Intangible Assets: Definition, Types, And How To Calculate

Intangible assets contribute significantly to a company's economic value, but their non-physical nature makes it challenging to quantify them. These assets provide businesses with a competitive advantage that contributes to long-term success. Despite their lack of physical presence, intangible assets may account for a significant percentage of a company's total value, especially in business industries such as technology, entertainment, and pharmaceuticals. 

What are Intangible Assets?

Intangible assets meaning refers to non-physical assets with long-term value because of the rights or benefits they provide to a business. Unlike tangible assets (such as land or equipment), intangible assets cannot be touched or seen, yet they usually contribute significantly to a company's economic value and competitive advantage.

Despite the fact that they do not take typical physical forms, intangible assets can contribute considerably to a company's financial performance. In several industries (such as technology, entertainment, and pharmaceuticals), intangible assets may comprise most of a company's overall worth. However, assessing intangible assets may be difficult since their value is frequently linked to characteristics such as brand impression, market position, and intellectual property, all of which are more difficult to measure than actual assets.

Examples of Intangible Assets

Intangible assets come in various forms, each contributing unique value to a business. Here are the most common intangible assets:

Goodwill

Represents the value of a company’s reputation, customer base, or brand strength. Goodwill often arises when one company acquires another for a price higher than the fair value of its tangible and identifiable intangible assets.

Patents

Legal rights granted to an inventor for their invention, providing exclusive rights to use, sell, or license the invention for a certain period.

Trademarks

Distinctive symbols, logos, words, or other identifiers used to distinguish a company’s products or services from others.

Copyrights

Protects original works such as music, books, films, and software. For example, the rights to a novel or a song are protected under copyright law.

Franchises

Rights granted to a business to operate under the name and trademark of an established brand. A McDonald's franchise, for instance, has the right to use the company's branding, business model, and proprietary systems.

Licenses

Permissions or rights granted to use certain assets or intellectual property.

Software

Proprietary software that a business owns, which could include custom software applications developed specifically for the company's needs. 

Tangible VS Intangible Assets

Both tangible and intangible assets are essential for business success, with tangible assets providing operational capacity and intangible assets helping to build brand value, protect innovations, and create competitive advantages.

Tangible Assets

Tangible assets are physical assets that a company owns. They have a clear financial value and can be used in their operations. Tangible assets are typically long-term and are also referred to as fixed assets or property, plant, and equipment (PP&E).

Examples:

• Real estate (land and buildings)
• Machinery and equipment
• Vehicles
• Inventory (raw materials, work-in-progress, finished goods)
• Furniture and fixtures

Intangible Assets

Intangible assets, on the other hand, do not have a physical presence, but they represent significant value for a business. These assets are generally harder to quantify and may not be easily transferable or sold. They contribute to the company's value, but they can't be seen or touched.

Here is a list of intangible assets:

• Patents
• Trademarks
• Copyrights
• Brand Reputation
• Goodwill
• Software
• Licenses

Key Differences

Types of Intangible Assets

Identifiable and Unidentifiable intangible assets. These types are based on whether the intangible asset can be specifically separated and valued on its own.

Identifiable Intangible Assets

Identifiable intangible assets are assets that can be separated from the business and sold, licensed, or transferred individually. They have specific identifiable characteristics, and their value can often be measured reliably. These assets are usually recognized on a company's balance sheet.

Examples of Identifiable Intangible Assets:

• Patents: These are granted rights to inventions and can be sold or licensed to other companies.
• Trademarks: These are brands, names, logos, and symbols that can be separately transferred or licensed to others.
• Copyrights: The exclusive rights to produce and distribute creative works like books, music, and films.
• Software: Proprietary software that is developed or purchased, which can be sold or licensed to other parties.
• Franchises: The right to operate under a company's brand name or business model can be transferred or sold to others.
• Licenses: Certain licenses, like the right to use specific software or intellectual property, are identifiable and can be bought or sold.

Unidentifiable Intangible Assets

Unidentifiable intangible assets are assets that do not have specific, separable, or measurable characteristics. These assets cannot be sold or transferred independently of the business and are typically harder to value. They are more general in nature and cannot be precisely separated from the business.

Examples of Unidentifiable Intangible Assets:

• Goodwill: Goodwill represents the excess value a company holds over its identifiable assets, often due to its reputation, customer loyalty, or overall market presence. It typically arises when one company acquires another for more than its book value. 
• Brand Value: The general reputation of a company, which can contribute to customer loyalty and future earnings. While brand recognition is valuable, it’s not an asset that can be transferred independently.
• Employee Skills and Expertise: Employees' skills, knowledge, and expertise, which contribute to the business’s success, are intangible but cannot be separated or sold as a distinct asset.
• Organizational Knowledge: The accumulated experience, culture, processes, and know-how within an organization that contributes to its performance but is not directly transferrable.

