Accounting Treatment of Intangible Assets

A. Overview

1. Lacking physical substance. Being contained in/on an item having physical substance does not give an intangible asset physical substance, as in the case of computer software (an intangible asset) contained on a compact disc.
2. Non-financial in nature (not in monetary form or representing a claim to assets in a monetary form similar to receivables).
3. Having a useful life of more than one year (beyond a single reporting period).

Examples of intangible assets include easements; land rights (water, mineral and timber rights); computer software; and patents, copyrights and trademarks if acquired for the purpose of enhancing the quality of University of Texas at San Antonio (UTSA) operating services. For more information see Patents, Copyrights and Trademarks (Intellectual Property).

1. Capitalization

Subject to the thresholds below, intangible assets are capitalized as follows:

1. Purchased — Acquisition cost plus costs necessary to obtain and/or put the asset into service.
2. Licensed — The amount of the license fee if the license is for more than one year. See Internally-Generated Computer Software for detailed guidance on internally-generated software.
3. Acquired through non-exchange transaction — Estimated fair value at the time of acquisition plus ancillary charges, if any.
4. Internally generated — Intangible assets are considered internally generated if they are:
   • Produced by UTSA; or
   • Acquired from a third party, but they require more than minimal incremental effort to achieve the expected level of service.

NOTE: This category could include assets such as patents, copyrights, trademarks, and computer software.

1. Determination of the specific objective of the project and the nature of the expected service capacity of the asset;
2. Demonstration of the technical or technological feasibility for completing the project; and
3. Demonstration of the current intention, ability, or presence of effort to complete or continue development of the intangible asset (budget commitment for funding, reference to the project in strategic planning documents, etc.).

For guidance on capitalization of specific costs associated with internally-generated software see Internally-Generated Computer Software.

The following capitalization thresholds apply to intangible assets:

2. Reporting Requirements

gasb.No51 requires that intangible assets be classified and reported as capital assets, and as such they are subject to existing accounting and reporting requirements for capital assets in addition to the provisions of this guideline. For more information on accounting and reporting for capital assets see fmog.0501.utsa.

No additional financial statement disclosures are required for intangible assets other than those required for capital assets. For more information see gasb.No34.

An intangible asset is recognized in the Statement of Net Position if it is identifiable (i.e., one of the following conditions is met):

• It is separable (can be separated or divided from UTSA and sold, transferred, licensed, rented, or exchanged); or

• It is the result of contractual or other legal rights (regardless of whether the rights are transferable or separable from UTSA or from other rights/obligations).

3. GASB 51 Exclusions

1. Assets acquired for the primary purpose of obtaining income or profit, such as copyrights for which the primary purpose is royalty income, or mineral rights acquired for the primary purpose of obtaining income (follow authoritative guidance for investments).
2. Assets resulting from capital lease transactions reported by lessees (accounted for as required by National Council of Governmental Accounting Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments, as amended).
3. Goodwill created jointly by UTSA and another entity (accounting and reporting for combination transactions extends beyond issues related to intangible assets).

B. Internally-Generated Computer Software

Computer software is considered internally generated if it is developed in-house by UTSA or by a third-party contractor on behalf of UTSA, or if it is purchased or licensed by UTSA and modified using more than minimal incremental effort before being put into operation.

This guideline does not address specific procedures for establishing projects, monitoring activity, or project closure. For information on these topics see fmog.0501.utsa, fmog.5.16.1.utsa, and fmog.5.16.2.utsa.

Project-related costs for internally-generated software are addressed below in the context of project development stages (hardware costs, if any, are recorded and capitalized separately in accordance with Texas State Property Accounting system requirements).

Costs incurred during the Application Development stage are generally capitalized, and costs during the other stages are expensed. However, project development stages do not necessarily occur in sequence, and therefore capitalization is based on the nature rather than the timing of an activity. Accordingly, costs related to Preliminary and Post Implementation/Operation activities are expensed regardless of when they are incurred.

1. Preliminary Project Costs

Conceptual formulation and evaluation of alternatives, determination of existence of needed technology and final selection of alternatives. These costs are expensed.

2. Application Development Costs

Costs of designing the chosen path, including software configuration and interfaces, coding, installation to hardware and testing are capitalized if the total project cost exceeds $1 million. Application Development costs should be capitalized when both of the following have occurred:

• Preliminary Project activities are completed; and
• Management authorizes and commits to funding (at least currently for a multi-year project) the software project.

