JoAnne C. Bennett

Governments have always owned intangible assets (easements, water rights, timber rights, patents, trademarks, computer software, etc.).  However, other than inclusion of intangibles in the definition of capital assets in Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, governments have had no clear guidance on how to record intangibles, particularly internally generated intangibles.  As a result, inconsistencies in reporting intangibles appear throughout the industry.  GASB issued Statement No. 51, Accounting and Financial Reporting for Intangible Assets, (GASB 51) in an effort to reduce these inconsistencies; therefore, enhancing the comparability of accounting and financial reporting for state and local governments. 

GASB 51 is effective for financial statements for periods beginning after June 15, 2009.  Earlier application is encouraged. 

According to GASB 51, intangible assets lack physical substance, are not financial in nature and have initial useful lives extending beyond a single reporting period.  GASB 51 requires all intangible assets not specifically excluded be classified as capital assets.  Exclusions include:

• Assets acquired or created primarily to directly obtain income or profit
• Assets resulting from capital lease transactions
• Goodwill created through the combination of a government and another entity

Certain types of intangible assets held by governments may be internally generated.  Assets are considered internally generated if they are:

• Created or produced by the government or an entity contracted by the government, or
• Acquired from a third party but requiring the government to expend more than minimal, incremental effort to place into service

Internally generated assets can consist of computer software, patents, trademarks and copyrights.  Because of the intensive process associated with developing and producing these assets, GASB 51 also provides specific guidance as to when to capitalize spending for these projects.  The statement establishes a specified condition’s approach for recognition of internally generated assets.  Specifically, certain conditions must be met before any outlays are capitalized.  These conditions include:

• Determination of a specific objective of the project and the nature of the service capacity that is expected to be provided by the intangible asset
• Demonstration of the technical or technological feasibility for completing the project so the intangible asset will provide its expected service capacity
• Demonstration of the current intention, ability and presence of effort to complete or, in the case of a multiple-year project, continue development of the intangible asset

Since computer software is a common type of internally generated intangible assets, GASB 51 also provides specific guidance for applying the specified conditions approach for internally generated computer software.  Developing and implementing internally generated computer software typically fall into the following stages:

• Preliminary project stage
• Application development stage
• Post-implementation/operation stage

All of the conditions in the specified condition’s approach are considered to be met when activities in the preliminary project stage are completed and management implicitly or explicitly authorizes and commits to funding.

Any outlays during the post-implementation/operation stage should be expensed as incurred.

Finally, GASB 51 addresses certain amortization considerations relating to intangible assets.  The useful life of an intangible asset arising from contractual or legal rights should be limited by the contractual or legal provisions.  Some intangible assets will have indefinite useful lives as no contractual, legal or other factors limit the useful life of the asset.  Intangible assets with indefinite useful lives should not be amortized.