Amortization of Intangible Assets: Definition & Examples

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  • 0:03 Intangible vs. Tangible Assets
  • 1:40 Intangible Asset Valuation
  • 2:44 Amortizing the Copyrights
  • 3:41 Patents
  • 4:36 Goodwill
  • 5:21 Lesson Summary
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Lesson Transcript
Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

Intangible assets cannot be seen or touched. In this lesson, we'll learn how to place a valuation on intangible assets and spread that valuation over their useful lives.

Intangible vs. Tangible Assets

The Lunatic Fringe are a smoking hot rock band. They have written plenty of music, even though some people have called it other things. The band is concerned about having control over how their music is used and played. How can they protect themselves from another band stealing their songs?

Most of us are familiar with tangible assets: they're things you can see and touch. When the Lunatics' business manager Mitch bought a van to transport them to gigs, he purchased a tangible asset. His accountant recorded it on his books for the purchase price, and spread the price over the van's useful life by depreciating it. The van is getting a lot of wear and tear, so he is glad she used an accelerated method to depreciate it quickly!

Now, back to the band's problem. Mitch decides it's time for the Fringe to start copyrighting their music. A copyright is the right for a person or group, like Lunatic Fringe, to own the exclusive rights over their original work. A copyright would allow them to get an injunction in court against any other band that plays their copyrighted music. The copyright itself has value, especially if the copyrighted song becomes popular and can be used to generate income. It is an asset, but it isn't like the van since you can't see it or touch it. Assets that can't be seen or touched are called intangible assets. Intangible assets aren't depreciated, though; they are amortized, which is basically the same thing. Amortization expenses the cost of the intangible asset over its expected useful life.

Intangible Asset Valuation

So how much of a copyright's value should be amortized each year? Well, before we get to that part, we need to decide what a copyright is worth. Intangible assets are valued in two ways. One way is the fair value of the asset. Fair value is best determined by what someone would pay for it, or its market price. The other is by estimating its future benefits to whomever owns it. Discounted cash flows can be used to estimate that.

Mitch decides the best thing once the Lunatics have copyrighted some of their most popular songs is to sell them to a music company or label. The music company will market the songs to radio stations and streaming services and pay the Fringe royalties when the music gets airplay. Mitch is able to get $10,000 from the music company to purchase the copyrights to ten of the songs he takes to them. The music company will record these copyrights as intangible assets for their fair value of $10,000. The Lunatics will be acting like lunatics when they hear of this offer!

Amortizing the Copyrights

So, back to our question of how the music company will amortize the copyrights. With tangible assets like the van, we depreciate them over their expected useful life. Copyrights, though, are good for the life of their creator, plus 70 years. The Lunatics' copyrights could be good for over 100 years! The music company that purchased them, though, will consider the copyrights to have an indeterminate useful life since they will not expire for a very long time. Intangible assets with an indefinite useful life are not amortized, but they must be examined each year for impairment.

When a copyright's value on the books exceeds its fair value, it is considered impaired and must be written down to its current value. Two of the purchased copyrighted songs have had little action in the way of airplay or interest from streaming services. The music company will write down their value from $1,000 to $100 at the end of the year.

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