What Are Intangible Assets? Examples and How to Value
Any physical assets, including machinery, property, goods, and even clients, are considered tangible assets. All of these items are visible and tappable (although you may not want to) in the actual world. In contrast, assets that aren't physical in nature are referred to as intangible assets.
Non-physical assets, known as intangible assets, contribute to the success of your business even though you can't see them. Intangible assets frequently contribute to the long-term expansion of your business. On the other hand, tangible assets are more frequently linked to short-term success, cash flow, and overall working capital. However, a tangible asset can be sold.
There are two types of intangible assets: those with limitless usable lives (indefinite intangible assets) and those with finite useful lives (definite intangible assets).
Indefinite Intangible Assets
If your brand is not damaged in any way, an intangible asset with an endless useful life will continue to be valuable. These assets can continue to produce revenue indefinitely. Trademarks, goodwill, and brand awareness are a few intangible assets with endless useful life. Consider a well-known chain restaurant like McDonald's or Domino's as an illustration. This big franchise benefits greatly from indefinite intangible assets, such as brand recognition.
Definite Intangible Assets
An intangible asset with a finite life is precisely what it sounds like: it only produces cash flow for a limited duration. Because patents have a predetermined lifespan when they are created, they are the most prevalent sort of limited-life intangible asset.
To further understand the abstract idea, let's now examine some typical examples of intangible assets.
Intangible Asset Examples
Despite not being real, intangible assets are fairly common and probably all around you. The following examples of intangible assets are typical for most business owners, regardless of the sector:
Understanding with a General Example
One should know that only the acquired intangible assets are recorded on the balance sheet. Suppose a Company ABC or Company XYZ agrees to a $1 billion patent purchase, then Company ABC/ XYZ would record the transaction as a $1 billion intangible asset transaction, and it would show up under long-term assets.
After that, amortization would be used to write off the $1 billion asset over a period of years. Intangible assets with an indefinite life span, like goodwill, are not amortized. Instead, the carrying value of these assets is compared to their fair value in order to determine if they have been impaired.
Intangible assets range from brand awareness to consumer interactions. Furthermore, this list is by no means complete. Intangible assets abound, many of which are unique to the particular industry. However, you can use the aforementioned list as a jumping-off point for figuring out what intangible assets you have. Let's now examine how to evaluate intangible assets.
How are intangible assets valued?
Intangible assets can be produced or purchased by businesses. For instance, a company might establish a patent or compile a client mailing list. A company can deduct the expenditures associated with the creation of an intangible asset, including the cost of filing a patent application, engaging legal counsel, and other associated expenses.
Additionally, all costs incurred in producing the intangible asset are expensed. However, a company's intangible assets do not show up on the balance sheet and do not have a documented book value. As a result, when a company is bought, the acquisition price is frequently more than the assets' book value on the balance sheet. The premium paid is listed as an intangible asset on the balance sheet of the purchasing business. Despite this, the following three factors are utilized to assess the value of intangible assets:
Any intangible asset that has a stronger relationship with revenue is appropriate for the valuation considering income methods. For instance, you may estimate a patent's potential value using the income approach.
You must first consider what the patent has accomplished for your business in order to assess the patent's worth. It is obvious that the patent is connected to income if it allows you to accomplish anything, like developing a novel product that you are now selling. After that, you could check your books to see how much money the product has brought in overall. You must go back as far as you can in order to determine whether the sales are increasing or decreasing. You should take into account any potential depreciation that might happen throughout the course of the products and the patent's existence, even if it is from the past.
You should also take into account whether you will need to pay a hefty licencing fee in order to sell the patented product in stores. Even while the patent itself may lead to the development of a costly product, costly and necessary licencing arrangements will reduce the patent's value.
The market technique for estimating intangible asset value is a reliable way to assess value; it is neither perfect nor scientific. Take note of the asset you're seeking to appraise before performing a market valuation. Then, check to discover whether any of your rivals have offered or sold a comparable intangible asset on the open market. As many public transactions involve multiple assets, not just one intangible asset, this can easily be said rather than done.
For instance, you may come across news stating that a business has sold a licencing deal to a store. What this sale does not reveal, however, is how much of the value of that licencing arrangement was attributable to the firm's name recognition alone.
In the end, you may still want to rely on any available data. So, you can look at local real estate to get an idea of how much your building space is worth. But you'll probably need the income technique if you're trying to figure out how much your brand is worth on its own.
Intangible assets like software can also be valued using the cost technique, which is frequently used for tangible assets.
The cost technique substitutes to determine the value of an intangible asset. Simply asking, "How much will it cost to replace this asset with a similar one?", may also do the job of this. Comparing prices is a straightforward way to accomplish this, for instance, when purchasing computer software.
If you want to figure out how much your complete organization is worth, keep in mind that this method isn't as beneficial for most intangible assets. Just remember that such software subscriptions can be changed from time to time and might not be as valuable as you thought.