Intangible Assets Meaning
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 the 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.
Intangible Assets Types
#1 – Goodwill
Below is the Goodwill amount reported by Google Inc from all its acquisitions.
It is a type of assets that are 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 intangibles 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 another 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 asset with the legal rights of 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. E.g., journals, books, magazines, etc.
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#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 companies and can use, invent, or develop the product.
- 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.
- 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.
- Suppose 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 purposes and tax purposes.
- It provides identity to the company even if the value of the intangibles 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 intangibles is important for company growth and development.
- 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 these assets cannot be derived easily.
- Intangibles need 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 overvalue to the organization.
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
The cost approach considers the historical cost and the estimated cost. It usually ignores the amount, time, and 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 parts of the organization as they are the long-term assets that 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 organizations or even can take those assets for lease or rent.
This has been a guide to what is Intangible Assets and its Meaning. 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 assets. You may learn more about finance from the following articles –