Policy References:

GASB Statement No. 51 - Accounting and Financial Reporting for Intangible Assets

Process and Document Preparation:

INTANGIBLE DEFINITION

An intangible asset is an asset that lacks physical substance, is non-financial in nature, and has an initial useful life extending beyond a single reporting period. Examples of intangible assets may include easements, permits and licenses, water rights, timber rights, mineral rights, patents, copyrights and trademarks. Internally generated software, certain purchased or licensed software, and agency owned websites are also examples.

Intangible assets must be identifiable to be reported. Intangible assets are identifiable if one of the following conditions is met:

• The asset is separable – capable of being separated or divided from the government and sold, transferred, licensed, rented, or exchanged.
• The asset arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

Certain intangible assets are associated with real property reported as a tangible capital asset. The ownership of the property includes the rights to control the use of the property and to benefit from the property. While the individual rights associated with the property are separable and intangible in nature, collectively, they represent the ownership of tangible assets. Therefore, the value of the individual rights should remain aggregated and reported as a tangible capital asset, (see Section 4.G - Capital Assets of this Chapter), not separately as an intangible asset (Example: Easements on State owned land should not be reported separately but be included in the reported land value).

Assets excluded from the scope of this policy are:

• Assets acquired or created primarily for directly obtaining a profit.
• Goodwill created through the combination of government and another entity.
• Assets resulting from a lease transaction.

INTERNALLY GENERATED INTANGIBLE ASSETS DEFINITION

Internally generated intangible assets are:

• Created or produced by the government or by an entity contracted by the government (such as software developed in house or by a contractor – commercially purchased or licensed and modified with minimal incremental effort).
• Acquired from a third party and required more than minimal incremental effort by the government to achieve their expected level of service capacity.

Any costs incurred in purchasing goods or services for creating internally generated intangible assets starting April 1, 2010 will be capitalized only if the following criteria are met (costs incurred before all criteria are met should be expensed – they are considered outlays of the preliminary project stage).

Criteria to be met are:

• Determination of the objective of the project and the nature of the service capacity expected of the intangible asset upon completion.
• Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity.
• Demonstration of the current intention, ability and presence of effort to complete or in a multi-year project, continue development of the intangible asset.

Computer software is a common type of intangible asset that is often internally generated, and therefore must meet the above criteria. In order to meet the criteria, the following events must also have occurred:

• Activities in the preliminary project stage are completed.
• Management commits to funding.

Activities involved in developing and installing internally generated computer software can be grouped into the following stages:

• Preliminary Project Stage – conceptual formulation and evaluation of alternatives, determination of the existence of technology, and selection of alternatives for the development of the software [outlays are expensed when incurred and should not be reported as part of the intangible asset].
• Application Development Stage – design of chosen path, software configuration and interfaces, coding, installation to hardware, testing [outlays are capitalized when incurred and should be reported as part of the intangible asset].
• Post-Implementation/Operating Stage – application training and software maintenance – [outlays are expensed when incurred and should not be reported as part of the intangible asset].

Costs associated with modification of internally generated computer software that is already in operation should be capitalized if the modifications result in any of the following:

• Increase in functionality of software (tasks previously incapable of performing).
• Increase in efficiency of software (level of service provided).
• Extension of estimated useful life.

If the modification does not result in any of the above outcomes, the cost should be considered maintenance and expensed as incurred.

INTANGIBLE RIGHT-TO-USE ASSETS

Under GASB Statement No. 87 and GASB Statement No. 96, lessees must record an intangible right-to-use lease asset and subscription-based asset, respectively, for applicable agreements. See Section XVI.4.O for information about accounting and reporting for leases and subscription-based information technology arrangements.

REPORTING INTANGIBLE ASSETS

The Office of the State Comptroller (OSC) requires agencies to identify and report intangible assets to ensure full and proper disclosures in the financial statements prepared in accordance with generally accepted accounting principles (GAAP). State agencies should maintain a system to track, document, and record the capital costs associated with intangible assets to meet the annual reporting requirements, in accordance with criteria described in preceding paragraphs. Each intangible asset, both existing and new, should be reported to the Office of General Services (OGS) through their Capital Assets Survey (see Section 4G -Capital Assets of this Chapter). The State Comptroller’s Office may contact agencies for additional information. Intangible asset information is subject to examination and verification from the State’s independent auditor.

The reporting threshold for intangible assets is $1 million. Internally generated computer software with cumulative assets valued greater than $1 million should be reported annually. Software licenses are valued on an individual basis for the application of this threshold.

A detailed listing of intangible assets categories are as follows:

AMORTIZATION

Assets with indefinite useful lives are not subject to amortization. The useful life of an intangible asset arising from a contractual agreement or other legal right should not exceed the period of the contract. For those assets without expressed useful lives, OSC prescribes 10 years for computer software and 20 years for all other such intangibles.

Guide to Financial Operations

REV. 12/26/2023