For NFPs, the GAAP applied to accounting for intangible assets is generally the same as for business entities. Outlays for intangible assets are capitalized or expensed according to prescriptive rules. If capitalized, assets are amortized over their estimated useful lives (if finite lived) and tested for impairment as necessary.
The rules for recognition and measurement vary based on how an intangible asset arose or was acquired, and whether it has finite-life or an indefinite life. Figure NP 10-8 provides a road map to the locations of this guidance within the FASB’s codification.
Figure NP 10-8
Road map to intangible asset GAAP
Goodwill and intangible assets acquired in NFP combinations |
|
- Day 1 accounting for goodwill
- Day 2 accounting for goodwill
|
|
- Day 1 accounting for other intangibles
- Day 2 accounting for other intangibles
|
Intangible assets obtained/arising through other means |
|
- Intangibles acquired individually
- Intangibles acquired as part of a group of assets
- Internally-generated intangibles
|
|
- Internal-use computer software developed or obtained
- Internal-use hosting arrangements (cloud computing)
|
|
- Website development costs
|
Like PP&E, intangible assets can be purchased, acquired by gift, internally-developed, or acquired in business combinations. However, similar to business entities, an NFP only recognizes an intangible asset on the balance sheet if it acquires it from another party, either in a business combination or in an asset acquisition. In accordance with
ASC 350-30-25-3, if an intangible asset is self-developed in its entirety, none of the costs may be capitalized.
ASC 350-30-25-3
Costs of internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business or nonprofit activity and related to an entity as a whole, shall be recognized as an expense when incurred.
As a result, an NFP with internally-developed intangibles may have valuable revenue-generating assets that are not reflected on its balance sheet. However, as illustrated in Example NP 10-2, if another entity subsequently licenses the rights to use the intangible or acquires the developer of the intangible in a business combination, the other entity is permitted to recognize the intangible (or its rights to use the intangible).
EXAMPLE NP 10-2
Accounting for acquired versus internally-developed intangible assets
NFP A creates a unique logo that it trademarks. NFP A subsequently licenses to Company B the rights to use the logo for 5 years. One year later, NFP A is acquired by NFP C.
How would NFP A account for the logo in each of these transactions?
Analysis
When NFP A creates the logo, it possesses an intangible asset with economic value. However, NFP A cannot capitalize the costs of developing the logo because GAAP requires entities to expense the costs associated with internally-developed intangible assets.
NFP A would recognize revenue for the license fees received from Company B in accordance with
ASC 606 (see
NP 12); however, the underlying asset itself would remain unrecognized on NFP A’s books.
When NFP C acquires the logo in connection with its acquisition of NFP A, NFP C would recognize the logo (trademark) as an asset that is initially measured at its fair value on the date acquired.