Payment recorded

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Contract-related intangibles include franchise agreements, licenses, and permits.

Licenses and permits come into play when a government agency grants a private company operating rights, such as the use of city streets or designated areas for taxicab stands. The cost of acquiring a franchise is expensed over the life of the agreement. Annual franchise costs are expensed in the financial period in which the franchisee incurs them. The cost of acquiring licenses and permits are capitalised if the company can match the costs to obtain the operating right with the actual license or permit. If a company pays a minimum guarantee for the privilege associated with the license or permit, the amount of the guarantee records as an intangible asset and moves to the balance sheet over the life specified in the license agreement.

Customer relationships form a key intangible asset for firms operating in many industries. Firms devote significant human and financial resources in developing, maintaining and upgrading customer relationships. In some instances, supply or customer contracts give rise to identifiable intangible assets. More broadly, however, customer related intangible assets consist of the information gleaned from repeat transactions, with or without underlying contracts. Firms can and do lease, sell, buy or otherwise trade such information, which are generally organised as customer lists.

Marketing-related intangible assets are intangibles help promote the company’s goods or services. Your biggest marketing-related intangible asset is a trademark. These assets are unique signs, symbols, or names the company uses to create a brand or unique image. For example, think “Kleenex” versus “facial tissue. If a company buys the trademark from another company, it capitalises the purchase price. If the company develops the trademark itself, all costs relating to its development are capitalised, except for research and development costs.

The biggest technology-related intangible is patents. A patent provides licensing for inventions or other unique processes and designs. Items that patents protect run the gamut from pharmaceuticals, to automobile circuitry, to unique machinery designs.

If a company purchases a patent from the inventor, the capitalised cost is the purchase price plus any costs incurred as part of the acquisition process, such as legal fees. Costs leading to patents developed in house aren’t capitalised, but are shown immediately as expenses on the income statement.

Artistic-related intangibles include items such as copyrights, which protect ownership rights. In other words, someone can’t use the company’s printed work (books, poems, and the like) or recorded work (musical score, song lyrics, movies, and so on) without permission. Any original piece of work is automatically copyrighted. The cost to acquire a copyright is capitalised. The cost to defend against the plagiariser is also capitalised. These costs are allocated to the value of the copyright over its useful life.