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Intangible assets don't physically exist, yet are valuable because they represent potential revenue. Take an intangible asset like brand recognition; there is value in people remembering your company and then wanting to buy its products.

Another type of intangible asset is intellectual property. Intellectual property includes legal rights such as patents, trademarks and copyrights. Intellectual property has a fixed lifespan. Because of this limited lifespan, intangible assets are amortized, and thus fractionally expensed over their legal lifespan.

Rocky Star is a famous guitar player and owner of Rocky Star Productions. Rocky Star Productions owns a number of intangible assets. One group of intangible assets is the copyrights to all of Rocky’s songs. Another is the brand recognition associated with Rocky’s name, which Rocky was smart enough to trademark. Rocky also invented a guitar sound effect, which he patented and licensed to a third-party manufacturer. 

Owning the copyrights, trademark and patent gives Rocky Star Productions the ability to receive multiple revenue streams: the company receives revenue whenever one of Rocky’s songs is purchased, played or performed; no one can use Rocky’s name on a product without paying for that right; and whenever the third-party manufacturer sells one of the guitar sound effects, it pays Rocky Star Productions a royalty. While none of these assets have a physical aspect, clearly they do provide a future financial benefit for Rocky Star Productions and thus are included in the balance sheet. 


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