The Amortization of Intangible Assets in the United States

According to American accounting principles, the amortization period for most intangible assets is 15 years. However, goodwill amortization is set at 10 years.

In the United States, intangible assets are typically defined as non-physical assets used over multiple fiscal years. These assets often include intellectual property and creations protected by copyright, such as literary, artistic, scientific, and musical works, as well as architectural, cinematic, and photographic works, software, licenses, and royalties.

Challenges in the Valuation and Accounting of Intangible Assets

The proper valuation and accounting of intangible assets can be complex, primarily due to the way these assets are managed. Assigning a value is challenging because of the uncertainty regarding their future benefits. Moreover, the useful life of an intangible asset can be either identifiable or non-identifiable.

Most intangible assets are considered long-term assets, meaning they have a useful life of more than one year. Examples of intellectual property classified as intangible assets include:

• Patents
• Trademarks
• Franchises
• License agreements
• Goodwill
• Copyrights
• Company brand identity

Intangible assets can also include:

• Internet domain names
• Service contracts
• Computer software
• Designs
• Manuscripts
• Joint ventures
• Medical records
• Permits

Brand equity is also considered an intangible asset since a brand’s value is determined by customer perception rather than being a physical asset. In many cases, intangible assets contribute significantly more value to a company’s future potential than tangible assets.

How Intangible Assets Are Recorded on Financial Statements in the U.S.

Intangible assets are listed on a company’s balance sheet only if they:

1. Have been acquired through a purchase,
2. Have an identifiable value,
3. Have a defined useful life and can therefore be amortized.

Internally developed intangible assets do not appear as such on a company’s balance sheet in the U.S. For example, even though Apple’s logo has immense brand recognition value, it does not appear on the company's financial statements. The reason is that the logo was internally developed and does not have a purchase price that can be used to assign it a fair market value, as would be the case if it were acquired through a merger or acquisition.

When intangible assets have an identifiable value and a defined lifespan, they appear on the balance sheet as long-term assets, recorded based on their purchase price and amortization schedule.

For example, if a company spends $10,000 to purchase the right to use another company’s customer list for 10 years, then $1,000 of the purchase price would be expensed each year. The value of the customer list license would appear as an asset on the balance sheet in the third year with a remaining value of $7,000.