For many business owners, the true value of your business extends far beyond the physical assets. Brand reputation, customer relationships, technology and intellectual property often drive performance and profitability – yet these assets can be difficult to quantify and are often overlooked in financial reporting.
In today’s economy, where innovation and customer loyalty are key competitive advantages, understanding how to recognise and manage intangible assets can provide a clearer picture of your business’s worth – and help you make better strategic decisions.
What are intangible assets?
Intangible assets are non-physical, non-monetary assets that deliver economic value or strategic advantage over time. Unlike tangible items such as machinery or property, they don’t take physical form – but they can be among the most valuable assets a business owns.
Common examples include:
- Patents, trademarks and trade secrets
- Customer lists and licences
- Brand recognition and goodwill
- Developed software or proprietary systems
Every successful business is building intangible value every day, through customer experience, innovation, or reputation, but the rules for recognising these assets on the balance sheet are strict. A key question many of my clients ask is: What can actually be capitalised?
The answer depends on whether the intangible asset was acquired or internally generated, as outlined in AASB 138 Intangible Assets – the accounting standard governing recognition, measurement and amortisation.
Acquired intangible assets: Valuing what you buy
When acquiring a business, intangible assets are generally easier to recognise. Because their cost can be reliably measured, assets such as customer contracts, patents or brand names can often be valued and capitalised.
In a typical business purchase, the difference between the purchase price and the fair value of identifiable net assets gives rise to goodwill – itself an intangible asset.
However, we recommend going a step further. As part of any acquisition, have all intangible assets valued and allocated to specific categories. This approach provides a clearer picture of the assets acquired, supports more accurate amortisation and ensures that not everything is simply grouped under goodwill.
Internally generated intangible assets: From idea to recognised value
For assets developed within your business, AASB 138 sets out strict criteria for capitalisation. These activities are divided into two key stages:
- The research phase – This is where ideas are explored and early investigations take place – brainstorming, market testing or experimenting with unproven concepts. Because outcomes are uncertain, research costs must be expensed rather than capitalised.
- The development phase – Once an idea moves into structured, goal-oriented development – such as designing prototypes, refining products, or testing systems – costs can potentially be capitalised, provided your business can demonstrate:
- Technical feasibility of completing the asset
- Intention and ability to use or sell it
- Probable future economic benefits
- Availability of necessary resources
- Reliable measurement of expenditure
If these criteria are met, directly attributable costs such as materials, testing, employee wages, external services and legal fees can be capitalised.
Costs that cannot be capitalised include general overheads, marketing expenses, training costs and any failed development efforts.
Amortisation and ongoing accounting
Once recognised, intangible assets are amortised over their useful lives – usually on a straight-line basis. Assets with indefinite lives, such as goodwill, are subject to annual impairment testing rather than amortisation, to ensure they’re not overstated.
Why this matters for mid-sized businesses
In practice, we often see a significant gap between what a business records on its balance sheet and what a purchaser ultimately pays. That difference often reflects the market’s recognition of intangible value – brand strength, customer loyalty, proprietary know-how and more.
By properly identifying and valuing intangible assets, businesses can:
- Present a more accurate picture of enterprise value
- Strengthen financial reporting and investor confidence
- Ensure compliance with accounting standards
- Unlock new insights into what truly drives performance
Reflecting the real value of your business
As the modern economy becomes increasingly knowledge-based, intangible assets are no longer just accounting footnotes, they’re central to understanding and communicating your business’s value.
By distinguishing between research and development and by capturing eligible costs at the right time, you can ensure your business’s balance sheet reflects not just what you own, but what you’ve built.
If you’d like to explore the real value of your business, your local William Buck Audit advisor can guide you every step of the way.
