Next video:
Loading the player...

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. 

 

Related Articles
  1. Investing

    Intangible Assets Provide Real Value To Stocks

    Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value.
  2. Managing Wealth

    Comparing Tangible and Intangible Assets

    Tangible assets are physical assets such as land, vehicles or equipment.
  3. Investing

    Goodwill versus other intangible assets: What's the difference?

    "Intangible" assets don't possess physical substance. Yet they are quantifiable, and of great importance to any business.
  4. Small Business

    How To Protect Your Intellectual Property

    Intellectual property rights - patents, trademarks, trade secrets and copyrights - protect creators of everything from new products to new pop songs.
  5. Small Business

    Your Business Could Ruin Your Investment Strategy

    It's important to properly value your business assets when managing your portfolio. Here's why.
  6. Investing

    Are Facebook, Coke Next for Transfer Pricing Tax?

    The ruling on Medtronic's transfer pricing practices could spell trouble for other multinationals.
  7. Small Business

    The Power of Branding

    Power of branding is the ultimate economic moat, and we look at the approaches and effects of good and bad branding.
  8. Taxes

    How Big Corporations Avoid Big Tax Bills

    How do companies manage to pay such low taxes? Just look at Google's 2.4% tax rate.
  9. Financial Advisor

    Why Is The Star Wars Franchise So Valuable?

    There is no doubt that Star Wars was well worth the $4 billion-plus purchase price.
  10. Investing

    Are These the Top 4 Game & Toy Stocks of 2016?

    These four toymaker stocks have the potential to deliver moderate to significant stock appreciation plays in 2016.
Trading Center