Intangible Assets and Natural Resources

Long-term (non-current) assets include property, plant and equipment assets such as land, buildings, and machinery; intangible assets such as patents and copyrights; and natural resources such as timberland, mineral deposits and oil-and-gas fields.

Assets represent a company’s strategic commitments well into the future and help create the revenue of the business.

Intangible assets are a unique kind of non-current assets that provide certain legal rights, privileges, and competitive advantages to the business. Intangible assets don’t have a physical substance or form unlike property, plant and equipment assets. Instead, intangible assets convey special rights from patents, copyrights, licenses, trademarks, etc. and other inventive works. Besides these, intangible assets also include pre-operating costs, research and development costs and leasehold improvements.

• Exclusive privileges granted bygovernmental authority such as patents, copyrights, franchises, trademarks, and tradenames.

• Private monopolistic arrangements arisingfrom contractual agreements such as franchises and leases.

• Acquisition of another business, in whichthe purchase price includes a payment for goodwill (Superior entrepreneurial capacity or management know-how and customer loyalty is related to goodwill.)

The purchase of an intangible asset should be treated as a capital expenditure and recorded at acquisition cost. In other words, the cost of intangible asset includes all acquiring expenditures and the necessary expenditures to bring the asset to its intended use. Some types of intangible assets can also be internally developed. The costs of these intangible assets can be measured by costs like registration fees and attorney’s fee. When an intangible asset is internally developed, it may be very difficult to evaluate it. These types of costs are generally recorded as a period expense.

If an intangible asset has a limited life, its cost should be allocated (amortized) over its useful life. Intangible assets with indefinite lives should not be amortized. Companies normally use the straight-line method for amortizing intangible assets.

A copyright is an exclusive right granted by the government to publish, reproduce and sell a book, musical composition, film, other art works, computer programs, or intellectual property. Government grants copyrights to authors, composers, sculptors and other artists for their creations and works. Copyright belongs to the person who creates it.

Trademarks (also called trade name) are assets that represent distinctive identifications of products or services. Trademarks may consist of any signs like words including personal names, figures, colors, letters, numbers, sounds and the shape of goods or their packages, providing that such signs are capable of distinguishing the goods or services of one undertaking from those of other undertakings and being represented on the register in a manner to determine clear and precise matter of protection afforded to its proprietor.

From an accounting standpoint, goodwill is the excess of the cost to purchase another company over the market value of business’s net assets (total assets minus total liabilities). Goodwill is the value paid above the net worth of the company’s assets and liabilities.

A franchise is a contractual arrangement between a franchisor and a franchisee. Franchises are privileges granted by a business to sell goods or services under specified conditions. The franchisor grants the franchisee the right to sell certain products, perform specific services, or use certain trademarks or trade names, usually within a designated geographic area. Licenses are privileges granted by a government to use public property in performing services.18 A license granted by a governmental body permits a company to use public property in performing its services.

Companies make preoperating expenditures when establishing a new business or founding a new branch or continuously expanding of the operations but in return there is no gain obtained. These kinds of expenditures are capitalized as an intangible asset named Preoperating Costs. Because the life of the company is assumed infinite, Preoperating cost are generally amortized within 5 years.

Research and Development expenditures are capitalized when the company makes expenditures for developing new technologies or products, or improves the current ones or expenditures made for similar aims. Related expenditures are capitalized by debiting in Research and Development Costs account. Research & Development Costs are generally amortized within 5 years.

Natural resources are long-term assets that come from the earth that are consumed such as Timberlands, Oil and Gas Reserves, and Mineral Deposits. These long-lived productive assets have two distinguishing characteristics:

(1) they are physically extracted in operations (such as mining, cutting, or pumping), and

(2) they are replaceable only by an act of nature.

The allocation of the natural resources’ cost to expense in a rational and systematic manner over the resource’s useful life is called depletion.Depletion is to natural resources as depreciation is to plant assets and amortization to intangible assets.

In the balance sheet, each class of long term assets (non-current assets) should be disclosed on the main body of the statement or in the notes.

Intangible assets are usually reported in the balance sheet ina separate section following Property, Plant and Equipmentassets. The balance of each class of intangible assets should be disclosed on the balance sheet at their book value either in the face of the statement or the notes. Intangibles do not usually use a contra asset account like the contra asset account Accumulated Depreciation used for plant assets. Instead, companies record amortization of intangibles as a direct decrease (credit) to the asset account. Amortization expense is reported on the income statement as part of operations.