2.20 Capitalization of Intangible Assets

POLICY:  Intangible assets are classified as computer software, websites, licenses & permits, patents, copyrights & trademarks, rights-of-way & easements, natural resources extraction rights, and other intangible assets.  Intangible assets can be purchased, licensed, acquired through nonexchange transactions, or internally generated.  This policy is effective after June 30, 2010 and is retroactive to July 1, 1980.

An intangible asset is an asset that possesses all of the following characteristics:

1. Lack of physical substance: An intangible asset may be contained in or on an item with physical substance, such as with computer software and a compact disc.  Also, an intangible asset may be closely related with another item that has physical substance, such as an easement and the underlying land.
2. Nonfinancial nature: An asset is not in a monetary form if similar to cash and investment securities, and it represents neither a claim nor right to assets in a monetary form similar to receivables.
   Intangible assets acquired or created primarily for the purpose of directly obtaining income or profit are excluded from this policy.
3. Initial useful life extending beyond a single reporting period

Intangible assets should be classified as capital assets and existing authoritative guidance related to capital assets should be applied to intangible assets.  This includes recognition, measurement, depreciation/amortization, impairment, presentation, and disclosures. 

An intangible asset should be recognized in the statement of net assets only if it is identifiable.  An intangible asset is considered identifiable when either of the following characteristics is met:

1. The asset is separable and capable of being separated or divided from the University and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, asset, or liability.
2. The asset arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the University or from other rights and obligations.

Intangible assets are capitalized or expensed depending on their cost.  If the cost of these intangible assets meets or exceeds the following Intangible Asset Capitalization table, the intangible assets are capitalized and amortized over their associated useful lives.  If the costs of the intangible assets do not meet the Intangible Asset Capitalization threshold the costs are expensed.

The useful life of an intangible asset that arises from contractual or other legal rights should not exceed the period to which the service capacity of the asset is limited by contractual or legal provisions.  Renewal periods related to such rights may be considered in determining the overall useful life of an intangible asset if there is evidence that the University will seek and be able to achieve renewal and that any anticipated outlays to be incurred as part of achieving the renewal are nominal in relation to the level of service capacity expected to be obtained through renewal.

Intangible assets acquired on or after July 1, 1980 are to be retroactively reported if the resource is still in use and the applicable costs meet or exceed the relevant capitalization threshold unless otherwise noted below.  If records documenting the costs of these resources no longer exist, a reasonable estimate is to be used

Intangible assets are divided into the following categories:

Computer Software & Websites,  Licenses & Permits,  Patents/Copyrights /Trademarks,  Rights-of-way & Easements,  and  Natural Resources Extraction Rights

COMPUTER SOFTWARE & WEBSITES:

Computer software and websites are acquired by the University through the following methods and valued accordingly.

1. Acquisition by Purchase/License/Donation:  Intangible assets acquired from an external entity by these methods are either capitalized or expensed depending on their cost.
   1.  If the cost of these intangible assets meets or exceeds the Intangible Asset Capitalization table, shown above, the intangible assets are capitalized and amortized over their associated useful lives.  If the costs of the intangible assets do not meet the Intangible Asset Capitalization threshold the costs are expensed.
2. Internally Generated:  Intangible assets that are internally generated are either capitalized or expensed depending on their cost, and stages in which cost incurred.
   1. If the cost of these intangible assets meets or exceeds the Intangible Asset Capitalization table, shown above, the intangible assets are capitalized and amortized over their associated useful lives.  If the costs of the intangible assets do not meet the Intangible Asset Capitalization threshold the costs are expensed.
   2. An intangible asset purchased from an outside resource can be considered internally generated if more than minimal incremental effort has been expended.  A minimal incremental effort is considered more than 30% of the cost of the purchased resource amount.  Applicable incremental effort costs include:
      1. Third party contract costs
      2. Activities characterized as customization
      3. Direct labor and associated University employee related expenses
      4. Other direct costs
      5. . Allocations of indirect costs or overhead should be excluded from costs to determine incremental efforts.
   3. There are 3 stages in the internal development of software and websites; the costs incurred during those stages are either expensed or capitalized.
      1. Preliminary Project Stage: Costs incurred during this stage should be expensed.  Applicable preliminary project stage costs include:
         • Conceptual formulation and evaluation of alternatives
         • Determination of existence of needed technology
         • Final selection of alternatives for development of asset
      2. Application Development Stage: Costs incurred during this stage should be capitalized.  Applicable application development stage costs include:
         • Design of the chosen path
         • Software configuration and software interfaces
         • Coding
         • Installation to hardware
         • Testing (including the parallel processing phase)
         Costs in the application development stage should begin to be incurred when all of the following conditions have been met:
         • Preliminary project stage has been completed
         • Determination of the specific objective of the project and the intended service capacity
         • Demonstration of the technical or technological feasibility
         • Demonstration of the current intention, ability, and presence of effort to complete or continue development
      3. Post-implementation stage: Costs incurred during this stage should be expensed.  Only costs that extend the useful life or provide new functionalities should be capitalized.  Applicable post-implementation stage costs include:
         • Application training
         • Annual maintenance fees
   4. Data conversion costs can be included in the application development stage only to the extent it is determined to be necessary to make the computer software operational.  If included, these data conversion costs should be included in capitalizable items.  Otherwise, if data conversion costs are not deemed necessary to make the computer software operation, those costs are included in the post-implementation stage and expensed.
   5. Costs incurred during the application development stage that are to be capitalized should be accumulated as Development in Progress until the project is implemented.  Upon implementation, project costs should be transferred from Development in Progress to Intangible Assets and amortization of the cost of the project should begin.
   6. Appropriate stages, similar to the development of software and websites, should be applied to other internally generated assets, such as patents and copyrights.  Those costs should be expensed and capitalized accordingly.
   7. Retroactive reporting of internally generated assets acquired on or after July 1, 1980 is not required, but permitted if need be.  Also, if a project has been started, but not completed by June 30, 2010 those costs even if incurred after this date can be retroactively reported if chosen.  Costs incurred for internally generated projects that begin on or after July 1, 2010 will be capitalized if the total costs meet or exceed the applicable threshold.

