A balance sheet only tells you what management chose to disclose, intangibles can vanish into expense, goodwill can sit untouched for a decade, and a bond at amortized cost can hide a 30% economic loss. Your job is to read what the statement reports, what the notes reveal, and what neither one captures.
An intangible asset is identifiable, non-monetary, and lacks physical substance. Patents, trademarks, licenses, franchises, customer lists, and software fit the definition. The reporting question splits on origin.
Purchased intangibles are capitalized at cost. If acquired in a business combination, they go on the balance sheet at fair value. Subsequent measurement depends on useful life.
DECISION: Finite life. Amortize over the useful life, test for impairment when indicators arise. Indefinite life. Do not amortize, test for impairment at least annually.
Internally generated intangibles are treated very differently across standards.
HIGH-FREQUENCY: The IFRS feasibility test for development costs is the PIRATE criteria: Probable future benefits, Intention to complete, Resources adequate, Ability to use or sell, Technical feasibility, Expenditure measurable.
Common mistakes
- Capitalizing internally generated brands. Both US GAAP and IFRS expense them. Trap: assuming a famous brand sits on the balance sheet at $X billion.
- Amortizing goodwill. Goodwill is never amortized under current standards, only impairment-tested. Trap: applying a useful life to goodwill.
- Reversing goodwill impairment. Irreversible under both frameworks. Trap: confusing goodwill with finite-life intangibles where IFRS permits reversal.
Bottom line
- Purchased intangibles capitalize at cost. Internally generated intangibles are expensed under US GAAP. IFRS capitalizes development costs once PIRATE (technical and commercial feasibility) is met.
- Finite-life intangibles amortize and impair. Indefinite-life intangibles and goodwill are impairment-tested only.
- Goodwill is never amortized and its impairment is irreversible under US GAAP and IFRS. Finite-life intangible impairments reverse under IFRS only.
- Financial instrument classification is driven by business model and SPPI: amortized cost (hold to collect), FVOCI (hold and sell), FVPL (everything else and trading).
Exam shortcut
For intangibles: purchased = capitalize, internal = expense, IFRS development = capitalize only after PIRATE. For goodwill: never amortize, never reverse. For financial instruments: SPPI plus business model determines classification, then measurement follows. For liquidity ratios: current includes everything current, quick removes inventory, cash keeps only cash and near-cash equivalents.
The full lesson (about 2,273 words, 15 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- analyzing balance sheets
Browse all free CFA Level I lessons or jump into free CFA Level I practice questions.