Intangible assets are long-term resources that typically lack a physical presence and have an unknown amount of future value or amount of benefits. In other words, intangible assets are typically intellectual assets that benefit the company over several accounting periods.
You can divide intangible assets into two categories: intellectual property and goodwill.
- Intellectual property is something that you create with your mind, such as a design. You have rights to your intellectual property, and other companies cannot copy it. Intellectual property includes trademarks, patents, and licensing agreements.
- Goodwill measures several factors that affect your brand’s value. Examples of goodwill include your company’s reputation, strategies, customer base, and employee relations.
You can divide assets into two groups: intangible and tangible. Tangible assets are items of value that you can touch. Examples of tangible assets include furniture, computers, buildings, and vehicles.
Sometimes, it’s hard to tell whether an asset is tangible or intangible. Tangible and intangible assets often connect to each other. That can make determining value difficult.
For example, you might keep a customer list on your computer and print it on paper. The paper itself is tangible. You can hold it in your hands. But, the actual item of value is not a piece of paper—the item of value in the list. Since the information holds value, the customer list is an intangible asset.
Recording intangible assets
Accounting for intangible assets has some unique requirements. You record intangible assets on the balance sheet. You only record an intangible asset if your business buys or acquires it. Also, the intangible asset must have an identifiable value and a long-term lifespan. You do not record intangible assets that you create within your business.
For example, your logo is an intangible asset that holds value. But, you created the logo within your business. You did not buy the rights to the logo from another company. You will not record the logo on the balance sheet.
Calculating Intangible Assets
The formula below can be used for calculating the total (on and off-balance sheet) financial value of a company’s intangible assets:
Market Value of Business – Net Tangible Assets Value = Intangible Assets Value
It should be noted that this formula only gives an approximate value. Market value is the current value of the company in the stock market.
What is the amortization of intangible assets?
When you start researching intangible assets, you’ll probably encounter the term “amortization” at one point or another. But what is amortization of intangible assets, and how does it relate to depreciation? On the face of it, amortization and depreciation look relatively similar – they’re both terms used to describe the expense of an asset over the course of its usable life. Essentially, they describe the same process, just for different types of assets.
Amortization refers to the mechanism whereby you reduce the value of an intangible asset over time, whereas depreciation refers to the process of reducing the value of tangible assets.