Intangible assets are typically nonphysical assets used over the long-term. Intangible assets are often intellectual assets. Proper valuation and accounting of intangible assets are often problematic, due in large part to the way in which intangible assets are handled. The difficulty assigning value stems from the uncertainty of their future benefits. Also, the useful life of an intangible asset can be either identifiable or non-identifiable. Most intangible assets are long-term assets meaning they have a useful life of more than a year.
Examples of intangible assets that are intellectual property include:
Intangible assets can also include internet domain names, service contracts, computer software, blueprints, manuscripts, joint ventures, medical records, and permits. Brand equity is an intangible asset since the value of a brand is determined by the perception of the company's customers and is not a physical asset.
In short, intangible assets add to a company's possible future worth and can be much more valuable than its tangible assets.
How Intangible Assets Show on the Balance Sheet
Intangible assets are only listed on a company's balance sheet if they are acquired assets and assets with an identifiable value and useful lifespan that can thus be amortized. The accounting guidelines are outlined in generally accepted accounting principles (GAAP).
An example of a balance sheet:
Apple Inc. (AAPL)
Below is a portion of Apple's balance sheet from their 2017 10K statement.
- Intangible assets were approximately $2.2 billion for Apple in 2017 (highlighted in blue).
- Intangible assets are not listed under current assets (in pink) showing their long-term useful life.
Internally developed intangible assets do not appear as such on a company's balance sheet. Even though an intangible asset such as Apple's logo carries huge name recognition value, it does not appear on the company's balance sheet. The reason for not appearing on the balance sheet is because the logo was developed internally and does not have a price that can be used to assign fair market value, as would be the case had the logo been part of the acquisition of another firm.
For example, if a company spent $10,000 to purchase the right to use another company's customer list for a period of 10 years, then $1,000 of the purchase price would be expensed each year, and the value of the customer list license would appear on the balance sheet in year three as $7,000.
Intangible assets with an infinite life, such as goodwill, are not amortized and therefore do not appear on the company's balance sheet.
For more on assets including a more in-depth look at the balance sheet of Apple Incorporated (AAPL), please read "How the Income Statement and Balance Sheet Differ?"