Intangible assets

Identifiable non-physical assets: brands, patents, software licences, customer relationships and development costs that met the capitalisation criteria. Unlike goodwill they have a determinable life, so they are amortised over it.

A pharmaceutical company capitalises ₹480 crore of product-development spending on a molecule with an eight-year commercial life. The annual amortisation charge is ₹60 crore.

The interesting question is what a company chooses to capitalise. Development costs may be capitalised only once technical feasibility and an intention to complete are demonstrated, and the boundary is soft. A firm that capitalises development while a competitor expenses it will report higher profit and a larger asset base, and its return on capital will be lower rather than higher.

Internally built brands never appear here, which is why the most valuable asset of a consumer company is usually absent from its balance sheet.