Intangible Assets: Definition, Types, Examples (2024)

Intangible assets may seem elusive, but for business owners, understanding them is crucial: although these assets cannot be touched, their impact on the value of a company is real.

Let’s take a closer look at intangible assets, how to calculate their fair value, and how to account for them in financial statements.

What are intangible assets?

Intangible assets are non-physical Long-term assets These are things that accumulate value over time. These aren’t just theoretical concepts, they are real assets that have a significant impact on your business. Examples include: intellectual propertyBrand awareness, customer relationships, and Goodwill.

In contrast, tangible assets are physical items that can be touched and typically fall into the PPE (property, plant, and equipment) category.

Two types of intangible assets

intangible assets They fall into two categories:

1. Identifiable intangible assets
2. Unidentifiable intangible assets

1. Identifiable intangible assets

Identifiable intangible assets can be acquired or separated from a company (bought and sold) but have no physical form. These assets often have an indefinite life and will last as long as the company exists.

Other examples of intangible assets include:

• Patents
• trademark
• Copyright
• Non-monetary government subsidies
• Airport landing rights
• Broadcasting license
• Proprietary Data and Algorithms

For example, a social media platform’s feed algorithm is an intangible asset with no expiration date: it will add value over the long term and could even be sold to another company.

2. Unidentifiable intangible assets

Unidentifiable intangible assets cannot be purchased or sold separately because they exist only in relation to a company. These are often well-defined intangible assets with a limited useful life.

Examples of unidentifiable intangible assets include:

Although difficult to quantify, these assets contribute significantly to the overall value of a company. Customer RelationshipsFor example, an asset is only an asset as long as it is maintained.

How do companies acquire intangible assets?

Companies can acquire intangible assets by either creating them internally or by purchasing them from other companies.

Internal development

Companies often develop assets in-house. For example:

• a Social media The company collects user behavior data to sell targeted advertising.
• Creative agencies build trust with their freelancers by offering the best compensation and a positive working environment.
• A hairdresser has created a viral TikTok post that is boosting the reputation of her salon.

External Acquisitions

Companies can also acquire intangible assets from other companies. For example, when Meta (formerly Facebook) acquired Instagram and WhatsApp, the company gained:

• Underlying technology (code, design)
• Branding
• Relationship with Advertisers
• intellectual property
• Reputation and credibility

While many apps perform similar functions, Instagram and WhatsApp’s intangible assets have contributed greatly to their high valuations.

How to calculate the value of intangible assets

Unlike tangible assets, the value of intangible assets can be difficult to quantify. A common formula for estimating the value of an intangible asset is:

Intangible asset value = market value of business – net tangible asset value

To use this formula:

Calculate the value of goodwill

Goodwill is an abstract concept, but it can be calculated when a company is bought or sold: the difference between the fair market value of the company’s assets and liabilities minus the purchase price.

Goodwill = Purchase Price – (Assets – Liabilities)

Depreciation of assets

We determine the value of many intangible assets over time, a process that involves gradually depreciating the asset’s initial cost over a period of time.

Amortization only applies to intangible assets that have a finite useful life. For example, your company may have a patent. That patent typically has a life of 20 years in the United States. However, the brand recognition that comes with that patent does not have a finite useful life and cannot be amortized.

To calculate depreciation, we use the straight-line method.

Depreciation = Initial Value / Useful Life

Note: Most intangible assets do not have residual value, making the calculation easier.

Recording intangible assets on the balance sheet

Only acquired intangible assets can be listed. Balance sheet It is found under tangible assets. It is omitted because internally developed assets cannot be assigned a fair market value.

For example, Meta couldn’t include its home-grown “Like” button on its balance sheet, but it could include Instagram’s “double tap” feature because it acquired it as marketable intellectual property.

How are intangible assets disclosed?

To comply with International Financial Reporting Standards, intangible assets are measured and disclosed at cost. This means that intangible assets are valued and disclosed when they are sold. The purchaser can use these assets as expense and amortization items in its own accounting. Profit and loss statement.

For intangible assets with finite useful lives, amortization expense is included in the income statement. Assets with indefinite useful lives are not amortized, but are tested annually for impairment. If impaired, the asset’s carrying amount is reduced to its recoverable amount and an impairment loss is recorded in the income statement.

Legal protection of intangible assets

To preserve the value of your intangible assets, it is important to take steps to provide them with legal protection. Common methods include:

1. Patents: It grants the exclusive right to use, manufacture, sell and distribute an invention for a fixed period of time (usually 20 years).
2. trademark: Protect your brand name logoslogans, and other identifiers that distinguish your products or services.
3. Copyright: It protects original works of literature, music, art, software, architecture, and other copyrighted material.
4. Non-Disclosure Agreement (NDA): Protect trade secrets and confidential business information that gives you a competitive advantage.
5. license Terms of Agreement: It allows a company to grant rights to use its assets to third parties under certain conditions.
6. Non-Competition and Non-Solicitation Agreements: Restricts an employee or partner from engaging in competitive activities or soliciting customers or employees for a certain period of time after termination.
7. Intellectual Property (IP) law: Various national and international intellectual property laws protect intangible assets.