A corporation incurs intangible costs when it purchases a license agreement from another firm. These costs are usually capitalized and amortized over a set period of time. A corporation may incur legal costs for different services that relate to the license agreement. These legal costs are capitalized under certain circumstances because they have to do with an intangible asset, although they are not themselves considered an intangible cost.
Intangible assets are nonphysical assets, such as patents, license agreements, copyrights or proprietary business processes. These types of assets can provide much value to a corporation, such as a well-recognized trade name. Coca-Cola, for example, derives much of its success from the recognition of its brand name. When one company acquires another, it takes ownership of certain intangible assets. Each asset must be recorded on the company's books at its fair market value.
A license gives the holder certain rights to generate income from someone else's creative work or invention. The license protects the holder's proprietary rights. Licensors grant licenses to users, known as licensees, for software, as an example. A company with a well-known brand name can grant a license to clothing manufacturers to use the name on their clothing. Licensing agreements can be difficult to enforce and protect from piracy or infringement. Firms may need to spend money on legal fees to defend their license agreements. These costs should be capitalized, although they are not intangible costs -- they are costs incurred to protect the intangible asset, which is the license agreement.
Certain costs related to intangible assets can be capitalized as they pertain to the intangible asset and its protection or enforcement. The cost of the intangible asset itself is not considered a legal cost, but it must be capitalized. Legal fees that a corporation incurs as a result of defending a license agreement also must be capitalized.
The cost of some intangibles must be amortized over time. Costs are capitalized so the expense can be spread over a period of years, known as amortization. According to Financial Accounting Standards Board Statement No. 142, intangible assets must be amortized over their useful lives if applicable. Some assets, such as brand names, have an indefinite life and are not capitalized or amortized. Other intangible assets, such as license agreements, have a useful life determined in the purchase contract. Items with a defined useful life must be amortized. Amortization works the same way as depreciation -- the asset's value is reduced each year as it is "used up."
Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. She has worked as a financial writer and editor for several online finance and small business publications since 2011, including AZCentral.com's Small Business section, The Balance.com, Chron.com's Small Business section, and LegalBeagle.com. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.