The Great Business

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.