Intangible assets are assets that have no physical form, you cannot touch them, hence they are very difficult to evaluate. However, they are considered valuable resources by businesses.
Examples of intangible assets include franchises, mining claims, licenses, brands, copyrights, goodwill, trademarks, mail lists, and patents. They are usually protected from use by others, unless they pay for the rights.
Intangible assets are extremely hard to value accurately because there is usually nothing equivalent to compare them to. Often their true value, as in the case of a trademark for example, may differ considerably from the amount indicated in a balance sheet.
Some companies’ intangible assets are worth tens of billions of dollars.
The British Government (HM Revenue & Customs) says the following regarding intangible assets:
“Intangible assets are defined in FRS10 as ‘non financial fixed assets that do not have physical substance but are identifiable and are controlled by the entity through custody or legal rights’.”
Trademarks and trade names that were developed internally, i.e. originated within the company as opposed to being bought from another firm for a lot of money, may not appear on the balance sheet, even though they may be worth more than any other asset the company has.
Trademarks are words, phrases, signs, symbols or designs that distinguish and identify the source of the goods or services of one party from those of others.
Despite having no intrinsic value, intangible assets should not be ignored when working out net debt to group shareholders’ funds on the grounds that they are worth something to a business.
Experts say investors should become cautious when intangibles exceed or make up the majority of a company’s overall assets within the balance sheet.
Although intangibles are generally long-term assets, some of them such as trademarks and patents are categorized as ‘fixed intangible assets’ (and not just ‘fixed assets).
Definite and indefinite intangible assets
There are two types of intangibles: indefinite and definite.
Indefinite intangible asset: a business’ brand, if it originated within the company, carries on as long while the company continues operating.
Definite intangible asset: if a business paid to use a brand name that belongs to another company and has no plans to extend the agreement, that asset will not be part of the company forever.
According to the Financial Times Lexicon, intangible assets are:
“Assets that have no physical form but are considered valuable resources of the business, e.g. patents, trademarks, goodwill, brand names, licences, franchises, etc. The term “intangible assets” includes items such as patents, mining claims that have no physical properties, a distinctive proprietary emblem, insignia, or a name that identifies a particular product or service.”
Goodwill is a vital component for increasing a commercial enterprise’s customer base – it also attracts investors.
Video – IAS 38 Intangible Assets
This video explains the definition of intangible assets according to the International Accounting Standards (IAS).