All About Intangible Assets

All About Intangible Assets

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Mar 26, 2024 18:02 IST

Intangible assets are valuable for any company as these help in differentiating products or services, building customer loyalty, and establishing a competitive advantage in the market. In this article, we will be discussing the details of intangible assets along with its types.

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Table of Contents

What are Intangible Assets?

Intangible assets are type of non-physical assets that cannot be seen or touched but have value for a business or organization. Patents, trademarks, copyrights, goodwill, brand recognition, and intellectual property are its examples. These are difficult to be valued, as their worth is based on subjective factors such as reputation and market demand. However, they can be extremely valuable to a company, as they can help to differentiate its products or services, build customer loyalty, and establish a competitive advantage in the financial market. Let us visually understand what exactly are intangible assets.

Importance of Intangible Assets

These assets have a significant role in helping businesses succeed. Here are some reasons that make them important:

  • Competitive advantage: Assets, such as trademarks and patents, can help a business differentiate its products or services from those of competitors, giving it a competitive advantage in the market.
  • Brand recognition: Assets, such as brand names and logos, can help to build brand recognition and customer loyalty, which can be critical for long-term success.
  • Innovation: Assets, such as patents and copyrights, can encourage innovation by protecting the ideas and inventions of businesses and individuals, providing an incentive for continued investment in research and development.
  • Revenue generation: Some assets, such as licensing agreements and royalty streams, can generate significant revenue for a business without requiring a physical product or service.
  • Investor confidence: The presence of valuable assets on a company’s balance sheet can signal to investors that the business has a strong foundation and potential for long-term success, increasing investor confidence and attracting additional investment.

Types of Intangible Assets

Intangible assets are those assets that are not available in physical form but have value to a business. Here are some types of intangible assets:

Identifiable Intangible Assets:

Identifiable intangible assets can be separately identified, measured, and recognized on a company’s balance sheet. They have a clear, finite lifespan and are usually acquired through purchase, legal rights, or contractual agreements. Here are some common types of identifiable intangible assets:

  1. Patents: Exclusive rights to use, make, or sell a unique invention, process, or design for a specified period (typically 20 years).
  2. Copyrights: Exclusive rights to reproduce, distribute, and display original creative works like books, music, software, and art for the life of the creator plus 70 years.
  3. Trademarks and Trade Names: Symbols, logos, brand names, and trade names that identify and distinguish a company’s products or services.
  4. Customer Lists: Lists of existing or potential customers with value attributed to their purchasing history or potential sales.
  5. Franchise Agreements: Rights granted by a franchisor to a franchisee to operate under a specific brand, business model, and support system.
  6. Licenses: Permissions to use intellectual property, technology, or other assets owned by another entity.
  7. Contracts and Agreements: Rights and obligations arising from contractual agreements, such as leases, supply contracts, or customer contracts.

Unidentifiable Intangible Assets:

Unidentifiable intangible assets, also known as goodwill, are intangible assets that cannot be separately identified or measured directly. They typically arise from business combinations or acquisitions whenever the purchase price exceeds fair value of identifiable assets and liabilities acquired. Unidentifiable intangible assets have an indefinite useful life and are subject to periodic impairment testing. They include:

  • Goodwill: Goodwill refers to the reputation and positive associations that a company has built up over time with its customers, suppliers, and other stakeholders.
  • Brand Reputation: The positive associations, trust, and loyalty that customers have toward a brand, which may not be explicitly listed on the balance sheet.
  • Employee Loyalty and Expertise: The collective skills, knowledge, and experience of a company’s workforce that contribute to its success.
  • Market Position: A company’s dominant position or strategic advantage in the market, which can be challenging to quantify.

Advantages

Intangible assets have the following advantages to businesses that effectively manage and leverage them.

  • Competitive advantage: Patents, trademarks, and copyrights can provide a business with a competitive advantage by protecting its unique products or services from imitators.
  • Brand recognition: Brand names and logos can help to build brand recognition and customer loyalty, making it easier for businesses to establish and maintain a strong market position.
  • Revenue generation: Some assets, such as licensing agreements and royalty streams. It can generate significant revenue for a business without investing any further.
  • Innovation: Intangible assets, such as patents and copyrights, can encourage innovation by providing businesses with legal framework to protect their ideas and inventions.
  • Investor confidence: Intangible assets can signal to investors that a business has a strong foundation and potential for long-term success, increasing investor confidence and attracting additional investment.
  • Flexibility: Unlike physical assets, intangible assets can be more easily transferred or licensed to other parties, providing businesses with greater flexibility and the ability to expand into new markets and product lines.

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Disadvantages

While these offer many advantages to businesses, they also have certain disadvantages including the following:

  • Difficulty in valuation: Such assets can be difficult to value accurately, as their worth is often based on subjective factors such as brand recognition and reputation.
  • Vulnerability to infringement: Intangible assets are vulnerable to infringement by competitors, which can dilute their value and require businesses to invest significant resources in legal action to protect them.
  • Uncertainty of future value: Intangible assets, such as patents and copyrights, have a limited lifespan, and their future value is uncertain. For example, a patent may become obsolete before its expiration date, or a trademark may lose its value due to changes in market conditions.
  • Maintenance costs: Such assets require ongoing maintenance and protection, such as trademark renewal fees, legal fees for enforcement, and costs associated with updating and defending patents.
  • Limited collateral value: Unlike physical assets, intangible assets may have limited collateral value, making it more difficult for businesses to secure financing based on their value.
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Conclusion

Intangible assets are valuable yet often overlooked components in a company’s overall value. Businesses that effectively manage and leverage these assets can enjoy a significant competitive advantage in today’s economy.

FAQs

How are intangible assets different from tangible assets?

Unlike tangible assets, which have a physical form and can be held, intangible assets have no physical shape or form.

What happens to intangible assets when a company is sold?

When a company is sold, its intangible assets are transferred to the new owner. They may be separately identified and valued as part of the sales process. If not separately valued, they may be included in goodwill.

How are intangible assets reported for tax purposes?

The tax treatment of intangible assets varies by jurisdiction. Generally, the costs associated with creating or acquiring an intangible asset can be capitalized and amortized over its useful life for tax purposes.

Can intangible assets become impaired?

Yes, if the future economic benefits of the intangible assets are less than their current book value, they can become impaired. Companies must then write down their value, which can impact financial statements significantly.

Can intangible assets be sold?

Yes, intangible assets can be sold. They can be highly valuable and often command significant prices, especially if they are expected to provide future economic benefit

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio