11.1 Intangible Assets and Goodwill: Overview
Consider how important video game developers such as BioWare, the creators of Dragon Age, have become in this decade with their mass-market appeal for gaming software. Their major long-term assets are not physical assets as is the case with other companies that own mainly property, plant, and equipment. Instead, their assets are the software and the unique software development teams who are inspired and talented enough to create gaming products that are successfully marketed to millions of people around the world. Software gaming programs are copyrighted, just like published books. The copyright may have no physical presence but it has value, as will now be discussed.
In terms of accounting for intangible assets, IFRS, IAS 38 Intangible Assets (IFRS, 2014) defines these as meeting three conditions:
- identifiable, non-monetary asset without physical substance
- controllable by the business (by purchase or internally created)
- from which future benefits are expected to occur
Identifiable, in this case, means either being separable (can be sold, transferred, rented, or exchanged) or arising from contractual or other legally enforceable rights. Intangible assets are non-monetary assets because they have inherent values based on their use in business. Cash, on the other hand, is a monetary asset because its value is based on what it represents since the paper the cash is printed on has very little value by itself, as was discussed in the cash and receivables chapter.
Intangible assets are not to be confused with goodwill. If BioWare was to sell their entire business to a third party for more than the sum of the fair values of their identifiable assets net of liabilities (net identifiable assets), then the excess amount of the fair value of the consideration paid over the net identifiable assets by the purchaser would be classified as goodwill. The additional amount that the purchaser is willing to pay may be due to a brilliantly creative software development team with extraordinary talents that has value to the purchaser. Even though goodwill is inherently part of the purchase and has no physical presence, it is not classified as an intangible asset. This is because it is not separately identifiable from the other assets, nor does it have any contractual or other legally enforceable rights. For this reason, it does not meet the definition of an intangible asset and is therefore classified separately as goodwill, which is discussed later in the chapter.
Some types of intangible assets are listed below.
- Patents, copyrights, databases, software, and website development costs
- Trademarks and trade names
- Franchise agreements’ initial fees and closing costs
- Purchased-only customer lists, brands, or publishing titles
In a Canadian context, intangible assets have the following characteristics:
- Patents are sole rights granted by the Canadian Patent Office to exclude others from making, using, or selling an invention. They expire after twenty years. Patents limit competition and therefore they provide incentive for companies or individuals to continue developing innovative new products or services. For example, pharmaceutical companies spend large sums on research and development, so patents are essential to earning a profit.
- Copyrights grant exclusive legal right to the author to copy, publish, perform, film, or record literary, artistic, or musical material. A copyright protects authors during their lifetimes and for fifty years after that. A recent example of copyright infringement involves Michael Robertson, CEO of the now-bankrupt MP3.com. The former chief executive of the online music storage firm MP3Tunes was found liable in March 2014 for infringing copyrights for sound recordings, compositions, and cover art associated with artists including the Beatles, Coldplay, and David Bowie (Raymond, 2014).
- Trademarks are a symbol, logo, brand, emblem, word, or words legally registered or established by use as representing a company or product. Coca Cola is an example. Trademarks are renewable after fifteen years, so they can have an indefinite life.
- Industrial design (ID) creates and develops concepts and specifications that improve the function, value, and appearance of products and systems. Registration of the design results in exclusive rights being granted for ten years.
