7.11 Intangible Assets
Note: The following section is in accordance with the following GASB Statements:
- No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments, (paragraph 19); and,
- No. 51, Accounting and Financial Reporting for Intangible Assets, and the State Accounting Office Capital Asset Policy, following is the University System of Georgia policy on intangible assets.
7.11.1 Intangible Assets Definition
An intangible asset is an asset that is acquired through purchase, license, and donation, or is internally generated and possesses all of the following characteristics:
- Lack of physical substance
- Nonfinancial nature
Initial useful life extending beyond a single reporting period
Note: The following intangibles are outside of the scope of GASB Statement 51:
- Those acquired or created primarily for obtaining income or profit.
- Those resulting from capital lease transactions of lessees (refer to National Council on Governmental Accounting (NCGA) - Statement 5).
- Goodwill created through the combination of a government and another entity.
GASB Statement No. 51 requires retroactive reporting for intangible assets except for those considered to have indefinite lives as of the effective date, and those that would be considered internally generated. Restatement of prior periods presented is required if practical. If restatement of prior periods is not practical, the cumulative effect of applying the statement, if any should be reported. If determining the actual historical cost of intangible assets is not practical because of insufficient records, then institutions should report the estimated historical cost for intangible assets acquired in fiscal years ending after June 30, 1980.
Pursuant to GASB Statement No. 34, governments categorized as Phase 1 or Phase 2 are subject to retroactive restatement for assets acquired after 6/30/1980. Internally-generated computer software is subject to prospective reporting. For Phase 3 governments, restatement is recommended, but is not required.
|Government||Total Annual Revenue
(excluding extraordinary items)
|Phase One||Annual Revenue >= $100 million||Required|
|Phase Two||Annual Revenue >$10 million up to $100 million||Required|
|Phase Three||Annual Revenue||Optional|
7.11.2 Internally Generated Computer Software
Internally Generated Computer Software (IGCS) is the most common type of intangible asset that is internally generated. Computer software is considered internally generated if it is developed in-house or by a third party contractor on the USG’s behalf.
Note: Commercially available software that is purchased or licensed but is modified using more than minimal effort is also considered internally generated.
Payments incurred for generating software should be capitalized only if all three of the following criteria are met:
Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the software upon the completion of the project.
Demonstration of the technical or technological feasibility for completing the project so that the software will provide its expected service capacity.
Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear project, continue development of the software.
In addition, both of the following must also occur:
The activities in the preliminary project stage are completed; and,
Management implicitly or explicitly authorizes and commits to funding the software project, at least currently in the case of a multiyear project.
7.11.3 Capitalization Threshold
Intangible assets are recorded using the basis of accounting that is appropriate for the fund. Items are capitalized on the accrual basis of accounting in the institution’s accounting records if it meets all of the following conditions:
- It is owned by the institution and held for operations, not for resale.
- It has a useful life that exceeds one (1) year.
- It meets the appropriate capitalization threshold, as shown below:
Intangible Asset Description and Capitalization Thresholds
|Asset Description||Cost Threshold||Useful Lives|
|Software||$1 Million||10 years|
|Water Rights||$100,000||20 years|
|Timber Rights||$100,000||20 years|
|Mineral Rights||$100,000||20 years|
Note: See OMB Circulars A-21 (Educational Institutions), A-87 (State and Local Governments), or A-122 (Non-profit Organizations) for the capitalization thresholds. Capital projects funded with federal dollars may be subject to lower thresholds as defined by the applicable circular.
IGCS Capitalization Guidelines
Preliminary computer software project stage - (Expense as incurred)
- Conceptual formulation and evaluation of alternatives
- Determination of existence of needed technology
- Final selection of alternatives
Application development stage (Capitalize)
- Installation of Hardware
- Testing, including parallel
- Data Conversion, if necessary to make operational
Post-implementation/operations stage (Expense as incurred)
- Application training
- Software maintenance
- Data conversion, if necessary to make operational
Modifications of software that is already in operation can be capitalized only under certain conditions. The modification must result in any of the following:
- An increase in the functionality of the software; or,
- An increase in the efficiency of the software; or,
- An extension of the estimated useful life of the software.
Note: If an institution determines that a shorter useful life is appropriate for software, then the method for estimating the useful life must be formally documented.
Amortization is the accounting process of allocating the intangible asset’s capitalized costs to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Amortization is not a matter of valuation, but a means of cost allocation. Intangible assets are not amortized on the basis of a decline in their fair market value, but on the basis of systematic charges to expense.
An intangible asset that has an indefinite useful life is not amortized if there are no legal, contractual, regulatory, technological, or other factors that limit its useful life. If an institution recognized and amortized any intangible assets with indefinite useful lives prior to adopting GASB Statement No. 51, it must restate its beginning balance to eliminate the prior period expense and reduce the related accumulated amortization
Intangible assets are amortized over the estimated useful life using the straight line method of amortization. Refer to Section 7.15.3 for a more comprehensive list.
|Description||Gross Asset Account||Accumulated Amortization Account||Non-Capitalize Account||Capitalize Account|
The provisions of GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, generally should be applied to determine impairment of intangible assets. A common indicator of impairment for internally generated intangible assets is development stoppage, such as stoppage of development of computer software due to a change in the priorities of management. Internally generated intangible assets impaired from development stoppage should be reported at the lower of carrying value or fair value. GASB Statement No. 51 adds “development stoppage” to the impairment indicators of GASB Statement No. 42.
COMPUTER SOFTWARE. The ownership or right to use computer programs that control the functioning of computer hardware and other devices. Computer software comprises both operating systems and applications programs. Computer software is the most common type of intangible asset that is internally generated. Computer software is considered internally generated if it is developed in-house or by a third party contractor of the institution’s behalf. Commercially available software that is purchased or licensed but is modified using more than minimal effort is also considered internally generated. Websites are considered intangible assets, and they may also be internally generated.
COPYRIGHT. A form of protection provided to the authors of “original works of authorship” including literary, dramatic, musical, artistic, and certain other intellectual works, both published and unpublished. Copyrights are registered by the Copyright Office of the Library of Congress.
EASEMENT RIGHT OF WAY. The right to use the land of another party for a particular purpose.
INTANGIBLE ASSET. An asset that lacks physical substance, is non-financial in nature, and has an initial useful life extending beyond one (1) year. Intangible assets are either acquired through purchase, license, or donation; or internally generated within the institution or agency. Common types of intangible assets include:
- Right-of-way easements
- Other types of easements
- Patents, copyrights, and trademarks
- Land use rights
- Licenses and permits
- Computer software
- Purchased or licensed; or,
- Internally generated
MINERAL RIGHTS. The right to draw minerals from a particular source, such as a lake or stream.
PATENT. The right to exclude others from making, using, offering for sale, selling or importing an invention. Patents are issued by the U. S. Patent and Trademark Office.
TIMBER RIGHTS. The right to cut and remove trees from the property of another party.
TRADEMARK. A word, name, symbol, or device that is used in trade with goods to indicate the source of the goods and to distinguish them from the goods of others. Trademarks used in interstate or foreign commerce may be registered with the U. S. Patent and Trademark Office.
USEFUL LIFE. The period during which an asset is expected to provide service to the institution. If the life is defined by contractual or legal rights, the period should not exceed the expected service period. Renewal periods may be considered in setting the useful life, if there is evidence that the institution will request and obtain renewals at nominal cost.
WATER RIGHTS. The right to draw water from a particular source, such as a lake, irrigation canal, or stream.