Valuable, invisible, and sometimes recorded
Morrow's Snapshot (balance sheet) lists tools, parts, a van and the bank balance. It does not list the two thousand riders on the mailing list, the booking app the owner wrote on winter evenings, or the reputation that fills the calendar every spring. The most valuable things a business owns are often unrecorded.
An intangible asset is an identifiable right without physical form: a patent, a customer relationship, a license, a piece of technology. The rules for recognizing one are strict, and the reflex in this unit is the fifth question: what is the evidence? An enthusiastic estimate of "our reputation" is not an asset. A signed license with a price and a term can be.
Built in-house versus bought
How the asset arose decides its accounting. Under US GAAP, research and development is expensed as it is spent, with exceptions for certain software: internal-use software and software to be sold each have their own rules on when development costs become an asset. Under IFRS, research is expensed but development spending that meets specific criteria is capitalized. So "R&D is never an asset" is wrong in both rulebooks, in different ways. Morrow's booking app, built in-house, was expensed as it was written.
- R&D expensed as spent
- Exceptions for certain software development costs
- Morrow's app: expensed while it was written
- Research expensed
- Development capitalized once specific criteria are met
- The same app could be an asset
- Recognized at fair value on the buyer's Snapshot
- Even if absent from the seller's books
- Customer list, technology, brand, licenses
Now suppose a larger chain buys Morrow. In a business combination the buyer recognizes acquired intangibles at fair value, even those absent from the seller's books. The mailing list becomes a customer-relationship asset. The app becomes acquired technology. Purchase accounting is not a copy of the seller's balance sheet. That is why the same asset can be invisible one day and carry a stated amount the next.
After the deal: amortize or test
Finite-lived intangibles are amortized over their useful lives and checked for impairment, like a machine. Indefinite-lived intangibles are not amortized while that classification holds, but they are tested for impairment at least annually. "Indefinite" means no foreseeable limit under the assessment; indefinite does not mean forever. A brand can lose its indefinite status and start amortizing.
A buyer acquires a workshop whose customer list never appeared on the seller's balance sheet. What happens to the list in the buyer's accounts?