A balance sheet shows only what the reporting rules put on it. Intangibles can vanish into expense. Goodwill can sit untouched for a decade. A bond at amortized cost can hide a 30% economic loss. The notes explain the financial reporting choices behind each number, and the ratios you calculate are only as good as those choices.
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. Under IFRS and public-company US GAAP, goodwill is never amortized, 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 not amortized (IFRS and public-company US GAAP) and its impairment is irreversible under both. 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. For solvency ratios, build total debt first (short-term borrowings plus long-term debt, never accounts payable), then divide.
The full lesson (about 3,318 words, 22 min read) adds 8 worked examples, all 8 common mistakes, a self-check, free in the app.
Learning objectives
- analyzing balance sheets
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