Intangible AssetDefined with Examples and Valuing Intangibles

Lisa Borga

An intangible asset is what it seems, a non-monetary asset that does not have physical substance.

Despite this, an intangible asset, like all assets, is expected to provide an economic return at some time in the future.

These are long-term assets, and as such, the expectation extends for greater than one posting cycle.

Intangible assets lack any physical substance in contrast to tangible assets that include items such as inventory, equipment, and even financial assets, such as stocks that possess value due to contractual claims.

These are the second-largest type of long-term assets and include examples such as goodwill, trademarks, and copyrights.

Intangible assets are generally separated into two classifications; non-identifiable and identifiable.

assets

How Intangible Assets Work

Intangible assets are long-term assets, which are common among business entities.

These assets lack any physical substance but are often valuable and can prove crucial to a company’s success.

Intangible assets are often classified as definite or indefinite.

Definite intangible assets possess a foreseeable end to the value they offer, and common examples include patents and copyrights, which offer a limited term of protection.

Indefinite intangible assets have no limitations placed by age, contractual obligations, or regulators, and a common example is a brand name.

This type of asset can be incredibly valuable.

Consider how much companies such as Coca-Cola, Ferrari, or Snickers earn off of name recognition.

Though it lacks any physical substance, it can offer a considerable boost in a company’s sales and thus value.

At some point, all companies will acquire an intangible asset of some sort, whether it is a business license, a brand name, a trademark, or countless other examples.

These assets can be created by the company itself, granted by a government, or purchased.

Tangible vs. Intangible Assets

Tangible and intangible assets together form the two distinct categories into which all assets fall.

Tangible assets are physical assets that a company owns, such as manufacturing equipment, buildings, and inventory.

These are the assets that a company uses to produce products and services.

Intangible assets, in contrast, do not physically exist but still offer potential revenue and thus possess value.

A good example of this is the patent to a certain technology.

Every time another company wishes to use this technology, they must pay the patent holder.

noncurrent assets

How Intangible Assets Are Valued

As you have seen, intangible assets can hold immense value, such as is the case for major brand names, which may offer millions of dollars in benefits every year.

This could raise the value of a company in turn by an immense sum if it were ever to be sold.

However, estimating the value of an intangible asset can often be a complex process.

Some common methods of valuation include determining the value that intangible assets add to the overall value of a company or how much it would cost another company to duplicate an intangible asset.

Another method is to measure the asset’s value through amortization.

This requires estimating the asset’s value now and in future accounting periods.

The final method is to use projections of future cash flow and measure the benefits that the intangible asset will offer.

Intangible Assets Example

Intangible assets will only show up on the balance sheet once the business has acquired them.

If Example Company purchases a patent from another business for $2 billion, the purchase would appear on the business’s balance sheet as an intangible asset in long-term assets.

The asset would then be amortized over its expected period of use.

Although, intangible assets with an indefinite life are not amortized.

Instead, they are assessed every year to see if they are impaired, meaning the fair value of the intangible asset is less than the carrying value of the asset.

average total assets

Key Takeaways

  • An intangible asset lacks physical substance, such as goodwill, brands, and patents.
  • A company can create, buy, or sell intangible assets.
  • Intangible assets can be definite, which means to have an identifiable end to its value or indefinite, which indicates that there is no limitation based on age or contractual or regulatory obligations.
  • Intangible obligations that a company creates have no recorded book value and thus will generally not be listed on the balance sheet.

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  1. Cornell Law School "Intangible assets." Page 1 . February 7, 2022

  2. IRS.gov "Amortization of Goodwill and Certain Other Intangibles " Page 1 - 5. February 7, 2022

  3. Cornell Law School "26 CFR § 1.167(a)-3 - Intangibles." Page 1 . February 7, 2022