Intangible assets: how they are amortized and when they become impaired

Intangible assets: how they are amortized and when they become impaired

A software license bought for 24,000,000 in January is not a January expense, and a trademark registered for 8,000,000 is never "spent", even when it is worth far less years later. An intangible does not get consumed the way diesel in a truck does: it runs out when the right expires or when the market stops paying for it. Anyone who confuses the two ends up with an inflated asset on the balance sheet and an expense that lands all at once, in the worst possible month.

Here is the full criteria: when a payment is recognized as an intangible, how it is spread when its life can be measured, what to do when it cannot, how to prove it is still worth what the balance sheet says, and what happens the day it is sold or written off.

What an intangible is and what it is not

It is a non-monetary asset, identifiable and without physical substance. All three conditions matter, and each one fails on its own.

Non-monetary: it is not money, nor a right to receive a fixed amount of money. A receivable is an asset, but not an intangible. Identifiable: it can be separated from the business and sold, leased or licensed on its own, or it arises from a contractual or legal right. A patent can be assigned; the customer base built over ten years of good service cannot, because it does not separate from the business. Without physical substance: that is what separates it from property, plant and equipment. A server is tangible even when it only holds software; the right to use that software is intangible.

That rules out the ones that are almost never capitalized: a brand built with the company's own advertising, a customer list compiled in-house, goodwill, a trained team. None of them meets the conditions on its own. Purchased goodwill is the separate case: when a business is bought for more than the sum of its identifiable assets and liabilities, that excess is not separable. It is the price paid for what could not be put on a list, and it has rules of its own.

Recognizing it as an asset: identifiable cost and future benefit

Three things are needed at once: probable future economic benefits, a cost that can be measured reliably, and control of the resource. If one is missing, it goes to expense for the period. There is no exception for "but it was expensive".

Cost includes the price, duties, non-recoverable taxes and outlays directly attributable to getting the asset ready for use: trademark registration fees, translations, commissioning tests. It does not include advertising, training or administrative expenses.

Colombian VAT deserves its own line, because that is where most mistakes happen. If the VAT is deductible it is not part of cost: it goes to deductible taxes and the intangible stays at the net amount. If it is not deductible, it is added to the asset and amortized with it. Putting deductible VAT inside the asset inflates amortization and throws the tax return out of balance.

One practical test settles half the doubts: what happens if the company stops paying? If failing to pay means losing the right of use, there is no asset: there is a service or a prepayment. A renewable annual license, hosting, or a monthly subscription to a cloud platform are not intangibles: they are expenses for the period, or a prepayment if paid in advance.

Finite useful life: how it is amortized

When the right has a term, amortization spreads the cost over that term. The base is cost less residual value, and residual value is assumed to be zero unless there is a real commitment to sell at the end: nobody buys an expired license.

The default method is straight line, the same amount every month. Another method is justified only if it better reflects how the benefit is consumed, for example a license that is used up by transactions. Without a clear pattern, straight line is the most defensible and the easiest to audit.

Amortization starts when the asset is available for use, not when the contract was signed or when the last installment was paid. A development finished in March that went live in May starts in May.

And useful life is not permanent: it is reviewed at least at each year end. If it changes because of faster obsolescence, a contract extension or the arrival of a substitute, the effect is applied going forward, on the carrying amount that remains. The past is not restated.

Indefinite life: why it is not amortized and what replaces that

Some rights have no foreseeable time limit because they renew themselves and the company intends and is able to renew them. A trademark renewed every ten years, with a renewal cost that is minimal against the benefit, is the classic case. There is no amortization, because there is no term to spread.

But not being amortized does not mean not being reviewed: the burden of proof shifts to impairment. Every year the company must show that the asset is still worth what the balance sheet says, and also whenever an indicator appears — falling sales in the line, a competitor taking the market, a regulatory change.

If the company loses the ability to renew, a legal term appears, or the market for that right closes, the asset must be amortized over its remaining life. The change is prospective.

Goodwill has a nuance that confuses many accountants in Colombia. Under full IFRS it is not amortized: it is tested every year and its loss is never reversed. Under IFRS for SMEs it is amortized over its useful life and, if that cannot be estimated, over the maximum period the standard sets. Confirm which framework your company reports under before deciding.

Software, licenses, trademarks, patents and goodwill

Treatment does not depend on price or prestige, but on whether the life can be measured and whether the right was purchased or generated in-house.

Improvements and in-house development: when to capitalize

An internal project is where the standard gets stretched the most. The rule is easy to state and hard to apply: research goes to expense, development can be capitalized.

Research is the search aimed at obtaining new knowledge, without certainty of commercial application. Development is applying that knowledge to a concrete plan, before production or use. The boundary is not perfect and it has to be documented: without paperwork the figure does not hold up.

Capitalizing development requires six conditions: technical feasibility of completing the project, intention and ability to use or sell it, probability of future benefits — an own market or demonstrable internal use —, available technical and financial resources, and a cost that can be measured reliably. If two fail, the whole project goes to expense. Only the cost from the point the conditions are met is capitalized, not what was spent before: earlier spending stays in expense and is not "recovered" by capitalizing more.

Two warnings that repeat. First: implementing a management system — configuration, data migration, training — is almost never capitalized; what is capitalized is in-house functionality that did not exist before. Second: if the project is abandoned, the balance is written off in the period the decision is made, instead of aging on the balance sheet.

