A company that builds its brand internally and a company that buys the same brand in an acquisition will report dramatically different balance sheets, even though the economic asset is identical.
How the intangible was obtained drives its accounting treatment, so to compare the financial reporting of two firms you first identify the origin of each asset.
Purchased intangibles (a software license bought from a vendor, a customer list bought from another firm) capitalize on the balance sheet at cost. Finite-life intangibles amortize over their useful lives. Indefinite-life intangibles (such as a brand expected to generate cash flows indefinitely) are not amortized but tested for impairment annually.
Internally developed intangibles are generally expensed as incurred under US GAAP. Research and development costs flow through the income statement immediately. The economic value of a brand built through decades of marketing never appears on the balance sheet.
KEY: The accounting asymmetry between purchased and internally developed intangibles is the single most important comparison in this reading.
Common mistakes
- Capitalizing internally developed brand or R&D under US GAAP. US GAAP expenses R&D as incurred. Trap: treating a successful internally developed brand as a balance sheet asset.
- Forgetting that IFRS allows impairment reversals. US GAAP prohibits all reversals. IFRS permits reversals on assets other than goodwill. Trap: applying US GAAP no-reversal logic to an IFRS question.
- Mixing up the US GAAP impairment trigger and measurement. Trigger uses undiscounted cash flows. Measurement uses fair value. Trap: comparing carrying amount to fair value for the trigger step, which is the IFRS approach.
Bottom line
- Purchased intangibles capitalize at cost. Internally developed intangibles are expensed (narrow IFRS exception for the development phase if six criteria met). Business-combination intangibles capitalize at fair value with goodwill as the residual plug.
- US GAAP impairment uses undiscounted cash flows for the trigger and writes down to fair value. IFRS uses recoverable amount, the higher of fair value less selling costs and value in use.
- Impairment is non-cash: it hits net income and assets, reducing current ROA, ROE, margins, and interest coverage, then flatters those ratios going forward via a lower asset base and lower depreciation.
- IFRS allows impairment reversals on assets other than goodwill. US GAAP prohibits all reversals.
Exam shortcut
When the question compares purchased and internally developed intangibles, expect the answer to hinge on capitalization asymmetry: purchased is on the balance sheet, internally developed (US GAAP) is on the income statement. When the question asks about impairment reversal, US GAAP says never, IFRS says yes except goodwill.
The full lesson (about 2,192 words, 15 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- analysis of long-term assets
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