In accounting, numbers must be calculated with precision and books must balance. However, not everything works out so nice and tidy. There a some items where an exact amount cannot be taken into account.
Intangibles are assets whose value can occasionally be difficult to nail down. Intangibles are recorded at cost but only when a cost can be assigned to a legal right or transferable form of intangible asset.
Examples of Recorded Intangible Assets
As a result, intangibles are often left unrecorded. Examples of intangibles represented by legal rights are patents, trade marks, franchises, licences, and copyrights. Those things referring to transferable trade secrets are customer lists and product formulas.
Patents are only assigned the costs incurred directly from obtaining the patent or sometimes in defending them. If the patent was purchased, the amount paid is an asset. However, if the patent was required through research, the cost of the research is considered an expense, not the value of the patent.
An Exception: Goodwill
When a business is purchased, the amount paid for it includes the tangible and intangible assets. At times, the price of the business may exceed the estimated value of the tangible assets and the legal or transferable intangibles. The excess is for the other intangibles defined as goodwill.
A business in financial distress will be purchased for less than the value of its tangibles and identified intangibles. Therefore, this business would have negative goodwill.
Goodwill is only recorded at the transference of the business, never otherwise. Goodwill appears on the balance sheet at the time of selling the business.