Intangible assets are the resources a business owns that cannot be moved, like equipment, or handled, like physical property. These intangible assets include goodwill, patents, trademarks, copyrights and more. They hold a lot of value for your business, even though they aren’t physical items you can touch. As a business owner, you’ll need to recognize, manage and amortize your intangible assets. Here’s how to do it.
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:
Intangible assets are resources your business owns that cannot be physically handled, including trademarks, patents and copyrights.
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.
Cash is neither an intangible nor a tangible asset. It’s considered a financial asset, which is an item you own that has monetary value and comes from a contractual claim. Financial assets include cash flow, bonds and bank deposits.
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.
You must assess the asset’s value over its estimated economic life when you amortize intangible assets. The best accounting software platforms on the market will be able to help you create amortization tables.
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.
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:
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.
If your business struggles to create intangible assets, consider how acquisitions, mergers and exchanges can help your business make up for those shortcomings.
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.
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.