The World of Intangible Assets: Their Value and Impact

Intangible assets are long-term resources that lack a physical form but hold measurable economic value for a business. Patents, trademarks, copyrights, franchise agreements, and goodwill are all intangible assets. They often represent a significant portion of a company's total value -- in many technology and service businesses, intangibles exceed tangible assets on the balance sheet.

Understanding how to identify, record, and amortize intangible assets is important for accurate financial reporting, tax compliance, and business valuation.

Two Categories of Intangible Assets

Intellectual Property

Intellectual property (IP) is something created through human ingenuity that carries legal protections. Common forms include:

• Patents -- exclusive rights to an invention, typically lasting 20 years from the filing date. The U.S. Patent and Trademark Office grants and tracks these.
• Trademarks -- brand names, logos, and slogans that distinguish a company's goods. Trademarks can be renewed indefinitely, making some of them indefinite-lived intangible assets.
• Copyrights -- protection for original works of authorship, including software code, publications, and creative content.
• Trade secrets -- proprietary formulas, processes, or methods (e.g., a restaurant's signature recipe).

Goodwill

Goodwill arises when one company acquires another for more than the fair value of its identifiable net assets. The excess purchase price reflects factors such as brand reputation, customer relationships, employee expertise, and strategic positioning.

For example, if Company A buys Company B for $2 million and Company B's identifiable net assets are worth $1.4 million, the remaining $600,000 is recorded as goodwill.

Intangible vs. Tangible Assets

Feature	Intangible Assets	Tangible Assets
Physical form	No	Yes
Examples	Patents, trademarks, goodwill	Equipment, vehicles, buildings
Cost allocation method	Amortization	Depreciation
Salvage value	Usually none	Often has residual value
Balance sheet section	Noncurrent assets	Property, Plant & Equipment

The line between tangible and intangible can blur. A customer list stored on a computer is physically printed on paper, but the value lies in the information, not the paper -- making it an intangible asset.

How To Record Intangible Assets

Under GAAP (FASB ASC 350), intangible assets are recorded on the balance sheet only when they are:

1. Acquired from an external party (purchased or obtained through a business combination).
2. Identifiable -- either arising from contractual or legal rights, or capable of being separated and sold independently.

Internally generated intangibles -- such as a brand you built from scratch or a customer base you grew organically -- are generally not capitalized. The costs of developing them (advertising, training, R&D) are expensed as incurred. This rule is one reason a company's market value often exceeds its book value.

Journal Entry for an Acquired Patent

Suppose your company purchases a patent for $80,000 in cash:

Account	Debit	Credit
Patent (Intangible Asset)	$80,000
Cash		$80,000

You then amortize the patent over its remaining useful life.

Amortization of Intangible Assets

Amortization spreads the cost of a finite-lived intangible asset over the periods it benefits the business. It follows the same logic as depreciation for tangible assets but applies the straight-line method in nearly all cases.

Amortization Example

A franchise agreement costs $120,000 and has a contractual term of 15 years.

Annual amortization = $120,000 / 15 = $8,000 per year

Account	Debit	Credit
Amortization Expense	$8,000
Accumulated Amortization -- Franchise		$8,000

After 15 years the franchise agreement's book value reaches zero.

Indefinite-Lived Intangibles

Some intangible assets -- such as trademarks that can be renewed indefinitely and goodwill -- do not have a finite useful life. These are not amortized. Instead, they are tested for impairment at least annually. If the asset's fair value drops below its carrying amount, the company records an impairment loss.

Private companies may elect to amortize goodwill over up to ten years under the FASB's accounting alternative (ASU 2014-02), which simplifies annual impairment testing.

Tax Treatment of Intangible Assets

The IRS treats acquired intangible assets under Section 197, which requires most purchased intangibles to be amortized over 15 years for tax purposes, regardless of their actual useful life (IRS Publication 535). Section 197 intangibles include:

• Goodwill
• Going-concern value
• Customer lists
• Patents and copyrights (when acquired as part of a business purchase)
• Franchise, trademark, and trade-name rights

Research and development costs that do not result in an acquired intangible are generally deducted as current expenses rather than capitalized.

Common Mistakes to Avoid

1. Capitalizing internally developed brands. GAAP does not allow recording internally generated goodwill or brand value on the balance sheet. Only acquired intangibles qualify.
2. Using the wrong amortization period. Match the period to the legal or contractual life of the asset, not an arbitrary estimate.
3. Skipping impairment testing. Indefinite-lived intangibles and goodwill must be tested annually. Failing to do so can overstate assets.
4. Confusing amortization with depreciation in your records. Use separate contra-asset accounts (Accumulated Amortization vs. Accumulated Depreciation) to keep reporting clean. Reconcile these against your invoices and purchase records in your financial system.

Related Articles

• Depreciation vs. Amortization
• Is Equipment a Current Asset?
• How To Calculate Goodwill of a Business
• What Is Financial Accounting?