How does one amortize intangible assets?
Intangible assets are identifiable but not physical. These assets commonly consist of intellectual property and include such things as patents, brand recognition, artistic assets and licensing agreements. Intangible assets are commonly amortized using straight-line depreciation of the asset's value over its useful life, plus any anticipated salvage value, though intangible assets are rarely recognized as having significant salvage value.
Intangible assets can be acquired by purchase or developed by a company internally. If the assets are acquired through purchase from another firm, the recorded value is the fair market value or agreed-upon purchase price. If the asset provides significant, increasing economic benefit over time, the amortization value of the asset is adjusted accordingly. For intangible assets a company develops on its own, the total research and development costs incurred prior to the asset becoming commercially viable set the value to be amortized. Subsequent development costs incurred after the point of commercial viability are capitalized expenses.
The amortization amount is also adjusted if the asset's value is impaired at some point after its acquisition or development. All intangible assets should be tested for impairment at regular intervals and at least annually. Examples of impairment include a significant drop in the asset's fair market value; an economically negative change in the asset's purpose or use; cash flow losses resulting from the asset; incurred legal costs associated with the asset, such as expenses of defending patent rights; or a significant change in the asset's useful life. Intangible assets with an indeterminate or unlimited useful life, such as the intangible asset of goodwill, cannot be amortized.