3. Updates/Minor Upgrades/Major Upgrades: The following is applicable to software that is obtained by purchase, license, donation, or if internally generated.
   1. Updates/Minor Upgrades:  Software often has updates and minor upgrades that are included with a maintenance subscription and those costs should be expensed.
   2. Major Upgrades:  The following apply for major upgrades that are and can be sold separately from the annual maintenance contract:
      1. If the intangible asset has already been capitalized and the major upgrades cost more than 30% of the original capitalized cost, the major upgrade should be capitalized.
      2. If the intangible asset has not already been capitalized, but the major upgrade equals or exceeds the applicable capitalization threshold, the major upgrade should be capitalized.
      3. If the major upgrade does not meet either of the conditions above, the major upgrade costs should be expensed.

LICENSES & PERMITS

Licenses & Permits are capitalized at their acquisition cost if that cost exceeds the relevant threshold in the above Intangible Asset Capitalization table.  The acquisition cost is then amortized according to the legal life or the estimated useful life, whichever is shorter.  If the life is considered indefinite or unlimited do not amortize the intangible asset.

In the case of a multi-user license, each user’s access to the system should be treated as an individual intangible resource.  The aggregate cost of the licenses may be over the relevant capitalization threshold, but if the cost of an individual intangible resource is below the capitalization threshold, expense the cost.

PATENTS/COPYRIGHTS/TRADEMARKS

The policies listed under SOFTWARE & WEBSITES are applicable to patents, copyrights and trademarks.  In the case of internally generated intangible assets, patents, copyrights, and trademarks have stages similar to the development of software and websites.  Those costs should be expensed and capitalized according to the 3 stages of internal development. 

The applicable costs should then be amortized according to the legal life or the estimated useful life, whichever is shorter.  If the life is considered indefinite or unlimited do not amortize the intangible asset. 

For amortization purposes, a patent, copyright or trademark is often limited by a contractual or legal life, but these intangible assets may still be considered to have an unlimited useful life.  These items can be considered to have an unlimited useful life if the amounts to renew are nominal in relation to the level of service capacity expected to be obtained through renewal.  Also, that the University will seek and be able to achieve renewal of the intangible assets.

RIGHTS-OF-WAY & EASEMENTS

Rights-of-way and easements are capitalized at the purchase cost if that cost exceeds the capitalization threshold.  If the right-of-way or easement is donated, the capitalized cost is the outlay the University would have incurred to acquire the easement in an exchange transaction.

If the value of the right-of-way or easement is separable from the underlying land, then apply the shorter of the legal life or the estimated useful life.  If the life is indefinite or unlimited, then do not amortize.  If the value is inseparable from the underlying land, then do not amortize.

NATURAL RESOURCE EXTRACTION RIGHTS

Natural resource rights relate to items such as water, timber, or mining rights.  These items are capitalized at the purchase cost if that cost meets or exceeds the capitalization threshold. 

If the value of the natural resource extraction right is identifiable, then apply the shorter of the legal life or the estimated useful life.  If the life is indefinite or unlimited, then do not amortize.  If the value of the intangible asset is indeterminable, unidentifiable, or inseparable from another asset (such as the land the resource extraction right is on), then do not amortize.