What are Intangible Assets?
Intangible assets represent those assets that do not have a physical existence and are not touchable. Usually, companies or businesses use intangible assets for long-term purposes. Similarly, they are often intellectual assets. For most modern companies, using intangible assets during their lifetime is inevitable. Intangible assets usually consist of goodwill, patents, trademarks, brand names, franchises, licenses, etc.
For some companies, recording intangible assets may be straightforward. These intangible assets may come in the form of software or patents. For these, companies know the cost. Therefore, the cost associated with it becomes its asset value. Sometimes, however, the value of intangible assets may not be measurable. In these cases, accounting standards may not allow the recording of these assets.
How to represent Intangible Assets on the Balance Sheet?
Companies can only recognize intangible assets if they meet the definition of an asset. Assets represent resources owned or controlled by a business that can generate future economic inflows. Similarly, the asset’s value must be measurable for companies to recognize it. Most intangible assets are resources that companies own or control.
Similarly, intangible assets can generate future economic inflows if a company sells them or uses them to make money. However, measuring the value of an intangible asset may not be possible. In the case of internally-generated intangible assets, the asset’s value may not be reliably measurable. However, for intangible assets acquired from external sources, its cost becomes its value for the company.
Once a company can measure an intangible assets’ value, it can present it as an asset on its Balance Sheet. Usually, intangible assets are for long-term use. Therefore, companies classify them as fixed assets or non-current assets. Some intangible assets may also depreciate. Just like tangible assets, companies calculate and deduct amortization expense against intangible assets.
In short, companies can present intangible assets on the Balance Sheet net off their accumulated amortization expense. The treatment will be similar to other tangible assets in terms of presentation.
How do companies value Intangible Assets?
There are three approaches to valuing intangible assets used by companies. Firstly, companies may use the income approach for assets that generate income. Companies may also use the cost approach for externally-acquired intangible assets. Lastly, companies may also use the marketable approach. With this approach, companies use the market values of similar intangible assets to determine the value of their assets.
What are the uses of Intangible Assets?
Intangible assets have several use cases. Mostly, companies can buy intangible assets from others, like other tangible assets. Similarly, companies may use intangible assets, such as goodwill or brand name, to increase their revenues or profitability. Companies may also earn from their patents or trademarks by licensing them to others.
Accounting standards also allow companies to spread the cost of their intangible assets through amortization. Therefore, they aren’t much different from tangible assets in their treatment. Similarly, having intangible assets on the Balance Sheet improves a company’s financial position. It can, therefore, result in higher share prices or valuation of the company.
Intangible assets represent intellectual assets that do not have a physical existence. Companies can recognize intangible assets if they can measure their value. Usually, these are long-term assets and, therefore, classified as non-current assets. Intangible assets have several practical uses for companies.