PCS 104: Intangible Assets
To establish policies for identifying and recording intangible assets
Government Accounting Standards Board (GASB) Statement No. 51
All intangible assets subject to the provisions of this policy should be classified as capital assets and existing authoritative guidance and other university policies applicable to capital assets, including recognition, measurement, depreciation/amortization, impairment, presentation and disclosure should be applied. This policy is effective June 30, 2010, and is retroactive to July, 1980.
This policy does not apply to (1) assets acquired or created primarily for the purpose of directly obtaining income or profit, (2) assets resulting from capital lease transactions reported by lessees, or (3) goodwill created through the combination of a government and another entity.
An intangible asset possesses all three of the following characteristics:
Examples of intangible assets include computer software, patents, trademarks, copyrights, websites, and right-of-way easements. Intangible assets can be purchased or licensed, acquired through nonexchange transactions (e.g., donations), or internally generated.
Intangible assets are capitalized or expensed depending on their cost. Intangible assets with a total cost greater than $5 million should be capitalized. Intangible assets costing less are expensed.
An intangible asset should be recognized in the statement of net assets only if it is identifiable. An intangible asset is considered identifiable when either of the following conditions is met:
Intangible assets will be depreciated over seven years using the straight line method, unless contractual or other legal rights determine otherwise. The useful life of an intangible asset that arises from contractual or other legal rights should not exceed the period to which the service capacity of the asset is limited by contractual or legal provisions.
Intangible assets that are determined to have an indefinite useful life (e.g., a permanent right-of-way) will not be depreciated. Also, if the value of an intangible assets is inseparable from another asset (e.g., right-of-way and easement), then it will not be depreciated.
Internally generated intangible assets are developed by the university or created by a third party specifically for use by the university. In general, capitalization of internally generated intangible assets is to occur only after all three of the following criteria have been met:
Only costs incurred after meeting the above criteria should be capitalized. Costs incurred prior to meeting the above criteria should be expensed.
An intangible asset purchased “out of the box” from an outside third party could be considered internally generated if more than a minimal incremental effort is expended to put the asset into operation. Outlays must be greater than 30 percent of the original cost of the purchase to be considered to have more than a minimal incremental effort. For example, if the university were to purchase licensed financial accounting software “out of the box” and then modified the software to add special reporting capabilities, the software would be considered internally generated if the cost to add the extra capabilities exceeded 30% of the original purchase price. Only direct costs (such as direct labor or third-party contracts) should be considered when making this determination. Indirect costs or overhead should be excluded.
Internally Generated Software and Websites
In addition to the criteria mentioned above, additional requirements apply to internally developed software and websites. These requirements are grouped according to the following three stages:
In order to capitalize internally generated software and websites, both of the following must also occur:
When determining if an outlay should be capitalized, the nature of the activity and not the timing of its occurrence should be the determining factor. For example, training may begin to take place during the development stage of the project. However, regardless of the timing, the expenses associated with training activities should not be capitalized. Also, data conversion costs should only be capitalized to the extent that they are necessary to make the computer software operational. Otherwise, data conversion costs are expensed.
An intangible asset that is impaired should be reported at the lower of carrying value or fair market value. Impairment is indicated when events or changes in circumstances suggest that the service utility of the capital asset may have significantly and unexpectedly declined. Examples:
Improvements to intangible assets that are already owned or in operation by the university should be capitalized if the modifications result in any of the following:
Also, costs for the improvements must meet/exceed the capitalization threshold. Updates and minor upgrades to software that are often included with a maintenance subscription should be expensed.
Clarification regarding this policy may be obtained by contacting Financial Services, Director, Rene Botiller at 480/965-8371. When a department is acquiring/creating an asset that falls under the guidelines of this policy, Financial Services should be contacted so that they may assist in ensuring that the asset is properly accounted for.
For information on the use of capital object codes, see the Financial Services, Financial References Web page.
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