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Written by : Brice Dobrunz
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this video covers the basics of intangible assets intangible assets are going to allow the company to benefit in future periods but they don't have any physical existence you can't see or touch them and they're not financial instruments they're not stocks or bonds they're normally classified as long-term assets and let's take a look at pfizer's intangible assets on their balance sheet for the most recent year december 31st 2019. we can see that the company had 167 billion dollars of total assets and more than half are coming from intangible assets types of intangible assets that we're going to cover patents copyrights franchises licenses trademarks trade names and goodwill let's look at how do we record the costs incurred in order to get the intangible assets do we capitalize the cost that the company incurs in order to capitalize a cost we have to be able to answer these two questions here will this cost generate probable future economic benefits and can we reliably measure that assets value are we gonna let's say we're working on developing a new a brand new product will that give us well this all these costs that we're incurring now actually results in a product that we can sell and get cash and if so can we have a come up with a good estimate of what that asset is worth today or in other words the present value of the future cash flows we're going to receive from developing this product these costs that the company incurs on its own of trying to develop and create new product these costs are not capitalized gaap generally accepted accounting principles say it's just too difficult to answer these questions we don't know if something good is going to come out of all these costs and even if we think there's a real high likelihood that it will it's just so hard for us to know what how much cash are we going to get in the future from that asset so most internally generated costs the cost of developing designing testing various products and ideas they are not capitalized meaning they are expensed immediately they're considered research and development expense the one caveat is legal costs so company works hard to develop a product all of those costs in development go straight to expenses but once it says you know this is a pretty good product let's put a patent on it those legal and registration costs to getting that patent which are generally not that much those are the only costs that the company can actually capitalize or record as an asset on the balance sheet when it's creating a product on its own here's an example abc pharma works on developing a drug over a span of five years here we see the financials so every year for five years the company incurs a three million dollar expense records it is research and development expense there is no asset to show for all of these costs then in the beginning of year 6 2019 the company obtains a patent on the drug so it goes out and it deals with the government and it gets a patent and that patent was only ten thousand dollars the legal fees to obtain the patent so the company spent fifteen million dollars over the course of five years and has an asset worth ten thousand dollars on its books but the drug works out to be really good and pfizer's really interested in it abc pharma sells the drug to pfizer for 30 million so after five straight years of three million dollars in r d expense the company abc pharma now records 30 million dollars of revenue with with only a ten thousand dollar expense as they get rid of that patent because they sell it to another company so we see a very large mismatch between when the expenses are incurred and when the related revenue is earned pfizer on the other hand just purchased a patent because it purchased it from an outside organization it wasn't developing something itself it records the value the patent at the acquisition cost the cost that pfizer had to incur in order to get that patent so abc farmers selling a patent for 10 000 and get and pfizer on the other side of that is recording a patent for 30 million dollars let's write some notes down what are the things that we need to know so far about intangible assets we're going to get to internally generated but first let's start with in our heading intangible assets most costs incurred this is the really important point about intangible assets most costs incurred to develop and or create design and test a product or idea that is later once it's successful it is later copy written in case of an artistic work patented trademarked franchised or licensed most of these costs are not capitalized meaning they're not recorded as intangible assets to capitalize a cost means to record an asset on the balance sheet and this is one caveat other than legal and registration costs let's just lump that into other than legal costs the costs other than legal are considered research and development because we don't know if they're going to be successful and we don't know how much revenues they're going to bring us are expensed immediately expensed as incurred okay let's return to our slides now how should an intangible asset become an expense so if we once we are able to capitalize so let's say pfizer purchases a 30 million dollar patent how does that ever become an expense well assume your company purchased a 20-year license let's say you're you work for gaap and gap purchases the license the right to print mal cute little minnie mouse on clothing and sell that for profit 20-year license expected to bring the company revenues for the next 20 years how long should that expense how long should the company expense that license well clearly over the 20 whatever uh gap had to pay walt disney for the right to print mickey and minnie on the clothing that should be allocated across 20 years okay what if your company purchased a 20-year license so you have the right to use it for 20 years but you think you're only going to use it for the next 10 years how long should you expense the license well obviously for 10 years so always for the shorter of if the useful life is less than the legal life we use the useful life how long is this going to bring us future cash flows or revenues how about this assume your company just purchased a renewable license and the company plans to renew the license indefinitely how long should you expense that license well how do you divide a cost by an infinite number what would you get you would get zero so if you expect to use that intangible asset forever for as long as you can see then you would not amortize the cost amortization is just like depreciation it's exactly the same thing but when we talk about allocating the cost over time for an intangible asset we simply call it amortization instead of depreciation let's talk about some specific types of intangible assets let's start with trademarks and trade names in the us trademarks and trade names have legal protection for an indefinite number of 10-year renewal periods so it's up to the company who obtains that trademark whether or not they want to renew it after the 10-year period expires if they do renew it they can renew it once twice or indefin
Thanks for your comment Errol Serles, have a nice day.
- Brice Dobrunz, Staff Member
so what did you do today share the photo of yourself grabbed from a clubs page you posted stills from your favorite show or maybe shared some slick vine football goals legally all copy rom copyrights makes it illegal to email a school book if they'll give it's playing YouTube videos across borders plenty of copy wrongs for artists to copyright does not protect you from unfair contracts it blocks you from creating and sharing reaction gifs your own remixes of pictures videos or music certain families and even photos of public spaces all found write illegal your daily life is illegal even if we all do it now ze you've got some sharp ideas on the table on how to bring copyright into the 21st century outdated laws can be balanced to everyone's interest for a change we're almost there but a powerful alliance with deep pockets and huge influence is attempting to block the plan it's time you stopped them it's time to make your voice heard copyright reform is in your interest legalize the internet go to copy wrong sorry you to see how you
Thanks Carolee your participation is very much appreciated
- Brice Dobrunz
About the author
I've studied particle mechanics at Binghamton University, State University of New York in Vestal and I am an expert in history of archaeology. I usually feel giggly. My previous job was environmental compliance inspector I held this position for 7 years, I love talking about snowshoeing and disc golf. Huge fan of Mark Twain I practice still rings and collect military items.
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