Intangible assets

Intangible assets are long-lived non-current assets that lack physical form but generate future economic benefit for the business. They sit on the balance sheet at historical cost net of accumulated amortisation for finite-lived intangibles, or at cost subject to annual impairment testing for indefinite-lived ones.

They fall into two broad categories. Intangibles that are internally generated, such as a brand built through decades of marketing or technology developed in-house. And intangibles that are acquired, either purchased individually or identified and measured as part of a business combination.

The asymmetry between these two categories is one of the most significant distortions in financial reporting. Internally generated intangibles are almost entirely expensed as incurred under both US GAAP and IFRS, meaning they never appear on the balance sheet regardless of their economic value. Acquired intangibles are recognised and capitalised at the fair value assigned to them at the acquisition date.

This means a company that builds its brand organically carries no brand asset on its balance sheet while a company that acquires an identical brand in an M&A transaction carries it as a measurable asset. This creates a fundamental incomparability between organic growers and acquisitive ones that makes book value an unreliable measure of intrinsic worth in intangible-heavy industries.

Common categories of acquired intangibles include customer relationships, developed technology, patents, trademarks, trade names, licences, and non-compete agreements. Each is assigned a useful life and amortised accordingly, generating an amortisation charge that flows through the income statement. This charge is frequently added back by management in adjusted earnings presentations on the basis that it is a non-cash charge relating to past acquisitions rather than current operational performance.