In the world of business, intangible assets are just as valuable as physical assets. In fact, intangible assets are often more valuable than physical assets because they can continue to generate revenue for a company long after the initial investment has been made. One such intangible asset is computer software.
What is an Intangible Asset?
An intangible asset is something that has value but cannot be physically touched or seen. Examples of intangible assets include patents, trademarks, copyrights, and goodwill. These assets can be bought and sold just like physical assets.
Computer Software as an Intangible Asset
Computer software is a type of intangible asset because it cannot be physically touched or seen. However, it is still valuable because it can perform important functions for a business such as managing customer data, tracking inventory, or processing financial transactions.
When a company purchases computer software that will be used over a long period of time, it must determine whether to expense the cost immediately or capitalize it as an asset. Capitalizing the cost means that the cost is spread out over several years and depreciated over time.
Benefits of Computer Software as an Intangible Asset
There are several benefits to considering computer software as an intangible asset:
- Longevity: Computer software can continue to generate revenue for a company long after the initial investment has been made.
- Ease of Transfer: Intangible assets like computer software can be easily transferred from one owner to another.
- Tax Benefits: Capitalized computer software costs can provide tax benefits for a company by reducing taxable income.
Risks of Computer Software as an Intangible Asset
While there are benefits to considering computer software as an intangible asset, there are also risks:
- Obsolescence: Computer software can become obsolete quickly, meaning that the value of the asset can decrease rapidly.
- Depreciation: Capitalized computer software costs must be depreciated over time, meaning that the value of the asset will decrease each year.
- Licensing: Computer software is often licensed rather than sold outright, which means that a company may not actually own the asset and may lose its ability to use it if the licensing agreement is terminated.
Computer software is an important intangible asset for many businesses. While it can provide significant benefits such as longevity and tax benefits, it also carries risks such as obsolescence and depreciation. Companies should carefully consider these factors before deciding whether to capitalize their computer software costs or expense them immediately.