Impairment: the test and the loss entry

An intangible can lose value without anyone selling it and without its term running out. The standard does not wait: it requires an annual test for indefinite-life assets and for those not yet in use, and a test whenever there are indicators for all the rest.

External indicators are market ones: a drop in the asset's value, technological or legal changes, higher rates. Internal ones are operational: obsolescence, performance below plan, restructuring, losses in the line the asset serves.

The test compares two numbers. The carrying amount: cost less accumulated amortization less prior impairment. And the recoverable amount: the higher of what would be obtained by selling it net of disposal costs, and what it will produce in use, meaning its future cash flows discounted to present value. If the recoverable amount is lower, the difference is the loss.

The steps, in order: identify the asset or the cash-generating unit it belongs to; estimate the recoverable amount; compare it with the carrying amount; recognize the loss in profit or loss; and recalculate future amortization on the new base. That last step is the one that throws the next year out of balance.

One surprising rule: the loss on a finite-life intangible can be reversed if the recoverable amount rises again, within two limits. It is not reversed above what the carrying amount would have been without the impairment, and the reversal also goes to profit or loss for the period. Goodwill is never reversed.

The full example, with the numbers on the table

A company buys a license in January for 24,000,000, with a useful life of 48 months, no residual value and no sales commitment.

Monthly charge: 24,000,000 ÷ 48 = 500,000. At 18 months, accumulated amortization is 500,000 × 18 = 9,000,000 and the carrying amount is 24,000,000 − 9,000,000 = 15,000,000.

At that point the company switches platforms and the license stops receiving support. The recoverable amount is estimated at 11,000,000. Since the carrying amount is 15,000,000, there is an impairment loss of 15,000,000 − 11,000,000 = 4,000,000. It is recognized in profit or loss and the asset stays at 11,000,000.

Thirty months remain. Amortization is recalculated on the new base: 11,000,000 ÷ 30 = 366,667 per month, not 500,000. The multiplication is not exact — 366,667 × 30 = 11,000,010 — because the charge was rounded to the peso; the ten-peso adjustment goes in the last installment and the asset ends at zero.

The trademark bought for 8,000,000 has an indefinite life: no amortization. If the annual test puts the recoverable amount at 6,000,000, an impairment of 2,000,000 is recognized. If the following year conditions improve and the recoverable amount rises to 7,500,000, 1,500,000 is reversed — up to the limit of the original amount — and it returns to 7,500,000.

Check at month 30: 11,000,000 − (366,667 × 12) = 6,599,996, rounded to 6,600,000. If the asset stops being used there, that balance goes entirely to expense.

What happens when the intangible is sold or written off

An intangible leaves the balance sheet in two ways: it is sold, or it stops generating benefits. In both cases what is received is compared with what was left on the books, and the difference goes to profit or loss.

On a sale: if the trademark from the example is sold for 9,000,000 when its carrying amount is 7,500,000, the gain is 1,500,000; if it is sold for 5,000,000, the loss is 2,500,000. There is no "sales revenue" recorded with the cost left aside: the asset and its accumulated amortization are derecognized and the net result is recognized.

On a write-off for obsolescence there is no income: the balance is recognized as expense in the period the asset is judged useless. Leaving it on the books "because it was expensive" inflates the asset and makes the company pay tax on a profit that does not exist.

A write-off does not remove the duty to keep the support: contract, invoice, registration and the minutes of the decision prove the asset existed. If it is also contributed to another company, a valuation is involved: that is checked before signing.

What the DIAN looks at and how it differs from accounting

Accounting and the income tax return do not follow the same rules, and the fiscal reconciliation is born there. An intangible may be amortized over four years for the balance sheet and over another term for tax, or have no tax cost at all.

The mechanism: tax law accepts as a deduction the amortization of the investment in intangibles within certain limits, generally the shorter of the term of the right and its useful life, with its own rules for purchased goodwill. And an internally generated intangible usually has no tax cost even when accounting has assigned it a value, because there was no demonstrable purchase.

Two consequences. Every difference between accounting and tax amortization is reconciled in the return, and that reconciliation must be documented. And when the intangible is bought from a related party abroad, transfer pricing and withholding tax on royalties and licenses come into play, with caps that change: check the value in force for the year before signing.

Common mistakes

These five show up in almost every review: symptom on the balance sheet, consequence in the pocket.

A sixth mistake does not fit in the table because it is judgement, not bookkeeping: changing the useful life to "balance" the year's result. Without written technical support, that is manipulation, not estimation.

An honest close before you decide

An intangible looks like a fixed asset in how it is recorded and differs in something more fragile: its value cannot be seen or counted. A license is only worth what the business does with it, and that changes with a vendor decision, a new rule or a competitor that appears. That is why the impairment test is not paperwork: it is the only defense the balance sheet has.

Three limits. If your company reports under IFRS for SMEs, several answers change, especially on goodwill. If the intangible is small against total assets, a sophisticated test may not be worth the effort, but the annual test for indefinite-life assets is not negotiable. And if it came from a purchase between related parties, the conversation with your accountant and statutory auditor comes first: accounting, tax and transfer pricing all meet there.

None of this replaces the accountant who signs: the judgement on useful life and on the cash flows behind the recoverable amount belongs to them and to management. What does help is keeping an inventory of intangibles with start date, term, monthly charge and last test. In Kardex Tauro that control is kept alongside the rest of the assets, so impairment and write-offs do not arrive as a December surprise.

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