Recognition and Impairment

Recognition

Goodwill arises in a business combination when the purchase price exceeds the fair value of the net identifiable assets acquired.

$$\text{Goodwill} = \text{Purchase Price} - \text{Fair Value of Net Identifiable Assets}$$

Example — Kingfisher Industries acquires BIF Partners:

Item	Amount
Purchase price	$2,000,000
Fair value of identifiable assets	$2,800,000
Fair value of liabilities assumed	($1,200,000)
Fair value of net identifiable assets	$1,600,000
Goodwill	$400,000

Debit

Credit

Identifiable assets

$2,800,000

Goodwill

400,000

Liabilities assumed

$1,200,000

Cash

2,000,000

Goodwill Impairment Testing (ASC 350)

Goodwill is tested at the reporting unit level. An entity may first perform an optional qualitative assessment (Step 0) to determine whether quantitative testing is necessary.

Quantitative one-step test:

$$\text{Impairment Loss} = \text{Carrying Value of RU} - \text{Fair Value of RU}$$

The loss is capped at the amount of goodwill allocated to the reporting unit — goodwill cannot go below zero.

Example — Illini Entertainment

Illini Entertainment's streaming division (reporting unit) has:

• Carrying value: $5,000,000 (including goodwill of $800,000)
• Fair value: $4,500,000 $$\text{Impairment} = \$5{,}000{,}000 - \$4{,}500{,}000 = \$500{,}000$$ Since $500,000 < $800,000 (goodwill balance), the full $500,000 is recognized as a goodwill impairment loss.

Debit

Credit

Goodwill impairment loss

$500,000

Goodwill

$500,000

warning

Goodwill impairment losses are never reversed under U.S. GAAP.

Purchased Software

Software purchased or licensed from a third party for internal use or for sale is recognized as an intangible asset and amortized over the shorter of its legal or economic useful life.

Software Developed for Sale or Lease

Under ASC 985-20, costs are accounted for in stages:

Phase	Treatment
Before technological feasibility	Expense as R&D
After technological feasibility, before available for sale	Capitalize
Production and customer support	Expense (inventory costs, maintenance)
Amortization of capitalized software costs is the greater of:

1. Straight-line over economic life, or
2. Revenue-based ratio (current revenue ÷ total expected revenue)

Example — Illini Security

Illini Security capitalizes $300,000 in software development costs after establishing technological feasibility. The software has an estimated economic life of 3 years and is expected to generate total revenue of $1,500,000. Year 1 revenue is $600,000.

• Straight-line: $300,000 ÷ 3 = $100,000
• Revenue-based: ($600,000 ÷ $1,500,000) × $300,000 = $120,000 Amortization = greater of the two = $120,000.

Debit

Credit

Amortization expense

$120,000

Accumulated amortization — software

$120,000

Cloud Computing Arrangements (CCA)

Under ASU 2018-15, a customer in a hosting arrangement that is a service contract (i.e., the customer does not control the software) capitalizes certain implementation costs.

Phase	Treatment
Preliminary project stage	Expense
Application development stage	Capitalize
Post-implementation stage	Expense
Capitalized costs are presented as a prepaid asset (not an intangible) and amortized over the term of the hosting arrangement.

note

This treatment mirrors the guidance for internal-use software (ASC 350-40) — the three-stage model is identical.

Franchise Accounting — Franchisee

When a franchisee pays an initial franchise fee, the cost is recognized as an intangible asset at the present value of the payments and amortized over the period of expected benefit.

