Intangible Assets
Goodwill, patents, trademarks—and how to expense assets you can't touch.
Why This Matters
In 2018, Microsoft bought LinkedIn for $26.2 billion. LinkedIn's identifiable physical assets (buildings, equipment, cash) were worth about $5 billion.
What did Microsoft pay $21 billion for?
Answer
Goodwill
You can't touch it. You can't see it. You can't put it in a warehouse. It's the value of LinkedIn's brand, network effects, user base, and future earning potential. And it sits on Microsoft's balance sheet as an asset worth more than most entire companies.
Intangible assets are the hidden giants of modern business. In the knowledge economy, a company's most valuable assets often aren't physical (Apple's brand, Pfizer's patents, Google's algorithms).
What Are Intangible Assets?
Intangible assets are long-term assets without physical substance that provide future economic benefit.
Characteristics
- No physical substance (can't touch it)
- Long-term (benefit > 1 year)
- Provide future economic benefit
- Can be identified or controlled
Examples
- Legal Rights
- • Patents
- • Copyrights
- • Trademarks
- • Licenses
- Other
- • Goodwill
- • Customer lists
- • Franchises
- • Software
Types of Intangible Assets
Patents
Exclusive right to make, use, or sell an invention.
Amortize: Yes, over shorter of legal or useful life.
Capitalize:
- • Purchase price
- • Legal fees to obtain
- • Legal fees to successfully defend
Ex: Patent cost $115k, 10-yr life = $11,500/yr amortization
Copyrights
Protects original creative works (books, music, software).
Amortize: Yes, over expected useful life (often short).
Capitalize:
- • Purchase price
- • Legal/registration fees
Ex: $50k software copyright, realistic 5-yr life = $10k/yr amort.
Trademarks
Words, symbols, or designs identifying goods (Nike swoosh).
Amortize: NO (usually). Test for impairment annually.
Capitalize:
- • Purchase price
- • Registration & design costs
- • Legal fees to protect
No amortization because life is indefinite.
Franchises
Rights to operate under someone else's brand.
Amortize: Yes, over the franchise term.
Capitalize:
- • Initial franchise fee
- • Legal fees
Ongoing royalty payments are EXPENSED, not capitalized.
Goodwill: Deep Dive
The excess of purchase price over the fair value of net identifiable assets in a business acquisition.
How It Arises
ONLY from purchasing another company. You CANNOT create goodwill internally.
// Co. A buys Co. B for $5M
Purchase Price Paid:$5,000k
Less: Co. B Assets(4,500k)
Add: Co. B Liabilities1,500k
GOODWILL:$2,000k
Amortize? NO. Indefinite life. Test for impairment annually.
What It Represents
"The price paid for future benefits that can't be separately identified."
- Brand reputation
- Customer loyalty and relationships
- Expected synergies from merger
- Competitive advantages
- Skilled workforce (not on books)
Recording Intangibles
Purchased Intangibles
Capitalize at Cost
Include purchase price + all costs to acquire and defend.
DR: Patent
CR: Cash
Internally Developed
Generally Expensed (R&D)
Because of uncertainty and conservatism, most internal development costs are expensed.
- Exception: Legal fees to register patent.
- Exception: Certain late-stage software costs.
Amortization vs. No Amortization
Amortization is to intangibles what depreciation is to tangible assets.
AMORTIZE
- • Straight-line (usually)
- • Over useful life
DO NOT AMORTIZE
- • Test for impairment annually
- • Write down if impaired
Amortization Entry:
DR: Amortization Expense
CR: Accumulated Amortization
Impairment Entry:
DR: Impairment Loss
CR: Goodwill (or Asset)
Natural Resources & Depletion
Natural resources (oil, gas, minerals, timber) use DEPLETION instead of depreciation.
The Concept
- • Resources are "used up" (depleted), not worn out.
- • Based on units extracted, not time.
- • Same math as Units of Production depreciation.
// Year 1: Extract 200k barrels @ $4/bbl
Depletion Expense800,000
Accumulated Depletion800,000
Summary: Intangible Asset Treatment
| Intangible | Amortize? | Life Used | Impairment Test |
|---|---|---|---|
| Patents | Yes | Shorter of legal/useful | When indicators present |
| Copyrights | Yes | Useful life | When indicators present |
| Trademarks (limited) | Yes | Expected useful life | When indicators present |
| Trademarks (indefinite) | No | Indefinite | Annually |
| Goodwill | No | Indefinite | Annually |
| Franchises/Licenses | Yes | Term of agreement | When indicators present |
| Internal R&D | Expense immediately (usually) | ||
Key Takeaway
Intangible assets are long-term assets without physical substance. Purchased intangibles are capitalized at cost, while most internally developed intangibles are expensed as R&D.
Finite-life intangibles (patents, copyrights) are amortized. Indefinite-life intangibles (goodwill) are NOT amortized but tested annually for impairment. Goodwill only arises from business acquisitions—you cannot capitalize your own reputation.
Test Your Understanding
See if you've got the basics down. Click each option and check your answer.
Question 1: A company purchases a patent for $180,000. Legal fees to acquire it were $20,000. What is the capitalized cost of the patent?
Question 2: Goodwill arises from:
Question 3: Which intangible asset is NOT amortized?
Question 4: A company spends $2 million on research to develop a new product. The research is successful and results in a patentable invention. How much is capitalized as an intangible asset?
Question 5: An oil company purchases mineral rights for $10 million. The estimated recoverable oil is 2 million barrels. If 300,000 barrels are extracted in Year 1, what is the depletion expense?
Ready to Practice?
You now understand intangible assets. The Practice Lab challenges you to calculate goodwill in an acquisition, record amortization for patents, and determine impairment losses.
Try the Practice LabWhat's Next?
You've completed the Long-Term Assets section! You now understand both tangible and intangible assets. Next, explore how all these concepts connect in financial statement analysis.