The Most Valuable Assets You Cannot See

23 Jun

Written By Leana van der Merwe, Technical Manager, Chartered Institute for Business Accountants (CIBA)

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When most people think about business assets, they immediately picture something physical. They think of office buildings, company vehicles, computers, machinery, or perhaps even inventory sitting on warehouse shelves. These are the assets we can see, touch, and easily identify.

However, some of the most valuable assets in modern businesses are completely invisible.

Think about the software that runs a company's operations, a well-known brand name that customers trust, or a licence that allows a business to operate in a specialised industry. These assets may have no physical form, but they often play a significant role in generating income and creating value for a business. These are known as intangible assets.

As finance professionals, we regularly encounter intangible assets when preparing, reviewing, or analysing financial statements. Yet they remain one of the areas that business owners often find the most confusing. The reason is simple: if you cannot see or touch an asset, how do you determine whether it should appear in the financial statements?

This is where IFRS for SMEs Section 18 provides useful guidance.

What Exactly Is an Intangible Asset?

An intangible asset is an identifiable asset that does not have physical substance. In simpler terms, it is something valuable that a business owns, even though it cannot be physically held.

Common examples include computer software, patents, trademarks, copyrights, licences, franchise rights, and customer-related rights acquired from another party.

While these assets may not occupy space in an office or warehouse, they often contribute directly to a company's ability to earn revenue and remain competitive.

Imagine a business that purchases specialised accounting software that saves hundreds of hours of work each year. The software may be stored on a server and have no physical form, but its value to the business is very real. In many cases, that software may be more valuable than some of the furniture sitting in the office.

The Question Every Accountant Must Ask

When dealing with intangible assets, one of the first questions we need to ask is whether the asset was purchased or created internally.

This distinction is extremely important under IFRS for SMEs.

When a business purchases an intangible asset from an external party, there is usually clear evidence of what was acquired and how much it cost. The transaction can be measured reliably, making it easier to recognise the asset in the financial statements.

However, things become far more complicated when a business creates an intangible asset itself.

Many business owners spend years building a brand, developing software, designing systems, or creating intellectual property. From their perspective, these assets may be extremely valuable. They may even be the reason the business is successful.

Yet accounting standards require more than simply believing something has value.

Under IFRS for SMEs, internally generated intangible assets are generally not recognised as assets. Instead, the costs incurred are usually recognised as expenses when they are incurred.

This often surprises business owners who feel they have invested significant time and money into creating something valuable. While their frustration is understandable, the accounting standard takes a cautious approach because it is often difficult to determine the true value of internally generated assets reliably.

The Famous Research and Development Debate

Few topics generate as much discussion among accounting students and finance professionals as research and development expenditure.

A business may spend substantial amounts investigating new products, improving processes, or developing innovative technology. The natural question is whether these costs should be capitalised as an asset.

Under IFRS for SMEs, the answer is straightforward.

Research costs are expensed as incurred, and development costs are also expensed as incurred.

This differs from full IFRS, where certain development costs may qualify for capitalisation if strict criteria are met.

For SMEs, the approach is intentionally simpler. The standard avoids the complexity of determining exactly when a project moves from the research stage to the development stage and whether future benefits can be measured reliably.

Intangible Assets Do Not Last Forever

Another important principle to remember is that intangible assets generally have a limited useful life.

Technology evolves rapidly. Software becomes outdated. Licences expire. Patents eventually lose their commercial value. As a result, intangible assets cannot remain on the statement of financial position indefinitely at their original cost.

Instead, the cost of the asset is allocated over its useful life through a process known as amortisation.

Many people describe amortisation as the intangible asset equivalent of depreciation. While the terminology is different, the principle is very similar.

The objective is to ensure that the cost of the asset is recognised over the period during which it helps generate economic benefits for the business.

What Happens When the Useful Life Is Unclear?

In practice, businesses do not always know exactly how long an intangible asset will remain useful.

A software package may remain relevant for five years, eight years, or perhaps even longer. Predicting the future is not always easy.

Recognising this challenge, IFRS for SMEs provides a practical solution. If management cannot estimate the useful life reliably, the asset is amortised over ten years.

This approach prevents businesses from leaving intangible assets on their books indefinitely while still providing a reasonable framework for financial reporting.

A Common Mistake in Practice

One of the most common mistakes encountered in practice is the temptation to capitalise costs that should actually be recognised as expenses.

Training costs, advertising expenditure, promotional campaigns, start-up costs, and internally developed brands are frequently treated incorrectly.

Business owners often see these expenditures as investments in the future of the business, and from a commercial perspective they may be right. However, accounting standards focus on whether an identifiable asset exists that can be measured reliably and controlled by the business.

As finance professionals, it is our responsibility to understand this distinction and apply the standards consistently.

Final Thoughts

The modern business world is changing rapidly. Increasingly, value is being created through knowledge, technology, innovation, and intellectual property rather than physical assets alone.

This means that understanding intangible assets has become more important than ever for accounting and finance professionals.

Although these assets cannot be touched or stored in a warehouse, they often tell an important story about how a business operates and where its future value lies.

The next time you review a set of financial statements, spend a little extra time examining the intangible assets note. You may discover that the most interesting assets in the business are the ones you cannot see at all.

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