- August 26, 2020
- Posted by: saenicsa
- Category: Accounting
In the article “What you need to know about Fixed Assets”, it was mentioned that Fixed Assets are an important part of any business, because we are referring to either property or equipment that generates income and has a useful life for longer than 1 year.
We also mentioned that the types of fixed assets a business has can be divided into 3 categories.
Now, tangible and financial assets are fairly straightforward, but intangible assets are a little more difficult to comprehend and are more complex, so today we are going to discuss a few of the important points.
What are Infinite and Finite Intangible Assets?
In the article mentioned at the beginning, it was stated that intangible assets are assets that are not of a physical nature, so we can see or feel them.
Also, unlike the tangible and financial asset categories, it is important to take note that there exist 2 types of intangible assets, we are referring to those assets that have a:
1) Finite life; or
2) Infinite life.
So, for example, if we are looking for examples of intangible assets that have a finite life, we could mention software licenses, concessions and sport contracts.
Now, what do these all have in common? All of these assets have a date of termination for which the rights to make use of a license, concession or exclusivity will expire, ergo they are limited or finite in their duration.
On the other hand, intangible assets that have an infinite life are very different. There is no set date of depreciation or termination of contract. So, when looking for examples of intangible assets with an infinite life we could mention a brand, logo and even a website.
Why is it important to differentiate one from the other?
The importance in knowing this difference and classifying correctly will have a great impact on your financial statements. What do we mean?
We mean that in the case of intangible assets with a finite life due to their temporary nature the costs of these contracts are amortized instead of depreciated. This means that even though the cost of the asset will be spread out over a period of time, unlike depreciable assets, in the majority of cases it won’t have a resale or salvage value.
Also, in the case of intangible assets with an infinite life, these assets are neither depreciated, nor amortized. Instead these very special types of assets need to expertise of someone familiar with estimating the value of these types of assets. Based on the actuary’s analysis the value of the asset may either increase or decrease, it all depends on the circumstances, data and other information at hand at the time of the evaluation.