The importance of classifying assets correctly
When creating financial statements, including your balance sheet, you need to categorise business assets in different ways to meet reporting requirements. Although this type of reporting doesn’t apply to many small businesses, it still is important to know how to categorise your assets, including the difference between tangible and intangible assets.
Definition of intangible assets
As opposed to assets that you can touch – such as property, plant and equipment – these assets do not physically exist. In addition, they are non-monetary, so digital currency and other forms of money do not fall into this category.
The Australian Accounting Standards Board (AASB) is the Commonwealth Government organisation that sets accounting standards in Australia. The AASB has set out criteria for defining intangible assets. This includes how they should be measured and disclosed.
Under AASB 138, intangible assets are:
- Identifiable – the asset must be separable from the business or must result from a legal right or legal document.
- Non-monetary – this means it cannot be valued in dollar terms. For example, it’s difficult to put a price on a trademark if you didn’t purchase if from another business and it’s an internally generated intangible asset.
- Does not have physical substance – it cannot be something you can physically touch and hold.
- Control – having control over an asset means you determine what happens to it. For example, if you have a trademark on a business name, you determine how the name is used and can prevent others from using it.
- Future economic benefit – this can include selling the asset or getting revenue from selling products and services based on the asset, such as selling a product you have patented.
Intangible asset examples include intellectual property (patents, copyrights, trademarks), software, market share, marketing rights, franchises, and customer or supplier relationships.
At the same time, the following internally generated assets are not recognised as intangible assets:
- Publishing titles
- Customer lists
- Any item that’s similar in substance that cannot be distinguished from the cost of developing the business as a whole.
Implications of intangible assets on financial statements
How you recognise your intangible assets influences numbers on your financial statements. If intangible assets are not recognised, it could be necessary to expense them in the current year. This will affect the profit of a business and tax liability. In addition, the way assets are classified will affect the value of a business. Classifying your intangible assets makes it possible to include them on your financial statements and potentially increase the book value of your business.
Consult with an accounting professional to determine what is both compliant and in the best interest of the business owners.