Intangible assets:  Definition and examples

Intangible assets have a high financial value. Despite the benefits they yield, most people fail to understand their significance. As a result, there are negative effects on enterprises and their constituent entities.

Intangible assets are non-monetary assets with no physical substance, which can provide future economic benefits to the owner. 

Intangible resources are “considered assets when acquired individually through a business acquisition or internally generated, which must not be considered as such if they result of subjective appreciations of productive quality of itself”.

Examples of intangible assets include: 

• Customers, distributors, mail, advertising subscriber lists, etc.; 
• Customer data bases;
• Client sales routes, delivery systems, and distribution channels; 
• Customer service capacity and product service support;
• Brands, patents, rights and trademarks, and franchises;
• Agreements (consultancy, sales, licenses, royalty rights);
• Commitments (no competition);
• Usufruct;Computing systems;
• Trained personnel, technical experience, quality systems; and
• Growth expectations, ideas flow, and businesses.

Mexico’s historic background in “differed expenses”

The background of Mexico’s fiscal acknowledgement, known as Differed Expenses, goes back to 2005 when the Mexican fiscal authority adopted a proposal to modify the definition of “differed expenses”. Intangible assets are included under the new definition, which allows the contributor the enjoyment of a good for a limited period of time shorter than the duration of the activity of company. This is because of the relationship between obtaining income from the intangible asset in addition to any expenses it generates, which nowadays happens with the deduction of any investment of fixed assets. In other words, differed expenses are considered to be intangible assets. This allows for the use of goods, so the definition scope includes usufruct cases, which must be considered as investments. 

Internal Revenue tax law

Under Mexico’s internal revenue tax law, fixed assets are considered as investments, with differed expenses, charges, and payments made in pre-operative periods according to the following principles: 

Differed expenses are intangible assets considered as goods or rights that reduce operation costs, improve the quality or acceptance of a product, and usage or exploitation of a Good through a limited period shorter than the duration of the activity of the company. 

Article 16 of Mexico’s internal revenue tax law states that the business based in Mexico, including participation associations, will accumulate the total amount of the income in cash and in goods.

According to Article 16, the following are not considered as income obtained by the contributor:

• An increase of capital;
• Payment by the loss by stockholders;
• Premiums obtained by setting stocks emitted by the society itself; or
• By using the participation method, the assessment of stocks, or re-evaluation of the entity’s assets and capital.

Benefits of assessment 

There are certain benefits from the assessment of intangibles. For example, a company’s social capital is normally the one in their constitution which is MXN 50,000. However, this value does not reflect the real, liquid value of the company, as it includes the enhanced value from the company’s intangibles which may substantially increase the market value of the business. Calculating an accurate estimate of the value of intangibles is critical to determining a company’s worth.

With social capital, the company can: 

1. Request credit. 
2.  Refuse to take part in bids. 
3.  Sell stock. 
4.  Make capital reimbursements. 
5.  Quote in the Stock Exchange.

Intangible assets can be classified according to their form of incorporation in the financial statements, including acquired intangibles and internally formed intangibles. Intangible assets have tax benefits, as they can be used to reduce a company’s tax base for income tax purposes. According to article 32 of the Income Tax Law (LISR), fixed assets (tangible) as well as intangible assets are considered investments.

If there is a higher level assessment, for example MXN 550,000, the company registers it in its differed assets and in its social capital, and is able to receive the following financial, legal, and fiscal benefits: 

1. A greater differed asset for MXN 500 million.
2. Greater social capital for MXN 500 million.
3. The ability to take part in bids.
4. The ability to request credit.
5. The ability to sell the business and sell stocks.
6. The ability to quote in the stock market.

Norms of international financial information

The aim of Financial Information Norm C-8 (NIF C-8) is to establish assessment, presentation, and disclosure criteria for intangible assets acquired individually, or generated internally, in the normal course of operations. 

The aim of the International Accounting Norm (NIC 38) Intangible Assets is to prescribe the accounting treatment of intangible assets not specifically considered in another international accounting norm. This norm demands that companies recognise an intangible asset only if certain criteria are complied with. The norm also specifies how to determine in the books the value of intangible assets, and requires that certain complementary information is disclosed in the notes of the financial statements referring to these elements.

Conclusion

It is urgent that companies recognise their intangible assets so they can present more solid financial statements. Using this register, they increase their assets and consequently their social capital. This will form the basis for access to credit, improvement of their relationship with clients and suppliers, access to public and private bids, and the selling of enterprises, among others.

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Dr Jorge Marcos García Landa is the founder and partner of Corporativo Garcia Landa, S. C.