Valuation of Intangible Assets
The term valuation of intangible assets refers to the process of computing and recording their cost on the company’s balance sheet. The capitalized costs of an intangible asset can include the purchase price as well as all costs required to ready the asset for its intended use.
As is the case with tangible assets such as property, plant, and equipment, the value of an intangible asset is recorded on the balance sheet at original cost. In addition to the purchase price of the asset, the value recorded on the balance sheet can include all costs necessary to ready it for its intended purpose such as legal fees.
The FASB’s Statement of Financial Accounting Standards No. 141 requires companies to record these assets at their fair market values on the date of acquisition. It also states that companies need to categorize certain intangible assets separately from goodwill. Examples of intangible assets that should be separated from goodwill include trademarks, trade names, service marks, collective marks, certification marks, newspaper mastheads, internet domain names, artistic-related assets (plays, operas, ballets), customer lists, construction permits, employment contracts, unpatented technologies as well as secret formulas. Generally, these fall into one of two broad categories: legal and competitive intangible assets.
Once acquired, companies need to conduct an annual test for impairment of goodwill. This two-step process includes:
- The fair market value of the asset is compared to the carrying amount, including goodwill that was previously recognized.
- The implied fair market value is then compared to the carrying amount of the goodwill. If the fair market value is lower than the carrying amount, the asset is considered impaired.
Intangible assets, other than goodwill, are amortized over their useful lives. A straight line method is used if no other method can be reliably calculated. The standard also allows for periodic adjustments of intangible assets based on professional appraisals. This information may result in both an adjustment to the value of the intangible asset appearing on the balance sheet as well as the amortization approach.