Depreciating intangible assets makes balancing the accounting books somewhat complicated. While tangible assets consist of known costs and values, intangible assets encompass many variables. Many corporations rely upon tax professionals to help them navigate through the confusion intangible assets cause. While the value of an asset can change drastically from one year to the next, the depreciation remains constant.
Assets fall into two categories: tangible and intangible. Tangible assets are material assets, such as a house, a car and business equipment. Intangible assets have no physical substance, making them harder to determine value. Examples of intangible assets include intellectual properties and even customer relationships. Depreciation looks at how much value an item loses over time. When determining the depreciation of intangible assets, accountants look at the cost of the item and factor in the value of the item, as well as the lifespan of the item.
Copyrights fall under the heading of "intangible assets." Copyright holders can reproduce and sell artistic works, and this includes books, music, paintings, and even software. Copyrights can last over 50 years, but for accounting purposes, depreciation takes place over a much shorter period of time. For example, a book publisher might purchase the rights to an ebook for $20,000 and spread out the depreciation over a period of five years. This means, for five years, the publisher can depreciate $4,000 in assets.
Depreciating some intangible assets, such as goodwill, make accounting slightly challenging. Consisting of things such as a company's reputation, goodwill equals the cost of buying a company over the value of the company on the market. In other words, if a company has a market value of $2 million and a buyer pays $2.5 million for the company, the goodwill cost is $500,000. Finding the goodwill value of a company requires selling the company. Only after a company is sold can the goodwill value undergo annual depreciation. Companies constantly examine the cost of goodwill resulting from a company paying more to get another company than the actual value of the company. This results in depreciating expenses being filed on tax returns. If Acme Industries buys Coyote Corporation for $3 million, but the value of Coyote goes down to $2 million the following year, this results in a goodwill depreciation cost of $1 million.
Auditing the depreciation of intangible assets creates numerous problems. For example, if a business sells all of its computer equipment, including software already installed on the computer systems, the valuation of the equipment changes, depending upon whether the installed software remained on the system or if removal of the software occurred.