What does an intangible asset mean?
An intangible asset is something that can’t be seen or touched. Intangible assets can’t be kept or changed because they don’t have a shape. Brands, loyalty, and intellectual property are common types of intangible assets. It can be challenging for businesses to determine how much these things are worth because they don’t have a shape or form. On the other hand, tangible assets are things that you can hold in your hands.
How to Understand Intangible Assets
As was already said, an intangible object can’t be seen or touched. Because of this, it can’t be dealt with. Most people consider these goods long-term investments whose value rises over time. Intangible assets are things that can’t be seen or touched. They can be handy to the owner and essential to their long-term success (or failure).
Most of the time, companies own intangible assets. These include goodwill, name recognition, and intellectual property like copyrights, patents, and trademarks. These goods can be broken down into two groups:
Indefinite: This kind of intangible asset, like a brand name, goes with the owner as long as it works.
Specific: This type can only be used for a particular time. A specific intangible asset is a formal agreement to use another company’s patent without plans to extend the agreement.
Intangible assets are things that businesses can make or buy. A business might, for instance, make an email list of customers or file for a patent. If a business makes an intangible asset, it can write off the costs it went through to make it, like filing for a patent, hiring a lawyer, and other connected costs.
If the company that owns something intangible fails or goes bankrupt, that thing can lose its value.
Many kinds of intangible assets
Let’s look at some of the most popular types of intangible assets, like intellectual property, brands, and goodwill.
Brand names
A brand is what makes a company unique. This could be a business name, a logo, or a symbol. When businesses come up with their names, they often use marketing, design, and advertising. This makes it easy for customers to find a particular company. Most people can quickly tell what company Apple (AAPL) is by looking at its logo.
Brands are important because they help people stay loyal to a business and build brand equity. Some customers may not care about price and pay more for a brand’s product out of love, even if it costs more than a similar product from a different company. Think about the players who pick Nike over Adidas and vice versa.
Peace and kindness
When one business buys another, the intangible assets that come with the deal are called goodwill. If a company buys another business, the goodwill of the target is the amount that is greater than its net assets. There will be goodwill if the amount exceeds the target’s book value. Anything less than the book value is called adverse credit.
Having intellectual property
The law protects intellectual property, which is a type of intangible property. This means that another person or business can’t use it without permission from the owner. Some common types of intellectual property are
- Right to copy
- Digital Things
- Business franchises
- Getting patents
- Brand names
- Secrets of Trade
When you use someone else’s intellectual property without their permission, this is called infringement. This includes intentionally or accidentally using, imitating, or copying someone else’s brand name, image, or other assets. Figure out the value of intangible assets.
Coke (KO) and other companies like it would not be nearly as successful without the money they make from name recognition. There is no real thing you can see or touch that makes up brand recognition, but it can significantly affect sales. How does a business determine how much it is worth?
The American Institute of Certified Public Accountants (AICPA) says that businesses can usually figure out how much their intangible assets are worth in three ways. These are the:
Market Approach: This price is based on an estimated value by comparing similar items. Its main goal is to give similar intangible goods value. It might be challenging because there isn’t much information about other companies’ related assets.
When a company has virtual assets that bring in cash, they can use the income approach. The relief from royalty method is one way to figure out income. It estimates possible royalty payouts from using the asset or not losing money.
This method is based on the idea of substitution and doesn’t consider any time or amount of benefits that might come in the future.
All of the costs that come with creating intangible assets are written off. On the other hand, its intangible assets don’t show up on the balance sheet or have no book value. Most of the time, the price paid for a business is higher than its book value, which can be found on its balance sheet. The company that bought the asset lists the price it paid as an intangible asset on its balance sheet.
Intangible Assets vs. Tangible Assets
As was already said, intangible goods are different from tangible ones. They have a shape, meaning you can hold and move them. These are some of the most important things that a business owns.
It might be easier to determine the value of physical assets than intangible assets. It’s up to the owner to decide whether to sell the item for cash or pay an appraiser to figure out its fair market value (FMV). A common way to determine how much something is worth is to compare it to how much a new one would cost.
The following are some of the most popular types of tangible assets:
- Things Used
- Things for the home
- Stock List
- Land
- The property
- Getting around
Other physical assets are financial securities, like stocks and bonds, even though you can’t hold them. That’s because their value comes from claims made in contracts.
You can divide tangible assets into two groups: present and fixed. Current assets are goods that can be quickly used or turned into cash. Fixed assets, on the other hand, can be seen and touched and last at least one year. Fixed assets include plant, property, and equipment (PP&E).
An example of an intangible asset
On the balance sheet, intangible assets only show up if they have been bought. Let’s say that Company ABC agrees to pay Company XYZ $1 billion for a patent. In that case, Company ABC would record the $1 billion deal as a long-term asset for intangible assets.
This would mean the $1 billion asset would be written off over several years. Goodwill and other intangible assets with an unlimited life span are not amortized. Instead, these assets are checked for impairment every year. Impairment occurs when the carrying value is higher than the asset’s fair value.
What are the main types of assets that can’t be touched?
There are two types of intangible assets: definite and indefinite. Definite assets only last for a certain amount of time, while indefinite assets last forever. For example, brands, trust, and intellectual property are intangible assets.
What’s the difference between an asset that can’t be touched and one that can?
Intangible assets are things that can’t be seen or touched. This means that you can’t deal with them. These are called tangible assets. They have a shape so that you can touch and hold them. A company’s most important assets are its tangible assets, like land, equipment, and stock.
How do you show intangible assets on a business’s balance sheet?
On company balance sheets, most intangible assets show up as long-term assets. The buying price and the schedule for paying it off over time determine whether invisible assets, like goodwill, don’t appear on a company’s balance sheet. That’s because they can’t lose value over time.
Conclusion
- An intangible object is something touched, like a patent, brand, trademark, or copyright.
- Intangible assets are things that businesses can make or buy.
- It’s possible for an intangible object to be either vague (like a brand name) or clear (like a legal agreement or contract).
- When a business makes intangible assets, those assets don’t show up on the balance sheet and don’t have value.
