Intangible Assets: Acquired vs Internally Built

Introduction

Coca-Cola spent $5.1 billion on advertising in 2024, and every dollar of it was expensed. The brand that decades of such spending has built, which Interbrand valued at about $58 billion in its 2023 ranking of global brands, as ESM Magazine reported, appears nowhere on Coca-Cola's balance sheet. Its balance sheet at the end of 2024 did carry $13.3 billion of trademarks, though: brands it bought. When it bought the 85% of the sports drink maker BodyArmor it did not already own in 2021 for $5.6 billion, it allocated $4.2 billion of the price to the BodyArmor trademark. After the brand underperformed, it wrote that trademark down by $760 million in 2024 and another $960 million in 2025.

The contrast captures one of the deepest asymmetries in accounting. An intangible asset a company buys is recorded on its balance sheet; the same kind of asset built internally usually is not, because the costs of building it, from advertising to research to staff training, are expensed as incurred. For bankers, the asymmetry distorts comparisons between companies that grow by acquisition and those that grow organically, in assets, returns and earnings alike.

US generally accepted accounting principles (GAAP) recognize an intangible asset when it is acquired: purchased individually, or obtained as part of a business combination. In an individual purchase it is recorded at cost; in a business combination it is recorded at fair value, provided it is identifiable, meaning it arises from contractual or legal rights or can be separated from the business and sold or licensed.

Identifiable intangible asset

A non-physical asset that arises from contractual or legal rights, such as a patent, license or customer contract, or that is separable from the business and could be sold, transferred or licensed, such as a customer list or trademark.

Acquisition accounting sorts identifiable intangibles into five categories; the fifth, artistic-related assets such as music catalogs and film libraries, matters mainly in media deals. The category signals how the asset will be treated afterwards:

In an acquisition, the price paid above the fair value of these and the other identifiable net assets becomes goodwill, the residual covered in goodwill and goodwill impairment.

Internally generated intangibles are treated differently. The costs of developing, maintaining or restoring intangibles that are not specifically identifiable, or that are inherent in a continuing business, are expensed as incurred. Advertising builds brands but is an expense; research produces patents but is expensed under Accounting Standards Codification (ASC) 730, as covered in research and development accounting under US GAAP; building a customer base through sales effort is an expense. The exceptions are narrow, and software is the main one.

The Internal Exceptions in Practice

Internal-use software, such as a company's own ordering system or the platform behind an online service, is capitalized once management has committed to funding the project and its completion is probable, and software to be sold is capitalized once it reaches technological feasibility; both are then amortized over their expected lives. Website development follows the internal-use rules. Beyond software, the capitalizable costs are narrow: filing fees and legal costs to register a patent or trademark and, in common practice, the costs of successfully defending one in court. The value the patent or trademark protects, built through research and marketing, stays off the balance sheet. A company that owns a portfolio of valuable patents it developed may therefore carry them at a few million dollars of legal costs.

Intangibles Bought Outside a Business Combination

Intangibles can also be acquired individually or in a group that does not amount to a business, such as a license bought from another company or a portfolio of patents. In such an asset acquisition, the intangibles are recorded at cost, including transaction costs, rather than at fair value, and no goodwill arises; any excess paid is allocated to the assets acquired. The exception is in-process research and development with no alternative future use, which is expensed immediately in an asset acquisition, the treatment behind several of the largest one-time charges in the pharmaceutical industry.

Once recognized, an intangible asset is classified by its useful life. A finite-lived intangible, such as a patent, customer relationship or developed technology, is amortized over the period it is expected to contribute to cash flows, usually on a straight-line basis, and tested for impairment under the rules described in impairment of long-lived assets when indicators arise. An indefinite-lived intangible, one with no foreseeable limit on the period it will generate cash, is not amortized at all. Most acquired trademarks for established brands fall into this category, along with some broadcast licenses and other renewable rights.

Indefinite-lived intangible asset

An intangible asset with no foreseeable limit on the period over which it is expected to generate cash flows, such as an established trademark that can be renewed indefinitely. It is not amortized but is tested for impairment at least annually, and reclassified as finite-lived if its life becomes limited.

The annual test compares the asset's fair value with its carrying amount. Coca-Cola's 2024 annual report shows both sides of the asymmetry, and the test at work:

The BodyArmor impairment shows how acquired intangibles behave after a deal. Coca-Cola explains that operating results for the trademark were lower than expected in early 2024, which triggered a new impairment analysis; revised projections of future results and higher discount rates since the acquisition reduced the trademark's fair value, estimated with discounted cash flows, below its carrying amount. The $760 million charge reduced earnings without any cash effect, and because the trademark is not amortized, the impairment test is the only route by which its carrying amount falls. The second, larger charge at the end of 2025, driven by slower expected growth for the category and tougher competition, left the trademark at $2.44 billion, according to Coca-Cola's 2025 annual report.

The accounting creates predictable distortions that bankers adjust for:

The return distortion is often the largest, and it is examined with the ratios themselves in return ratios: return on equity, return on assets and ROIC.

In valuation, the asymmetry largely washes out: a discounted cash flow model captures the value of a brand or technology through the cash flows it produces, whether or not the asset appears on the balance sheet. The accounting matters more for earnings-based multiples and for analysis after a deal. Most acquirers exclude amortization of acquired intangibles from adjusted earnings, arguing it reflects purchase accounting rather than operations; bankers usually accept the adjustment for comparison purposes while remembering that the acquisition itself was a real cash cost. In purchase price allocation work, the split between finite-lived intangibles, indefinite-lived intangibles and goodwill decides how much amortization the buyer will report afterwards, as covered in purchase price allocation.

Impairments of acquired intangibles, like Coca-Cola's BodyArmor charges, deserve close reading. They are one-off charges, but they record a real judgment that an acquisition is worth less than was paid for it. A sequence of such charges across a company's acquisitions says more about its deal-making than any single write-down, and it is one of the clearest pieces of evidence a banker has about the returns a company earns on the businesses it buys.