What is the meaning of intangible assets?
The resources that a company possesses that are not handled or transportable, such as real estate or equipment, are known as intangible assets. Trademarks, copyrights, patents, goodwill, and more are examples of these intangible assets. Despite not being tangible objects that you can touch, they are extremely valuable to your company. You must identify, oversee, and pay off your intangible assets as a business owner. This is standard procedure.
The resources that a company has that are not physical but have actual value are known as intangible assets. Intellectual property owned by a company is a typical example of intangible assets. Examples include designs, songs, software licenses, trademarks, movies, customer lists, and franchises.
According to Yarik Kim, a Macias Gini & O’Connell LLP audit partner, intangible assets can be highly valuable to the business. In certain instances, they may have more value than all of the company’s tangible assets. Consider businesses like Facebook and Twitter. Their reach to billions of users is worth far more than the total value of their material possessions.
Here are some more examples of the kinds of assets to which this accounting phrase applies:
Goodwill
When a company buys another, goodwill is frequently acknowledged. It is the amount that a business has spent above and above the asset value of the business it has purchased. For instance, a firm paying $8 million for a $7 million company would have a goodwill value of one million dollars due to the company’s reputation in the market and other contributing variables.
Copyright
A firm that receives a copyright is able to carry on producing and marketing the goods and services of the company it has acquired. This is an illustration of intellectual property (IP). This is an intangible asset that provides businesses with actual value both now and in the future as long as they retain the exclusive rights to the goods or services.
Patents
A patent gives a research or manufacturing organization the authority to utilize and market a particular design. For instance, a business might own a patent covering the sole method of bringing a particular product to market. Another business might buy the patent-holding corporation, take ownership of the patent, and manage the manufacturing of the patented design.
Tangible vs. intangible assets
Tangible assets are material resources that have monetary worth and support corporate operations, as opposed to intangible assets. They consist of tangible, monetary-valued goods that your company has acquired, such as tangible property or equipment. Compared to intangible assets, they are simpler to track and value.
According to Timo Wilson, ASAP Fundr CEO, this is the kind of asset that is usually used for manufacturing products and services. Real estate and buildings, office furniture and equipment, computers, machinery, and equipment are examples of tangible assets.
Cash is not a tangible asset or an intangible one. It qualifies as a financial asset. This is any property you possess with a monetary worth derived from a legally enforceable claim. Bank deposits, bonds, and cash flow are examples of financial assets.
Depreciating intangible assets
In order to amortize intangible assets, their value must be expended over the course of its planned existence. Intangible assets have an operational lifespan, similar to tangible assets, and accountants monitor how much an asset’s value has decreased throughout that time.
While patents only have a 20-year useful life, some components, like goodwill, have an infinite useful life. Like the age of a company’s equipment, the remaining usable lifetime affects the general intangible asset valuation.
When amortizing intangible assets, you have to evaluate the asset’s worth over its expected economic life. You can build amortization tables with the aid of the greatest accounting software platforms available on the market.
Certain intangibles have a defined life, sometimes referred to as an economic or legal life. In this instance, the asset’s total cost or value is divided by the amount of time left on its useful life. Software licenses, patents, and client lists are examples of such assets.
The duration of other assets is unknown and depends on how long the company’s brand will be valuable. These assets include goodwill and brand name. These are based more on a company’s development and reputation than on a predetermined period of time.
Intangible asset amortization is usually done by accountants using the straight-line method. For instance, obtaining a patent might cost a business $50,000. Although the corporation only intends to make use of the patent for ten years before developing a fresh product, the patent has a 20-year legal life. After that, the business would have to amortize the patent over ten years, which would come out to $5,000 annually.
Getting intangible assets
Companies can acquire intangible assets in a number of ways. Acquiring all assets during a merger or acquisition of a firm is a standard process. Here are a few more potential approaches:
- Purchase separately: Just like conventional services, intangible assets may be acquired from an established business. Businesses will surrender their production rights and patents to the buyer for the correct amount.
- Government grants: Under some conditions, obtaining intangible assets is made possible at no cost by means of a government grant. For instance, a corporation may receive intangible assets from the government, such as operating permits or rights to use property.
- Exchange of assets: A business may be purchased by exchanging its assets for stock or other assets from the acquiring company.
- Self-creation: Some assets can be produced internally for usage or eventual sale rather than having to be bought. In this case, businesses generate intangible resources using internal resources.
Both the initial cost of development and the asset’s future value determine an intangible asset’s value. These assets’ purchase and exchange, as well as a deal’s overall effect on the market, have an impact on their worth. If your company has trouble producing intangible assets, think about how exchanges, mergers, and acquisitions might help you make up for those weaknesses.
Tracking assets with balance sheets
It is critical to understand how to manage your financial, material, and intangible assets. A balance sheet is a type of financial statement that provides you with an overview of your company’s financial health and aids in keeping track of all these things. As per the statement made by Expect Tax & Accounting Inc. tax preparer Angela Nedd, balance sheets display your possessions (i.e., assets), debts (i.e., liabilities), and equity (i.e., net worth) at a specific point in time.
According to Nedd, the balance sheet is the most crucial of the three financial statements because it shows you whether you can pay your debts.
It is common advice for businesses to record intangible assets at cost instead of perceived value on their balance sheets. Usually, they are only included on this financial statement if they have a set value or can be amortized.
An entity can deceitfully alter the entire firm’s perceived worth and momentarily increase its stock’s value when it places a perceived value on an intangible asset, like a jingle. However, it poses a challenge for investors and stockholders when a corporation is audited, and such inaccurate information appears on an income statement or balance sheet. Even while intangibles like the McDonald’s brand name are invaluable, financial reporting statements are unable to assign a value to them.
The significance of intangible assets for your company
Software and patents are two of the most well-known examples of intangible assets, however they can be any valuable object that isn’t made of physical substance, with the exception of financial assets. Gaining an understanding of the worth of intangible assets will benefit your company. You’ll be more adept at making the most of the intangible assets you already have and acquiring new ones.
It is not always simple to determine the value of intangible assets. Stock prices can be artificially inflated if an asset is valued excessively. If you haven’t accurately appraised new assets, you run the danger of overpaying for them. Conversely, undervaluing your current assets could have an impact on depreciation accounting and make rivals attempt to purchase your assets at a discounted cost.
Hire an expert accountant if you don’t feel comfortable handling these responsibilities on your own. An expert accountant knows how to amortize intangible assets to help your company get the most out of it while avoiding audit problems.