For purchased/licensed software that will be modified to the extent that it is considered internally generated, both of these events are considered to have occurred when UTSA commits to purchasing or licensing the software.

1. Purchase of software: Capitalize if more than $100,000 regardless of whether the total project cost exceeds $1 million (annual software license fees are expensed).
2. Non-salary expenditures: Includes but is not limited to project management consultants (including consultant travel), travel by UTSA staff to other UT institutions related to software configuration, interfacing, and coding. Data conversion is considered an Application Development activity only to the extent that it is necessary to make the software operational (otherwise it is a Post-Implementation/Operation expense). Training of staff who work on the project does not directly contribute to the development of the software and is therefore expensed.
3. Salaries: Salaries of staff dedicated 100% to the implementation team during the Application Development stage, if material, are capitalized.
4. Capitalization at project completion: Eligible project costs are capitalized to Construction in Progress periodically during the project, and at substantial completion of the project, all capitalizable expenditures are reclassified as Intangible Assets in the Investment in Plant Fund and amortized in accordance with UTS142.13 (see " Amortization" ). For more information on capitalization at project completion see fmog.5.16.1.utsa.

3. Post-implementation/Operation Costs

Includes application training, software training tools, hardware maintenance, data conversion (unless necessary to make the software operational), and ongoing operations. These costs are expensed.

C. Internally-Generated Modification of Computer Software Already in Operation

Internally-generated modification costs for computer software that is already in operation are capitalized if Preliminary Project activities are completed, management authorizes and commits to funding the project (see Application Development Costs), and the modification results in any of the following:

• Increase in functionality (the software is able to perform tasks that it was previously incapable of performing)
• Increase in efficiency (increase in the level of service provided without the ability to perform additional tasks); or
• Extension of estimated useful life.

Modifications that do not result in any of these outcomes are considered maintenance and should be expensed as incurred.

D. Patents, Copyrights and Trademarks (Intellectual Property)

Most UTSA copyrights and patents are the by-products of research conducted to expand the general knowledge of science, and most trademarks are developed to brand the institution, rather than to improve UTSA services or obtain income. In such cases the patent, copyright or trademark does not qualify as an intangible asset or an investment. In the absence of GASB guidance to the contrary, UTSA expenses these items in accordance with UTS142.13 and fasb.No2, which requires that research and development costs be expensed as incurred.

For patents, copyrights and trademarks that are acquired or developed for the primary purpose of obtaining income or profit, or to improve the quality of services, gasb.No51 states:

• Acquired or developed for the primary purpose of obtaining income or profit: Should be treated as investments rather than intangible assets (see GASB 51 Exclusions). While the statement does not specifically address patents or trademarks in this context, UTS 142.13 applies the concept to these items. Accordingly, in compliance with UTS 142.13, UTSA classifies intellectual property acquired or developed for the primary purpose of obtaining income or profit as an investment.
• Acquired or developed to improve the quality of services: Example 2, Appendix C involves a patent developed by a university. The Statement concludes that the internally-generated patent developed for the purpose of improving the quality of services provided by the university should be capitalized as an intangible asset. Although the example does not specifically mention copyrights and trademarks, UTS 142.13 applies this concept to copyrights, trademarks and other intellectual property as well. In compliance with UTS 142.13, UTSA considers intellectual property as an intangible asset if it meets the intangible asset criteria in this guideline, and it is purchased or developed with the specific purpose of improving the quality of services provided by UTSA.

E. Amortization

An intangible asset is amortized over the estimated useful life of the asset (the useful life may be limited by contractual, legal or regulatory provisions, as well as technological and other considerations). Replacements of ERP systems are amortized over 72 months, and other software is amortized over 60 months unless a more accurate estimate is available.

If there are no legal, contractual, regulatory, technological, or other factors that limit the useful life of an intangible asset, the asset is considered to have an indefinite useful life, and is therefore not amortized. An example of an intangible asset with an indefinite life would be a permanent right-of-way easement.

F. Impairment

The requirements of gasb.No42 are applicable to intangible assets. GASB 42 defines asset impairment as a significant, unexpected decline in the service utility of a capital asset. Indicators of possible intangible asset impairment include:

• Enactment of laws or regulations or other environmental changes;
• Technology changes or evidence of obsolescence;
• A change in the manner or duration of the use of the asset; or
• Stoppage of development.

If it is determined that an intangible asset has been impaired, the impairment should be measured, recorded, and disclosed. An example of impairment of an intangible asset would be stoppage of a computer software development project. For more information on impairment of capital assets see Texas Comptroller of Public Accounts.