Intangible Assets: Definition and Examples

By Indeed Editorial Team

Updated August 25, 2021 | Published March 20, 2020

Updated August 25, 2021

Published March 20, 2020

Assets are resources a company owns that hold economic or financial value. While a company's net worth can be calculated by subtracting the value of its liabilities from the value of its assets, you’ll need to understand intangible assets to determine a company’s fair market value. Intangible assets are different from physical assets, like land and inventory, and have long-term value.

In this article, we explain what intangible assets are, the types of intangible assets, how they differ from tangible assets and how to calculate their value with examples.

What is an intangible asset?

An intangible asset is a resource that has no physical presence but still holds long-term financial value for a company or business. Intangible assets are the intellectual property a company owns that they can use to generate value for the business over time. You can determine that an asset has long-term financial value if you expect its value to last at least one year or more.

Although you cannot physically see or touch an intangible asset, it can still have a significant impact on the value of a business. For example, brand recognition is an intangible asset that can increase a company's net worth because it improves its target audience reach and increases sales.

Related: What Are Assets?

Types of intangible assets

There are several different ways to classify intangible assets. These classifications include:

  • Definite intangible assets

  • Indefinite intangible assets

  • Intellectual property

  • Goodwill

Definite intangible assets

A definite intangible asset has a value with a set time limit. For example, a contractual agreement for the use of another company's patent for two years is a definite intangible asset because it loses its value when the contract expires.

Indefinite intangible assets

An indefinite intangible asset is one that remains valuable for the life of the company. For example, customer loyalty is an indefinite intangible asset because it remains valuable to the company for as long as they stay in business.

Intellectual property

Intellectual property refers to things you create with your mind, such as new inventions, names, images, designs and literary work. You can protect your intellectual property with patents, copyrights, trademarks and licensing agreements. These forms of protection then become intangible assets that prevent other companies from copying your work.

Goodwill

In business and accounting, goodwill is an intangible asset that you cannot transfer, exchange, license, rent or sell separately from the company. Goodwill includes non-quantifiable assets such as brand recognition, business strategies, customer loyalty and employee relations. These things add value that you cannot separate from the company itself.

Related: 54 Financial Assets Your Company Can List

Intangible assets vs. tangible assets

While intangible assets are valuable resources a company owns that don't have a physical presence, tangible assets are physical resources. Tangible assets include land, real estate, vehicles, equipment, machinery, inventory, computer hardware, money, stocks, bonds, furniture and office supplies.

Sometimes, intangible assets have tangible components. For example, patents, trademarks and copyrights are all documents that you can print on a piece of paper. The paper you are printing is a tangible document you can see and touch, but the value of the asset is the protection that the trademark, patent or copyright represents, not the physical piece of paper itself.

Related: Assets vs. Liabilities: What is the Difference?

How to find the value of intangible assets

You typically won't find a company's intangible assets listed on its balance sheet, but the value of these assets is important for understanding the company's true valuation. You can use these steps to find the value of a company's intangible assets as well as their true market value:

  1. Find the value of the company's tangible assets.

  2. Make a list of the company's intangible assets.

  3. Determine which calculation method to use.

  4. Find the true market value of the company.

1. Find the value of the company's tangible assets

Begin by making a list of the company's tangible assets and determining their value. You can usually find this information listed on a company's balance sheet. Once you have this list, add all the values together to determine the total value of the company's tangible assets.

2. Make a list of the company's intangible assets

Next, determine the intangible assets the company has and compile them into a list. These assets are usually not on the company's balance sheet, so you need to think carefully about the things that add value to the company that they do not record on paper. For example, a company's intangible assets may include its customer list, trademarks on its logos or branding, brand recognition and patents on its unique designs.

3. Determine which calculation method to use

Once you have a list of all the company's intangible assets, you can use one of three different methods to calculate their value. Your calculation results may vary based on the method you choose to use, but each method can help you better understand the value of the company's intangible assets.

  • The cost method: This method focuses on calculating what it would cost for another company to recreate the asset. You can estimate this cost by finding the present-day value of the original costs to create it. These costs can include things such as compensation for time spent on the creation, the cost of materials and the cost of hiring a lawyer or applying for a patent, trademark or copyright.

  • The market method: This method involves first finding another company, brand or intangible asset similar to the asset you are valuing. Then, you use the value of the other company's intangible assets to determine the value of your own.

  • The income method: This method involves using cash flow projections to determine the future income value the intangible assets would provide to another business.

If you need help determining which calculation method to use or the values to use in each method, a business advisor or accountant can help you find the value of your intangible assets.

4. Find the true market value of the company

Finally, after you have calculated the value of the company's tangible and intangible assets, you can find the true market value of the company. The true market value is the highest price someone else would pay to purchase a company that the current owner would accept. You can calculate the true market value by adding the total value of the company's tangible and intangible assets and subtracting the total value of its debts and liabilities.

Intangible asset examples

A company only records the value of intangible assets on its balance sheet if they purchase or acquire the asset. Here are a few examples of intangible assets being recorded:

Recording intangible assets for the acquisition of a company

Healthy Cupcakes and Snacks is a business that has built a large base of loyal followers and has a significant amount of brand recognition in the health foods industry. Fresh Food Markets makes a deal to purchase Healthy Cupcakes and Snacks for $2 million. While the fair market value of Healthy Cupcakes and Snacks' tangible assets is only $1 million, the company's true fair market value is higher because of its strong brand recognition and loyal customer base. Fresh Food Markets records the excess $1 million purchase price as intangible assets on its balance sheet.

Recording intangible assets you purchase from another company

Healthy Cupcakes and Snacks' secret cupcake recipe is one reason it has been so successful in building a large base of loyal followers and a strong brand recognition in the health foods industry. The company owns a patent for the recipe. They make a deal with Fresh Food Markets to purchase the use of their patent and have access to their secret recipe for five years. Fresh Food Markets records the cost they pay to purchase the use of the patent on their balance sheet as an intangible asset.

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