Question

What are the two main characteristics of intangible assets?

Why does the accounting profession make a distinction between internally created intangibles and purchased intangibles?

Answer 1

Answer 1 :

Two main characteristics of intangible assets.

1. Intangible assets lack physical existence / form - Intangible assets does not have any physical form like tangle assets . They are refer to the rights acquired by the entity in order to use them.
2. Intangible assets are not financial instruments - Intangible assets are not financial instruments like accounts receivable or bank deposits etc. Intangible assets are generally long term assets which provide services to the entity on long term basis.

Answer 2 :

Accounting profession makes a distinction between internally created intangibles and purchased intangibles because internally created intangibles are expensed & purchased intangibles are capitalized at cost.

Reason:

• In case of internally created intangibles, it is difficult to verify the potential future benefits that the entity can extract. Since there lies a subjectivity in relation to such costs thus these are expense as incurred .
• But in case of purchased intangibles, there lies an evidence in term of fair value of intangibles received as on date of acquisition. Thus it is easy to verify the potential future benefits. Thus such costs are capitalized.

Therefore , due to difference in accounting treatment, it is necessary for an accounting profession to make a distinction between internally created intangibles and purchased intangibles.