What Are Intangible Assets?

What are intangible assets?

Intangible assets are the resources a business owns that are not physical, but still provide real value. A common example of intangible assets is intellectual property held by a business, such as songs, designs, trademarks, software licenses, motion pictures, customer lists and franchises.

“Intangible assets can be extremely valuable to the company and in some cases have more value than all of the company’s tangible assets,” said Yarik Kim, an audit partner at Macias Gini & O’Connell LLP. “Just think about companies like Facebook or Twitter, whose ability to reach billions of users is way more valuable than the sum of their tangible assets.”

Here are some additional examples of the types of assets this accounting term refers to:

• Goodwill: Goodwill is often recognized when one business acquires another. It represents the cost paid by a business in excess of the value of the purchased business’s assets. For example, a purchasing company might pay $8 million for a company valued at $7 million, giving the purchased company a goodwill value of $1 million based on its business reputation and other contributing factors.
• Copyright: Granting a copyright to a purchasing company allows it to continue creating and selling the purchased company’s services or products. This is an example of IP as an intangible asset and gives companies real value, both now and in the future, for as long as it holds the exclusive rights to the products or services.
• Patents: A patent grants a manufacturing or research company control over the patent’s use and sale of a specific design. For example, a company may possess a patent for the only way of producing a specific product on the market. Another company could purchase the business with the patent, claim ownership of that patent, and continue overseeing the production of the patented design.

Intangible vs. tangible assets

Unlike intangible assets, tangible assets are the physical resources that hold monetary value and maintain business operations. They include items, property or equipment purchased by your business that have monetary value and can be touched or seen. It’s much easier to track and determine their worth compared to intangible assets. 

“This is the type of asset that is usually utilized to produce products and services,” said Timo Wilson, CEO of ASAP Fundr. Tangible assets include office furniture and fixtures, buildings and real estate, computers, equipment, and machinery.

Amortizing intangible assets

Amortization of intangible assets entails expensing out their value over their intended lifetime. Much like tangible assets, intangible assets have a useful lifetime, and accountants track the depreciation of an asset’s value throughout that lifetime.

Some elements, such as goodwill, have an indefinite useful life, whereas patents only possess a useful lifetime of 20 years. The remaining useful lifetime influences the overall intangible asset valuation, much like the age of a company’s equipment.

Some intangibles have a determinable life, also known as a legal life or economic life. In this case the overall value, or cost of the asset, is divided against the remaining duration of its useful life. Such assets include software licenses, patents and customer lists. 

Other assets have indeterminable lives dependent on how long the company’s brand will hold value. These assets include brand name and goodwill, elements that are dependent on a company’s reputation and growth rather than a set timeframe.

Accountants commonly amortize intangible assets using the straight-line method. For example, a patent may cost a company $50,000 to obtain. The patent’s legal life is 20 years, but the company only plans to use the patent for 10 years before creating a newer product. The company would then be required to amortize the patent over 10 years, yielding a per-year amortization of $5,000.

Acquiring intangible assets

Businesses obtain intangible assets through various methods. A common practice is to obtain all assets during a company acquisition or merger. These are some other possible methods:

• Separate purchase: Intangible assets can be purchased from an existing company, just like purchasing regular services. For the right price, companies will give up patents and other production rights to the purchaser.
• Government grants: In some circumstances, intangible assets are acquired free of charge through a government grant. For example, the government may transfer or allocate intangible assets, such as licenses to operate or land usage rights, to a company.
• Assets exchange: A company might be acquired through the purchase of its assets in exchange for assets or stock from the purchasing company.
• Self-creation: Not all assets need to be purchased; they can be created internally for use or future sale. In this instance, companies rely on their own in-house resources to create intangible resources.

The value of intangible assets depends on both the cost of creation and the asset’s long-term value. The acquisition and exchange of these assets affect their value, as does the broader market impact of a deal.

Using balance sheets to track assets

It’s important to know how to track your tangible, intangible and financial assets. A balance sheet is a financial statement that helps you monitor all these things and gives you an overview of your company’s financial health. According to Angela Nedd, a tax preparer at Expect Tax & Accounting Inc., balance sheets show your assets (what you own), liabilities (what you owe) and equity (net value) at a moment in time.

“The balance sheet is the most important of the three financial statements, as it lets you know whether you’re able to cover your obligations,” Nedd said.

When an entity assigns a perceived value to an intangible asset, such as a jingle, this deceptively changes the perceived value of the entire organization and may temporarily boost its stock value. However, when a company is audited, and such incorrect information is included on an income statement or balance sheet, it creates a problematic situation for investors and stockholders. For example, intangibles like the Coca-Cola brand name are priceless, but they cannot carry value on financial reporting statements.

What intangible assets mean for your business

While the most common examples of intangible assets include patents and software, they can be anything of value that isn’t physically substantive (except financial assets). Understanding the value of intangible assets will give your business an edge. You will better know how to use your existing intangible assets, as well as acquire new ones.

Determining the value of intangible assets isn’t always easy. Placing too much value on an asset can artificially inflate stock prices. You risk paying too much to acquire new assets if you haven’t accurately evaluated them. Placing too little value on your existing assets, on the other hand, could affect depreciation accounting, and competitors may try to acquire your assets at a deflated price.

If you don’t feel comfortable tackling these tasks on your own, hire an experienced accountant. A good accountant can amortize intangible assets so your business maximizes benefits without exposing itself to auditing issues.