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The following is for informational purposes only

Intangible Assets Definition & Examples

What are Intangible Assets?

Intangible assets are resources that lack physical existence (unlike tangible assets such as cash, land, vehicles, buildings, equipment) and include:

  • Accounts receivable.
  • Brand recognition.
  • Pre-paid expenses.
  • Goodwill.
  • Blueprints and manuscripts.
  • Customer relations and service contracts.
  • Databases and medical records.
  • Audiovisual materials (movies and TV programs).
  • Intellectual property (patents, internally developed computer software, copyrights, permits, proprietary technology, trade names, internet domain names, and trademarks).

Although impalpable, they must have a form of existence, for instance, license, written contract, procedural documentation, or customer lists). Many intangible assets (patents in particular) are considered vital to a company's existence as they add up to a business' possible future worth and can become more valuable than tangible assets.

Types Of Intangible Assets

What are the Two Main Characteristics of Intangible Assets?

Intangible assets have two main characteristics:

  • They are nonphysical in nature (they cannot be seen, physically measured, or touched). Their existence is based on their intrinsic legal power that's recognizably distinctive from other assets).
  • They are non-monetary instruments.

In many cases, they are classified as long-term assets because they provide services over an extended period, and they're created through time and effort.

How Can Intangible Assets be Acquired?

intangible assets

Intangible resources can be attained by:

  • Independent acquisition.
  • Interchange of assets.
  • Internal development (self-creation).
  • As part of a business merger.
  • Through a government grant.

How are Intangible Assets Valued?

Evaluating intangible assets includes a high degree of difficulty. Their fair-value depends on a combination of factors related to the market conditions, income, and costs, based on the number of economic benefits or growth prospects they could bring to the owner by:

  • Increased market share or market exposure/visibility.
  • Cost savings (advertising cost savings).
  • Generating earnings or revenue (volume, pricing, and better distribution).

Can Intangible Assets be Written Off?

The process of systematically writing-off the value of an intangible asset with a finite useful life to expenses is called "amortization." Apart from goodwill and intangibles deemed to have an indefinite life, most intangible assets can be amortized using the straight-line amortization method. Goodwill is only tested for impairment every year. During amortization, a share of the asset's cost is distributed to every accounting period throughout the useful (economic) life of the asset, depending on the business sector or the type of activity that engages the asset to generate income.

What is the "Useful Life" of Intangible Assets?

The useful life of intangible assets refers to the duration it increases a business' value. For example, if a patent will be valid for 35 years, this means it would have a useful life of 35 years.

Can You Sell Intangible Assets?

All intangible assets (patents, licenses, etc.) except goodwill can be sold and acquired individually. Goodwill is the premium paid over the market value of assets when buying a company. Since it's attached to a company, goodwill allegedly has an indefinite life that is strictly connected to how long the company operates and cannot be traded independently.

What are Three Examples of Intangible Personal Property?

Intangible personal property includes items that are intrinsically valuable without having a physical substance (although their existence is validated by accompanying records or certificates), for instance:

  • Partnership interests.
  • Life insurance contracts.
  • Securities investments, stocks, bonds, and intellectual property.

Intangible personal property cannot be felt, held, or touched, unlike Tangible Personal Property (TPP) that can - furniture, jewelry, artworks, and cars.

Which are the Three Critical Attributes of Intangible Assets?

  • Separability or identifiability (being distinctive from goodwill).
  • Controllability (the owner's power over them towards acquiring benefits).
  • Profitability (generating future revenue or decreasing future expenses).

What Happens to the Intellectual Property When We Die?

What Happens to the Intellectual Property When We
								Die?

Intellectual property is part of the deceased's estate. If there is no will, or if the will is invalid, then it passes along with the rest of the estate to whoever inherits it, according to the rules of intestacy. Through proper estate planning, anyone can control who will own, protect, and manage their intellectual assets after they pass away. To ensure their value will be maximized and the tax liability minimized, some key points to consider would be:

  • Determining the beneficiaries (relatives, charities, etc.).
  • Hiring an expert to assess the value.
  • Are there special taxes attached to it? If so, you might need a tax strategy.
  • What or who is suitable to preserve and maximize the value of the intellectual property?

How are Intangible Assets Accounted For?

The accounting for an intangible asset consists of recording it as a long-term asset and amortize it over the duration of its useful life, together with systematic impairment reviews. For intangible assets with a useful life, the amortization of the cost is carried throughout its useful life, minus the residual value.

Why are Intangible Assets Important?

Intangible assets are a major resource that enhances business communication while providing competitive advantages and supporting decision-making practices. In 2020, for the first time in history, the global intangible value has exceeded $50 trillion (reaching $57.3 trillion). Around 90% of the value of companies in the consumer staples industries, IT, and health care is intangible, while for utility or energy enterprises, only 33% is intangible.

In the United States:

  • The amount of intangible assets is estimated at $20-$25 trillion dollars.
  • Since 1995, the value of intangible assets has started to outweigh Property, Plant, and Equipment (PP&E).
  • The annual investment in intangibles is between $850 billion and $1 trillion, while the stock of intangibles is around $5 trillion.

Globally, according to a 2018 Brand Finance report:

  • The value of undisclosed intangibles grows by at least 25% every year.
  • 75% of the world's intangible resources are kept off any balance-sheet.
  • Amazon replaces Apple as the most intangible business in the world, although 98% of its value stays unreported.

Which Companies Have the Largest Intangible Value?

Which Companies Have the Largest Intangible
								Value?

The Top 5 largest businesses by the total value of intangible assets are:

  • Microsoft ($904 Billion, 90% share of enterprise value).
  • Amazon ($839 Billion, 93%).
  • Apple ($675 Billion, 77%).
  • Alphabet ($521 Billion, 65%).
  • Facebook ($409 Billion, 79%).
  • AT&T ($371 Billion, 84%).
  • Tencent ($365 Billion, 88%).
  • Johnson & Johnson ($361 Billion, 101%).
  • Visa ($348 Billion, 100%).
  • Alibaba ($344 Billion, 86%).

What is "Rate of Depreciation"?

The depreciation rate is the percent used to depreciate an asset's value across its estimated productive life.

What is the Depreciation Rate for Intangible Assets?

According to the Income Tax Act, the depreciation rate for intangible assets (business or commercial rights, know-how) is 25%.

Why Intangible Assets are Not on the Balance Sheet?

Only intangible assets that are acquired or have a useful lifespan and an identifiable value (therefore can be amortized) are included on a company's balance sheet with their purchase price and amortization schedules. The intangible assets developed in-house don't show up on the balance sheet since they were created internally, and they don't have a fair market value assigned to them yet. Any other intangible assets with infinite life (goodwill, for instance) cannot be amortized, and they are not featured on any balance sheet.

How do You Find Intangible Assets?

You can either estimate the value of each intangible asset on its own or, the simplest way to calculate the total value of a company's intangible assets is by subtracting from its current market value the firm's book value (assets minus liabilities). More information can be found in the asset search report. 

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