How to Calculate Intangible Assets

Accurately calculating intangible assets' value might be difficult as they don’t have a physical presence, so the following method gives only an approximate value.

To calculate the value of intangible assets, subtract the value of net tangible assets from the market value of the company. This formula indicates the difference between the business's total value and its tangible assets is due to the intangible assets.

The formula below essentially represents how to calculate the value of intangible assets within a business:
 

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

• Market Value of Business: This is the business’s estimated price if it were to be sold on the open market (this includes both tangible and intangible assets).
• Net Tangible Assets Value: This refers to the value of the company’s tangible assets, such as buildings, machinery, land, and inventory, minus its liabilities.

Example

Let’s assume that we need to calculate the intangible assets value of a company that has a market value of $50M and its net tangible assets value is $30M.

Intangible Assets Value = $50 million - $30 million = $20 million

This means that the estimated worth of this company’s intangible assets is $20M.

Impairment of Intangible Assets

Impairment of Intangible Assets refers to a situation where the carrying value of an intangible asset on a company’s balance sheet exceeds its recoverable amount. The recoverable amount is the higher of the asset’s market value or its value in use. When the carrying value exceeds the recoverable amount, the asset is considered impaired and must be written down to its recoverable amount, reflecting the loss in value.

Impairment of intangible assets can happen due to various reasons, such as:

• Technological obsolescence: This cause is due to technology’s constant evolution. For example, software may become outdated due to new innovations.
• Market conditions: Reduced demand for a product or service associated with the intangible asset.
• Legal or regulatory changes: If an intangible asset loses protection or is subject to restrictions.
• Economic factors: A downturn in the economy or industry can also affect future cash flows from the intangible asset.

Note: It is important to note that the amortization of intangible assets is a separate process from impairment, as amortization gradually reduces the value of intangible assets over time, whereas impairment reflects a sudden drop in value.

Process of intangible asset impairment:

The very first step should be to determine the market value of the intangible asset, and then compare the asset's carrying amount to its market value. If the carrying amount exceeds the market value, an impairment loss is recognized. Record the impairment loss by reducing the intangible asset's carrying value on the balance sheet. The loss is reflected on the income statement, affecting net income.

Under International Financial Reporting Standards (IFRS), intangible assets are tested for impairment using IAS 36 (Impairment of Assets). Under U.S. GAAP, intangible assets are tested for impairment per ASC 350 (Intangibles—Goodwill and Other).

The impairment loss is reflected in the financial statements, and in some cases, a reversal of the impairment can occur if there is a recovery in value, although this is not allowed for certain assets like goodwill under IFRS.

How Can Enerpize Help in Intangible Assets Managing

Enerpize is a fixed asset management software that can help in managing intangible assets through several features and tools aimed at optimizing their tracking, valuation, and strategic use.

Enerpize can provide a centralized system where all intangible assets, such as patents, trademarks, copyrights, and goodwill, are stored and managed in one place. This allows for easy tracking of ownership, expiration dates, renewal processes, and other important details. The software can send notifications or reminders when it’s time to renew intellectual property rights, update licenses, or act on expiring patents or trademarks.

The software can help streamline the accounting for intangible assets, ensuring proper documentation and support for financial statements. It may generate reports that help companies comply with standards like IFRS or GAAP, which are vital for proper asset recognition, amortization, and impairment procedures.

FAQs About Intangible Assets

Are Intangible Assets Current Assets?

No, intangible assets are not considered current assets since they are expected to last for one year before being converted to cash, whereas intangible assets are intended to provide economic advantages for more than one year.

What are Intangible Assets on Balance Sheets?

Intangible assets on balance sheets are non-physical assets that have value due to their rights or benefits. These assets show on a balance sheet in the non-current assets section (long-term assets) because they provide value to a company over time, generally more than a year. Intangible assets are normally recorded at their acquisition cost, which includes the purchase price and any directly related costs required to prepare the asset for use.

Are Intangible Assets Fixed Assets?

Yes, intangible assets are fixed assets. They are considered fixed assets since they are not intended for immediate sale but are instead used in operations to generate revenue over time. While they lack a physical presence, they are vital for a company's performance and are reported on the balance sheet like tangible fixed assets.

How to Value Intangible Assets?

Intangible assets can be valued by subtracting the value of net tangible assets from the market value of the company:

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