What are Intangible Assets on Balance Sheet?
Intangible asset is an asset which does not have any physical existence and cannot be touched like goodwill, patents, copyrights, franchise etc. They are long-term or long living assets as they are used included for more than 1 year by the company.
- It is very difficult to value the intangible assets on balance sheet as it will not be having any defined value like other tangible assets. It not recorded in the balance sheet of the organization if it is internally created, but if they are acquired then it will be recorded in the balance sheet of the organization.
- If any organization spends more money on advertising and creating a brand name for the organization even after spending also the asset will not be considered in the balance sheet.
List of Intangible Assets Types & their Examples
The following are a list of types and examples of the intangible asset with an explanation:-
#1 – Goodwill
Below is the Goodwill amount reported by Google Inc from all its acquisitions.
It is a type of intangible assets which is recognized and valued when one entity tries to acquire the other entity. Goodwill is a separate kind of intangible assets where goodwill is never amortized. But other intangible assets are amortized.
Goodwill Formula =Acquiring cost of the business – Net asset value of the company.
The management of the organization is responsible for the valuation of the goodwill of the organization every year. When the company acquires other company then the acquired goodwill should be mentioned in the balance sheet. For example company, A is purchasing company X for Rs 2000000 and the net asset value is Rs 1500000. So the difference Rs 500000 is treated as goodwill.
#2 – Copyrights
Copyright is a type of intangible asset with legal right for the creator of the original work. This exists in many countries. By obtaining this right the original work can be used by the one who obtains the right to use the work. For example journal, books, magazines etc.
#3 – Trademarks
source: Google 10K
Trademark is used to legally protect the logo, brand name, sign and design of a firm. The trademark owner can be an individual, partnership firm or any kind of legal entity. Trademark protects the trademark owners from others using it.
Patents provide the owner right from others using, selling, importing from using the invention or the product for years. Where one company can purchase the patent from other company and can use, invent or develop the product.
Characteristics of Intangible Assets on Balance Sheet
- Lack of existence, where it cannot be seen, touched or even feel.
- It should be identifiable.
- Intangible assets can be acquired or purchased and even they can be licensed, leased or rented.
Uses/Advantages of Intangible Assets on Balance Sheet
- General intangible assets can be purchased and sold. Like copyrights of the musicians or artists sale copyrights of music or album.
- They are used to increase the sale value. Goodwill of the company can lead to an increase in the price of the product of the company.
- If the business has the patents and trademark. The company can license the patents to others who can produce products for them.
- Amortization of the intangible assets: This allows spreading the expenses across the life span of the intangible. The collective amortization expense of several years reduces the business income during the year. Thus the business tax will also get reduced. Amortization of it is used for both accounting purpose and the tax purpose.
- It provides identity to the company. Even if the value of the intangible asset is valued less when compared to the tangible assets. Where if the brand name is stronger it helps in creating a new set of customers to the products. The value of the intangible asset is important for company growth and development.
Disadvantages of Intangible Assets on Balance Sheet
- Internally generated Goodwill is not recorded in the balance sheet of the business. It is difficult for all to understand the value of these intangible assets.
- The exact value of the intangible assets cannot be derived easily.
- Intangibles needs to be constantly monitored like a half year or yearly so that they can find an approximate value of those assets.
- Sometimes it can bring the over value to the organization.
- The expectation of the customers will be high on the companies which are having over the value of intangible assets.
Intangible Assets Valuation
The following are three major methods of intangible asset valuation.
#1 – Income Approach
This approach is mainly used on the assets which produce income or generates cash flow. Income approach converts the total amount to a single discounted amount for a particular period. Difficulty in this approach is to distinguish the cash flow which is linked to a particular intangible asset.
#2 – Cost Approach
Cost approach considers the historical cost and the estimated cost. It usually ignores the amount, time and the risk of performance of a competitive environment. This cost includes the new reproduction cost of the product and the current cost of a similar new property.
#3 – Marketable Approach
This approach is based on the value of the similar intangible asset. This market data is used in the income-based model as well. The direct market source is available on the internet. which is very useful to compare the market value. It involves buying, selling, leasing and licensing.
The intangible asset on the balance sheet is one of the important part of the organization as they are the long-term assets which will be with the organization until the end of the organization. It is very difficult to derive the value of it as they cannot be seen or feel. It is very difficult to estimate or to value the assets. This helps the organization to internally develop the assets or acquire the assets from other organization or even can take those assets for lease or rent.
This has been a guide to what is Intangible Assets and its definition. Here we list the types of Intangible Assets – Goodwill, patents, copyrights, trademarks etc along with advantages and disadvantages. We have also included the top 3 methods of valuing intangible asset. You may learn more about finance from the following articles –