What is an Intangible Asset
An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks and copyrights, are all intangible assets. Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment and inventory. Additionally, financial assets such as stocks and bonds, which derive their value from contractual claims, are considered tangible assets.
What are Intangible Assets?
BREAKING DOWN Intangible Asset
An intangible asset can be classified as either indefinite or definite. A company's brand name is considered an indefinite intangible asset because it stays with the company for as long as it continues operations. An example of a definite intangible asset would be a legal agreement to operate under another company's patent, with no plans of extending the agreement. Therefore, the agreement has a limited life and is classified as a definite asset.
While intangible assets don't have the obvious physical value of a factory or equipment, they can prove valuable for a firm and be critical to its long-term success or failure. For example, a business such as Coca-Cola wouldn't be nearly as successful if it not for the money made through brand-name recognition. Although brand recognition is not a physical asset that can be seen or touched, it can have a meaningful impact on generating sales.
Valuing Intangible Assets
Businesses can create or acquire intangible assets. For example, a business may create a mailing list of clients or establish a patent. A business could also choose to acquire intangibles. If a business creates an intangible asset, it can write off the expenses from the process, such as filing the patent application, hiring a lawyer and other related costs. In addition, all the expenses along the way of creating the intangible asset are expensed. However, intangible assets created by a company do not show up on the balance sheet and have no recorded book value. Because of this, when a company is purchased, often the purchase price is above the book value of assets on the balance sheet. The purchasing company records the premium paid as an intangible asset, goodwill, on its balance sheet.
Intangible assets only show up on the balance sheet if they have been acquired. If Company ABC purchases a patent from Company XYZ for an agreed-upon amount of $1 billion, then Company ABC would record a transaction for $1 billion in intangible assets that would show up under long-term assets. The $1 billion asset would then be written off over a number of years via amortization. Indefinite life intangible assets, such as goodwill, are not amortized. Rather, these assets are assessed each year for impairment, which is when the carrying value exceeds the asset's fair value.