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What Is An Intangible Asset?: Goodwill Intellectual Property Trademarks Exist in Opposition To Tangible Assets

An intangible asset is an asset that lacks physical substance, such as patents, trademarks, copyrights, brand recognition, and goodwill. Intangible assets can be created internally by a company or acquired from another company. Internally-created intangible assets do not appear on a company's balance sheet, while acquired intangible assets are recorded as assets. Examples of intangible assets that may appear on a balance sheet include patents, customer lists, and non-compete agreements acquired through business purchases.

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37 views

What Is An Intangible Asset?: Goodwill Intellectual Property Trademarks Exist in Opposition To Tangible Assets

An intangible asset is an asset that lacks physical substance, such as patents, trademarks, copyrights, brand recognition, and goodwill. Intangible assets can be created internally by a company or acquired from another company. Internally-created intangible assets do not appear on a company's balance sheet, while acquired intangible assets are recorded as assets. Examples of intangible assets that may appear on a balance sheet include patents, customer lists, and non-compete agreements acquired through business purchases.

Uploaded by

Sheila Mae Araman
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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INTANGIBLE ASSETS

What Is an Intangible Asset?


An intangible asset is an asset that is not physical in nature. Goodwill, brand
recognition and intellectual property, such as patents, trademarks, and
copyrights, are all intangible assets. Intangible assets exist in opposition to
tangible assets, which include land, vehicles, equipment, and inventory.

Additionally, financial assets such as stocks and bonds, which derive their value
from contractual claims, are considered tangible assets.

Understanding an Intangible Asset


An intangible asset can be classified as either indefinite or definite. A company's
brand name is considered an indefinite intangible asset because it stays with the
company for as long as it continues operations. An example of a definite
intangible asset would be a legal agreement to operate under another company's
patent, with no plans of extending the agreement. The agreement thus has a
limited life and is classified as a definite asset.

While an intangible asset doesn't have the obvious physical value of a factory or
equipment, it can prove valuable for a firm and be critical to its long-term success
or failure.

For example, a business such as Coca-Cola wouldn't be nearly as successful if it


not for the money made through brand recognition. Although brand recognition is
not a physical asset that can be seen or touched, it can have a meaningful
impact on generating sales.

Valuing Intangible Assets


Businesses can create or acquire intangible assets. For example, a business
may create a mailing list of clients or establish a patent. If a business creates an
intangible asset, it can write off the expenses from the process, such as filing the
patent application, hiring a lawyer, and paying other related costs.

In addition, all the expenses along the way of creating the intangible asset are
expensed. However, intangible assets created by a company do not appear on
the balance sheet and have no recorded book value. Because of this, when a
company is purchased, often the purchase price is above the book value of
assets on the balance sheet. The purchasing company records the premium paid
as an intangible asset on its balance sheet.

KEY TAKEAWAYS
 An intangible asset is an asset that is not physical in nature, such as a
patent, brand, trademark, or copyright.
 Businesses can create or acquire intangible assets.
 An intangible asset can be considered indefinite (a brand name, for
example) or definite, like a legal agreement or contract.
 Intangible assets created by a company do not appear on the balance
sheet and have no recorded book value.
Example of Intangible Assets
Intangible assets only appear on the balance sheet if they have been acquired. If
Company ABC purchases a patent from Company XYZ for an agreed-upon
amount of $1 billion, then Company ABC would record a transaction for $1 billion
in intangible assets that would appear under long-term assets.

The $1-billion asset would then be written off over a number of years
via amortization. Indefinite life intangible assets, such as goodwill, are not
amortized. Rather, these assets are assessed each year for impairment, which is
when the carrying value exceeds the asset's fair value. (For related reading, see
"How Do Intangible Assets Show on a Balance Sheet?")

An intangible asset is a non-physical asset having a useful life greater than one year. These
assets are generally recognized as part of an acquisition, where the acquirer is allowed to assign
some portion of the purchase price to acquired intangible assets. Few internally-generated
intangible assets can be recognized on an entity's balance sheet. Examples of intangible assets
are:

 Marketing-related intangible assets

o Trademarks

o Newspaper mastheads

o Internet domain names

o Noncompetition agreements

 Customer-related intangible assets

o Customer lists

o Order backlog

o Customer relationships

 Artistic-related intangible assets


o Performance events

o Literary works

o Musical works

o Pictures

o Motion pictures and television programs

 Contract-based intangible assets

o Licensing agreements

o Service contracts

o Lease agreements

o Franchise agreements

o Broadcast rights

o Employment contracts

o Use rights (such as drilling rights or water rights)

 Technology-based intangible assets

o Patented technology

o Computer software

o Trade secrets (such as secret formulas and recipes)


An intangible asset is an asset that lacks physical substance; in contrast to physical assets, such
as machinery and buildings, and financial assets such as government securities. An intangible asset
is usually very hard to evaluate. Examples are patents, copyright, franchises, goodwill, trademarks,
and trade names. The general interpretation also includes software and other intangible computer
based assets; these are all examples of intangible assets. Intangible assets generally—though not
necessarily—suffer from typical market failures of non-rivalry and non-excludability.[1]

Definition[edit]
Intangible assets may be one possible contributor to the disparity between "company value as per
their accounting records", as well as "company value as per their market
capitalization".[2] Considering this argument, it is important to understand what an intangible asset
truly is in the eyes of an accountant. A number of attempts have been made to define intangible
assets:
 Prior to 2005 the Australian Accounting Standards Board issued the Statement of Accounting
Concepts number 4 (SAC 4).[3] This statement did not provide a formal definition of an intangible
asset but did provide that tangibility was not an essential characteristic of asset.
 International Accounting Standards Board standard 38 (IAS 38)[4] defines an intangible asset as:
"an identifiable non-monetary asset without physical substance." This definition is in addition to
the standard definition of an asset which requires a past event that has given rise to a resource
that the entity controls and from which future economic benefits are expected to flow. Thus, the
extra requirement for an intangible asset under IAS 38 is identifiability. This criterion requires
that an intangible asset is separable from the entity or that it arises from a contractual or legal
right.
 The Financial Accounting Standards Board Accounting Standard Codification 350 (ASC 350)
defines an intangible asset as an asset, other than a financial asset, that lacks physical
substance.
The lack of physical substance would therefore seem to be a defining characteristic of an intangible
asset. Both the IASB and FASB definitions specifically preclude monetary assets in their definition of
an intangible asset. This is necessary in order to avoid the classification of items such as accounts
receivable, derivatives and cash in the bank as an intangible asset. IAS 38 contains examples of
intangible assets, including: computer software, copyright and patents.

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