Example — Bear Co. (Franchisee)

Bear Co. acquires a franchise from a national chain. The initial fee is $50,000, payable $10,000 at signing and $10,000 per year for four years. The appropriate discount rate is 8%.

$$\text{PV of annuity} = \$10{,}000 \times \text{PV factor}_{4, 8\%} = \$10{,}000 \times 3.3121 = \$33{,}121$$ $$\text{Total franchise cost} = \$10{,}000 + \$33{,}121 = \$43{,}121$$

Debit

Credit

Franchise intangible asset

$43,121

Discount on note payable

6,879

Cash

$10,000

Note payable

40,000

The franchise asset is amortized over the franchise agreement term (e.g., 20 years):

$$\text{Annual amortization} = \frac{\$43{,}121}{20} = \$2{,}156$$

Debit

Credit

Amortization expense

$2,156

Accumulated amortization — franchise

$2,156

Start-Up Costs

Under ASC 720, start-up costs (including organization costs) are expensed as incurred for financial reporting purposes. Example — BIF Partners incurs $25,000 in organization costs:

Debit

Credit

Start-up costs expense

$25,000

Cash

$25,000

tip

Start-up costs are amortized over 15 years for tax purposes — but for financial accounting (which the FAR exam tests), they are expensed immediately.

Research and Development (R&D) Costs

Under ASC 730, R&D costs are expensed as incurred. This includes:

• Salaries of R&D personnel
• Materials and supplies consumed in R&D
• Depreciation on R&D equipment (if no alternative future use)
• Contract R&D services
• Reasonable allocation of indirect costs

Exceptions to Immediate Expensing

Exception	Treatment
R&D equipment with alternative future use	Capitalize and depreciate
Software development (after technological feasibility)	Capitalize per ASC 985-20
R&D acquired in a business combination	Capitalize at fair value; if no alternative future use, expense immediately

Example — MAS Inc. R&D activities:

Debit

Credit

Research and development expense

$150,000

Cash

$90,000

Accumulated depreciation — equip.

30,000

Accrued liabilities

30,000

warning

Materials, equipment, and facilities acquired for R&D with no alternative future use are expensed at acquisition — they are not capitalized as assets.

Crypto Assets

A crypto asset (such as Bitcoin or Ethereum) represents a digital value or right recorded on a distributed ledger (blockchain). Under ASC 350-60, crypto assets are classified as intangible assets because they are not cash, financial instruments, or tangible property.

Classification

Crypto assets are treated as indefinite-lived intangible assets when all of the following conditions are met:

1. The asset meets the definition of an intangible asset under ASC 350
2. The asset does not provide the holder with enforceable rights to or claims on underlying goods, services, or other assets
3. The asset is created or resides on a distributed ledger based on blockchain or similar technology
4. The asset is secured through cryptography
5. The asset is fungible
6. The asset is not created or issued by the reporting entity or its related parties

Measurement

When the conditions above are met, crypto assets are measured at fair value each reporting period, with changes in fair value recognized in net income.

Example: Bear Co. holds 5 BTC purchased at $30,000 each. At year-end, the fair value is $35,000 per BTC.

$$\text{Unrealized gain} = 5 \times (\$35{,}000 - \$30{,}000) = \$25{,}000$$

Debit

Credit

Dec 31

Crypto assets

$25,000

Unrealized gain on crypto assets

$25,000

:::tip Exam Tip

Under ASC 350-60, qualifying crypto assets are marked to fair value each period — unlike traditional indefinite-lived intangibles, which are tested for impairment only when indicators exist. If the crypto asset does not meet all of the conditions above (e.g., it is an NFT and therefore not fungible), it follows the standard indefinite-lived intangible impairment model.

:::

Summary

Category	Amortization	Impairment Test
Finite life intangible	Shorter of legal/economic life	Two-step (same as PP&E)
Indefinite life intangible (excl. goodwill)	None	Compare carrying value to FV annually
Goodwill	None	Qualitative screen → one-step quantitative
R&D costs	N/A — expensed immediately	N/A
Start-up costs	N/A — expensed immediately	N/A
Capitalized software (for sale)	Greater of SL or revenue-based	NRV floor test
Crypto assets (qualifying)	None — fair value through NI	N/A (mark-to-market each period)

info

Key takeaway: The most important distinction is between finite and indefinite life intangibles — it determines whether you amortize and which impairment model applies. Qualifying crypto assets are a special case: they are indefinite-lived intangibles measured at fair value through net income each period.