Intangible Assets
Intangible assets are those that are not stored or accumulated in physical form. Like all assets, intangible ones can be owned, transferred, or licensed, and they have value. An intangible asset can be any intellectual property or brand — trademarks, copyrights, and patents are all classified as such.
Intangible assets usually exist in opposition to tangible assets. They can be either definite or indefinite, depending upon their nature.
Any company’s name will be considered an indefinite intangible asset because one has permission to use the said name as long as the business is in operation. On the other hand, a definite intangible asset can be a legal agreement or a contract. For instance, if you sign an agreement to do business under the patent of some other company without any plans of extending the agreement, this will be considered a definite intangible asset.
Although there is some form of tangible evidence of the existence of an intangible asset, the value of the intangible asset does not reside in the physical elements of that tangible evidence.
Intangible Assets vs. Tangible Assets
Tangible assets are basically the physical assets of the company—for example, land, equipment, or computers that the company owns. Tangible assets are used by the company as a source of producing their products and generating sales. Conversely, intangible assets do not have physical value, but they do possess a significant monetary value since they represent potential revenue-generating capacity.
One can say that tangible assets form the backbone of a company, as they provide means for the company to produce its products and services. Since they are physical assets, tangible assets of a company can be destroyed or damaged accidentally by naturally occurring incidents or any kind of outside threat. Tangible assets include land, buildings, vehicles, equipment, furniture, inventory, stocks, cash, and bonds.
Examples of Intangible Assets
Intangible assets are not physical assets, and this is the reason why they only appear on the balance sheet when a company acquires them or if it is required to identify and value them for financial reporting purposes. For example, if one company purchases a patent from another company for a fixed amount, then that fixed amount will be recorded as a transaction by the company that is purchasing the patent.
Different types of intangible assets include:
technology related: patents, computer software, know-how
- customer related: customer lists, customer engineering drawings, technical documentation relationships, customer contracts (including backlog, and non-contractual relationships)
- contract related: supplier contracts, technology sharing agreements, franchise agreements, user rights, broadcast rights
- human capital related: non-compete covenants, trained assembled workforce, employment agreements
- marketing related: advertising materials, marketing brochures
- location related: leasehold interests, mineral or mining exploration rights
- license related: operational or environmental licenses or permits, pollution control permits
- artistic related: plays, operas, ballets, musical works, pictures, photographs
Patents, Copyrights, and Trademark Examples of Intangible Assets in Accounting
There is a specialized classification of intangible assets called intellectual properties. These manifest all of the identification and economic attributes of other commercial intangible assets, but they enjoy special legal recognition and competitive advantages. These advantages may allow the owner to use the asset on an exclusive basis, thereby preventing others from using the intellectual property for a specific period of time. For example, a specific piece of new technology is patent for a period of 20 years, stopping everyone else from using the same technology.
