When an intangible asset can no longer enhance future cash flow, it must be disposed of in your accounting records. Several circumstances may exist. The intangible asset may have:
- Already been fully amortized over its useful life
- Passed the end of its useful life for your business, but have residual resale value
- Been only partially amortized, with useful life and resale value remaining
- Been partially amortized, but with no value remaining (became useless early)
Other circumstances could also apply, especially if special tax provisions covered purchase of the intangible asset. Regardless of the exact situation, the purchase cost of the intangible asset must be removed from the Intangible assets, at cost account and its accumulated amortization must be removed from Intangible assets, accumulated amortization. Otherwise, the balances of these two accounts would grow endlessly as the business purchases assets over the years, even if those assets are no longer owned. Finally, whether the intangible asset is sold or has merely lost its value, the difference between its book value and any amount recovered through disposal must be recorded, either as income or expense.
To dispose of an intangible asset, go to the Intangible Assets tab, click the Edit button for the asset disposed, check Disposed intangible asset, then enter the date of disposal. This transfers the book value of the asset to the designated expense account and the book value on the balance sheet is reduced to zero.
By default, disposal gains or losses are posted to Intangible assets - loss on disposal, a control account activated automatically when the Intangible Assets tab is enabled. If desired, the disposal gain or loss can be posted to any regular expense account.
Example
ACME Industries’ electric controller patent becomes useless because the company discontinues products in which it is used, even though only two months of its anticipated life have passed. The disposal is recorded as below:
After ACME Industries’ disposal action, its Balance Sheet shows no balance for either Intangible assets, at cost or Intangible assets, accumuated amortization. The Profit and Loss Statement shows two months’ worth of amortization expense and the large remaining book value:
Unless ACME Industries can find a buyer for the patent, this situation will look like a serious business mistake.
Like intangible asset purchases and amortization, disposals are reported on the Intangible Asset Summary in the Reports tab:
Notes
In the Intangible Asset Summary, the Acquisition cost column includes all purchases and upwards revaluations. Consideration received includes all sales posted to the asset’s subaccount (see below) and downwards revaluations. Amortization includes all amortization during the reporting period. Profit (loss) includes amounts transferred to other accounts when the asset is disposed.
Two methods can be used when a disposed fixed asset is sold. The first is to post a receipt in the Receipts & Payments tab to Intangible assets and the specific asset’s subaccount prior to recording disposal. This reduces book value, decreasing any loss on disposal. Such a receipt would show up in the Consideration received column. The second method is to post the transaction to Intangible assets - loss on disposal after disposal. The net effects are the same, but the second method would not show on the Intangible Asset Summary, because the transaction would not be posted directly to the asset’s subaccount.