Intangible asset

An intangible asset is an item of property without physical substance that the business controls and from which it expects future economic benefits. It encompasses intellectual property rights such as patents, trade marks, designs and rights in software, but also assets that the law does not protect by a title, such as know-how, data, customer base or reputation. In accounting, the concept is governed by the French General Chart of Accounts (plan comptable général) and, for consolidated accounts prepared under international standards, by IAS 38.

Recognition in the accounts

An intangible item is recognised as an asset on the balance sheet only if it is identifiable, that is to say separable from the business or arising from contractual or legal rights, if it is controlled by the business and if its cost can be measured reliably. Rights acquired from a third party are recorded at their acquisition cost. Internally generated rights are subject to a stricter regime: research expenditure is expensed, and development expenditure may be capitalised only under strict conditions of feasibility and profitability. International standards also prohibit the recognition of internally generated trade marks and customer lists, so that a significant part of intangible capital remains off the balance sheet. Assets with a finite useful life, such as patents, are subject to amortisation, whereas trade marks, which are indefinitely renewable, are instead tested for impairment.

The legal value of the asset

The value of an intangible asset depends directly on the strength of the right that protects it. A patent exposed to an invalidity action, a trade mark threatened with revocation for lack of genuine use or know-how without reasonable protection measures lose part, or even all, of their value. Title must be established without any break in the chain, which requires checking employment contracts, copyright assignments, research agreements and register entries. The valuation of an intangible asset is therefore inseparable from a legal analysis of its scope, its remaining term and its enforceability against third parties.

Putting the asset to use

An intangible asset may be assigned, licensed, contributed to a company, pledged or used as the basis for financing. In acquisitions, the allocation of the purchase price to identified intangible assets and the due diligence on those assets shape the structure of the transaction and the extent of the warranties given by the seller. For tax purposes, income derived from certain industrial property assets may benefit from a reduced tax regime.

Key points

An intangible asset is any intangible value controlled by the business, whether or not it is protected by an intellectual property title. It is only partly reflected in the accounts, since a large share of internally generated assets does not appear on the balance sheet. Its real value depends on the quality of its legal protection. These assets should be inventoried regularly, their ownership secured and those not yet protected brought under protection, through titles or confidentiality measures.

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This glossary entry is general in scope and does not constitute legal advice.

Dhenne Avocats is a patent litigation firm. Matters outside that field, such as trade marks, designs, copyright and IT contracts, are handled by practitioners the firm works with regularly, and by the firm itself when they arise in a patent dispute.

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