Intangible assets are non-physical resources that have value and contribute to an organization's ability to compete in its market. Intangible assets include copyrights, trademarks, patents, trade secrets, brand recognition, and customer lists.
These assets usually have little or no physical substance but instead take more tangible forms, such as computer data files and documents.
Intangible assets are important because they help measure the actual value of a business beyond just measuring its real estate, current assets, and other tangible property. The value of intangible assets is typically not included on standard financial statements or stock valuations. However, by correctly calculating the value of these intangibles, you can gain a more accurate picture of what your company is worth.
What is the Difference Between Intangible Assets and Tangible Assets?
There are a few differences between intangible assets and tangible assets. Intangible assets are non-physical resources with a value that contribute to an organization's ability to compete in its market.
On the other hand, tangible assets are physical resources with a value that contribute directly to the organization's ability to produce goods and services.
Another difference between tangible and intangible assets is that tangible assets go on the balance sheet, but most intangible assets do not.
Intangible assets are a critical part of any business, but they are difficult to measure. The value of many intangible assets can only be determined through a sale process in which multiple parties bid on the assets, and then the bids are compared with each other to determine the value. That's why there is often a big difference between the amount a business owner thinks his intangible assets are worth and the amount a potential buyer does.
How to Measure and Value Intangible Assets
There are a few ways to measure and value intangible assets. -
Residual method: The residual method is the most accurate way to determine the value of intangible assets, but it is also the most complicated. It works by calculating the net present value of the future cash flows of the intangible asset and then subtracting any relevant costs. -
Third-party method - The third-party method can help provide a ballpark estimate of the value of intangible assets. You can hire an outside expert to help decide the value of certain intangible assets, such as customer lists and intellectual property. The expert would then use comparable businesses to evaluate your company. -
Discounted cash flow method: The discounted cash flow method is a simplified version of the residual method. It involves determining the present value of the future cash flows of the intangible assets and any relevant costs. Once you have this information, you can plug it into a standard formula to estimate the value of intangible assets.
Is goodwill an intangible asset
Goodwill is the difference between what a company's assets and what the company is worth. It's the intangible value of the company.
For example, if the company's assets are worth $1 million but the company is worth $10 million, then $9 million of that additional value is goodwill. For example, let's say a company has $1 million in cash, $1 million in land, and $1 million in equipment.
The company is then purchased for $2 million in cash. The company's assets have increased from $3 million to $5 million. The business's goodwill is the $2 million difference between the assets and the purchase price.
Examples of Intangible assets
Goodwill, customer lists, patents, trademarks, and trade secrets are all examples of intangible assets.
A customer list, for example, has no physical substance. It is simply a record of names and contact information. However, that customer list is valuable because it attracts and keeps customers.
Patents are another example of intangible assets. While patents have a physical form and are filed with the government, they are used by companies to protect their creations and inventions.
Trademarks are another example of intangible assets. A trademark is a word or symbol that identifies a product or service as belonging to a specific company.
Is software an intangible asset?
While software may not have any physical substance, it is far from an intangible asset. There are two common misconceptions about software: (1) It can't be an asset, and (2) it can't be valuable.
While it's true that a computer program doesn't have any physical substance, it does indeed have value. And that value can be captured for accounting purposes through capitalization.
Capitalization addresses the question: When is it appropriate to treat the acquisition or creation of a certain asset as a capital expense (which is reported on the balance sheet) versus an operating expense (which is deducted from revenue when calculating income)?
In the case of computer software, we capitalize the asset if it meets two criteria: it has an expected useful life of more than one year and an identifiable cost. That's because the software has an identifiable cost: the price paid to acquire it. Once acquired, it also has an identifiable cost: the cost of maintenance and upgrades. It also has a useful life since it must be maintained, upgraded, and replaced every few years. All of these factors make the software an asset.
How to account for intangible assets under IFRS
International Financial Reporting Standards (IFRS) state that when an intangible asset is purchased or created, it must be capitalized. Capitalizing an intangible asset means that it is recorded as a long-term asset on the balance sheet and amortized over its expected useful life.
One of the most important things to remember when accounting for intangibles is to identify the asset being created and properly identify its useful life. Once identified, you will record the initial cash outlay as an intangible asset on the balance sheet and then record the asset along with its cost in each income statement as it is used over time. Examples of intangible assets that are commonly capitalized include: - Computer software used in the operations of the business - Franchises, patents, and trademarks - Customer lists.
How to account for intangible assets under US GAAP
Under U.S. GAAP, there are two methods of determining the value of intangibles: the fair value method and the equity method. The fair value method is used when the company is interested in acquiring the company with intangible assets. The equity method is used when a company already owns an interest in the firm and might be interested in expanding its ownership. Under the fair value method, the intangible assets are valued and recorded at their current market value. Under the equity method, the investor gathers information about the firm and subtracts their expectations of what it would cost to replace the assets. The difference between the two numbers is the value of the intangible assets. Another way to look at this is that the investor is paying what they think the firm is worth, less what they think it would cost to replace the assets.
How is it said that NFTs are an intangible asset?
A non-fungible token is an intangible asset. This means that each token has some exceptional value. A non-fungible token could be a digital representation of an asset. This means the token is distinct and has a unique value beyond just being a token.
Intangible assets are important because they help measure the actual value of a business beyond just measuring its real estate, inventory, and other tangible property. The value of intangible assets is typically not included on standard balance sheets or stock valuations.
However, by correctly calculating the value of these intangibles, you can gain a more accurate picture of what your company is worth. Moreover, intangible assets can take much work to measure. The best way to measure intangible assets is to use the residual method. Additionally, the value of intangible assets can be challenging to ascertain because these assets typically have no physical form and are difficult to appraise.