What Is an Intangible Asset? Definition and Type (2022)

Intangible assets can be difficult to understand. It’s kind of their nature—in fact, it’s right there in the name. But just because you can’t touch it doesn’t mean you can’t understand it. Let’s take a closer look at what intangible assets are, how to calculate their value and how to account for them in your financial documents.

What are intangible assets?

Intangible assets are assets without physical form. It is a long-term asset that accrues value year after year. Examples of intangible assets include intellectual property, brand recognition and reputation, relationships and goodwill. Tangible assets, on the other hand, are assets that you can physically touch, which tend to fall under the category of PPE—that is, “property, plant, and equipment.”

Two types of intangible assets

There are two main types of intangible assets: 1. identifiable intangible assets and 2. non-identifiable intangible assets.

1. Identifiable intangible assets

An identifiable intangible asset is an asset that can be acquired or separated from the company (ie, bought and sold) but does not have a physical form. Examples of identifiable intangible assets include intellectual property, such as patents, trademarks, copyrights, and even non-monetary government grants, such as airport landing rights or broadcasting licenses.

Identifiable intangible assets are often indefinite, meaning they remain with the company as long as they exist. Proprietary data and algorithms are all included in this bucket. For example, a social media platform’s algorithm that controls its feed is an uncertain intangible asset, as it can exist as long as the company exists and will add value in the long term. It can also be separated from the company and sold to someone else, if the company chooses.

2. Intangible assets that cannot be identified

An unidentifiable intangible asset is a type of intangible asset that cannot be bought or sold because it only exists in relation to the company. Intangible assets that cannot be identified include reputation, customer relationships, goodwill and brand recognition. You may not sell any of these; they are difficult—if not impossible—to measure, but they greatly contribute to a company’s value.

An intangible asset that cannot be identified is often a definite intangible asset, meaning that it has a finite life. A customer relationship, for example, is only an asset as long as it is maintained.

How do companies acquire intangible assets?

There are two main ways a company can acquire an intangible asset: by creating it from within the company or acquiring it from another entity.

Companies can develop assets internally. For example, to sell targeted ads, social media companies collect behavioral data on their users, such as what they post, like or search for on the platform—that’s an intangible asset. Or, the goodwill that a creative agency builds with its freelance talent by paying them well and creating a positive work experience is an intangible asset. A viral TikTok post made by a hairdresser that boosts the reputation of their salon is also an intangible asset.

Companies can also acquire intangible assets from other companies. For example, when Facebook acquired Instagram in 2012, it gained ownership of everything underlying the app: its code, branding, design, relationships with advertisers and its intellectual property. It also earned Instagram’s reputation and goodwill, which shaped what Instagram is. After all, there are many other apps that perform similar functions, but none come close to Instagram’s $1 billion valuation.

How to calculate the value of intangible assets

While it’s easy to see how tangible assets contribute to a company—if you own a delivery company, for example, your business needs vehicles to make deliveries—it can be more complicated to measure how intangible assets contribute. Therefore, it is also difficult to calculate their value and account for it on the financial statements.

It probably doesn’t help that there are slightly different ways to calculate the value of different types of intangible assets. If you are looking for a general idea of ​​the value of your company’s intangible assets, you can use the following formula:

Value of Intangible Assets = Market Value of Business – Net Tangible Asset Value

In other words, determine your net tangible asset value by subtracting your assets from your liabilities, then subtracting that number from the market value of your business.

How to calculate the value of goodwill

Although goodwill is a relatively abstract concept, there are concrete ways to calculate the value of business goodwill. But keep in mind that you can only do this when a company is bought or sold, because you need to know the purchase price.

To calculate, subtract the difference between the fair market value of the business’s assets and liabilities from its purchase price. In other words:

Goodwill = Purchase Price – (Assets – Liabilities)

Amortization of assets

This is where things get more complicated. To find out the value of many intangible assets over the life of the asset, you will use a process called amortization. To amortize is to write off the initial cost of an asset gradually over a period of time.

You may have heard of depreciation, a term used to describe how an asset decreases in value over time. A common example is a new car, which depreciates as soon as you drive off the lot. Amortization is conceptually similar to depreciation but is applied to intangible assets instead of tangible assets.

Not all intangible assets can be amortized—only assets that have a finite useful life, which refers to the set amount of time you own the intangible asset. Let’s say your business gets a patent. In the US, the patent is likely to have a finite useful life of 20 years, after which it expires. But if that patent leads to your company being known as the best in the world at what you do, that brand recognition doesn’t have a finite useful life—it has what’s known as an “eternal life.” Therefore, you cannot write off its value.

To calculate the amortization of your assets, you need to use the straight-line method for the amortization of intangible assets. The calculation is:

Amortization Expense = (Initial Value – Residual Value) / Life

Residual value is the value of an asset after you’ve gotten all you can get out of it. The problem is that intangible assets usually have no residual value, because when you no longer own them, they are worth nothing. So, for most intangible assets, you can use the following calculation:

Amortization Expense = Initial Value / Life

How to record intangible assets on the balance sheet

Anything developed in-house cannot be assigned a fair market value and therefore cannot be relied upon on the balance sheet. However, intangible assets purchased by your company can be amortized using the method outlined above, then listed on the balance sheet under tangible assets.

For example, Meta (formerly Facebook) cannot list the Like button on its balance sheet because it is an internally developed intangible asset. However, it could theoretically list the “double-tap” feature on Instagram, because it’s intellectual property it acquired when it bought Instagram—that is, it has market value.

Frequently Asked Questions Intangible assets

What are the types of intangible assets?

Intangible assets can be identifiable or unidentifiable, as well as certain or uncertain. Identifiable assets can be separated from the company and continue to exist, while non-identifiable assets cannot. Definite intangible assets have a definite useful life, while uncertain ones do not.

What are examples of intangible assets?

Some examples of intangible assets include brand recognition, goodwill and intellectual property (patents, domain names, confidential information, inventions, names and the like).

Is real estate an intangible asset?

Real estate such as buildings, offices and land are tangible assets, not intangible assets. Even if you can’t hold a building in your hands, it’s still a physical asset and therefore tangible.

source: https://www.shopify.co.id/blog/intangible-asset