What is an Intangible Asset?
Intangible assets are company resources that don’t have a physical presence but can still generate long-term revenue — some even in perpetuity.
🤔 Understanding intangible assets
Intangible assets can’t be touched, felt, or seen because they don’t have a physical form. Unlike tangible assets (e.g., equipment, inventory, land, cash), intangible assets don’t exist physically and can’t be destroyed or damaged by an accident, fire, or natural disaster. Intangible assets are fixed assets, or non-current assets, because they take longer than 12 months to convert into cash, generate revenue, provide a benefit, or be fully utilized. A company lists intangible assets on its balance sheet under the non-current assets section. Examples of intangible assets include royalties, trademarks, copyrights, patents, and goodwill. Intangible assets can be divided into identifiable assets (those that can be separated from the company, such as patents and trademarks) and unidentifiable assets (those that can’t be separated from the company, such as goodwill).
Let’s take a look at the intangible assets on the balance sheet of Amazon for the fiscal year that ended December 31, 2019 (all values in millions):
Goodwill $14,754 Other assets $16,314
(Source: Amazon Annual Reports)
The “Other assets” line item from Amazon’s balance sheet includes acquired intangible assets, net of amortization.
Here’s the breakdown of Amazon’s acquired intangible assets, net of amortization as of December 31, 2019 (all values in millions):
Marketing-related $1,963 Contract-based $1,400 Technology- and content- based $534 Customer-related $152 Acquired intangibles $4,049
By adding the amounts for goodwill and acquired intangible assets, you can determine that Amazon had total intangible assets valued at over $18.8 billion as of December 31, 2019.
An intangible asset is like a basketball team’s ability to collaborate...
No matter how good each basketball player is, the team won’t win games unless they’re able to collaborate with each other. Players can’t see or touch collaboration, but they can all agree that it provides value to them. Likewise, an intangible asset lacks physical existence, but a company recognizes that it provides a valuable benefit.
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- What is an intangible asset?
- What are some examples of intangible assets?
- What is the difference between identifiable and unidentifiable intangible assets?
- What is the difference between tangible and intangible assets?
- What are the types of intangible assets?
- What is goodwill?
- What are intangible assets on a balance sheet?
What is an intangible asset?
An intangible asset is a resource without physical substance, under control of a company, and with value for its owner — This does not include financial assets, such as stocks, bonds, and mutual funds that the company holds. Unlike tangible assets, intangible assets are invisible, imperceptible, and shapeless.
While intangible assets lack physical existence, they do have economic value for the company, which is recorded on the non-current assets section of the balance sheet. Intangible assets aren’t liquid assets — they take at least a year to turn into cash, provide a benefit, or be fully utilized.
While most non-current tangible assets (e.g., real estate, property, plant, and equipment) are depreciated, intangible assets are amortized — a company gradually writes off the initial cost of the intangible asset over a period.
However, some intangible assets may have a perpetual life because they can be renewed with ease and at a sustainable cost. Intangible assets with perpetual life aren’t amortized.
What are some examples of intangible assets?
Some examples of intangible assets include:
- Computer-related assets
- Research & development
- Government grants
- Secret formulas
- Intellectual property
Example of intangible assets in the tech industry
Let’s take a look at the intangible assets on the balance sheet of Twitter for the fiscal year that ended December 31, 2019 (all values in thousands):
Intangible assets, net $55,106 Goodwill $1,256,699
(Source: Twitter Annual Reports)
Twitter includes “patents and developed technologies” and “publisher and advertiser relationships” in its inventory of intangible assets. The patents, developed technologies, and relationships of Twitter can’t be touched, seen, or felt, but they provide Twitter over $1.3B in value as of December 31, 2019.
Example of intangible assets in the financial industry
Let’s take a look at Visa’s intangible assets on its balance sheet for the fiscal year that ended December 31, 2019 (all values in millions):
Intangible assets, net $27,137 Goodwill $15,767
(Source: Visa Quarterly Reports)
Visa indicates that its finite-lived intangible assets primarily consist of “customer relationships and trade names.” The firm also indicates that it has some indefinite-lived intangible assets or intangible assets with a perpetual life. Visa had over $42.9 billion in intangible assets as of December 31, 2019.
What is the difference between identifiable and unidentifiable intangible assets?
Intangible assets can be further classified into identifiable intangible assets and unidentifiable intangible assets. Identifiable intangible assets are intangible assets that can be isolated or separated from the company, while unidentifiable intangible assets cannot be separated from the company.
Identifiable intangible assets include trademarks, brands, copyrights, patents, permits, and secret formulas. A company can trade, barter, or sell these assets and pass on ownership of those assets to another party.
Examples of unidentifiable intangible assets include branding, goodwill, reputation, and recognition. Unlike identifiable intangible assets, unidentifiable intangible assets can’t be separated from the company, and can’t be traded, bartered, or sold.
What is the difference between tangible and intangible assets?
The difference between tangible and intangible assets is that intangible assets lack physical existence and can’t be seen, touched, or felt. Tangible assets are also referred to as physical assets because you can generally touch, feel, and see them.
According to accounting standards, financial assets and monetary assets aren’t considered intangible assets. Financial assets and monetary assets are defined as tangible assets and are recorded under other line items on the balance sheet of a company.
Examples of tangible assets include cash, property, inventory, investments, and marketable securities.
What are the types of intangible assets?
Let’s review the types of intangible assets.
- Goodwill: The difference between the total value of all company assets and the fair market value of that company when another company buys it. Goodwill is that premium and is recorded on the balance sheet.
- Brand: A specific phrase, word, symbol, or logo that legally makes a product different from all of its peers. There’s “cola,” and there’s “Coca-Cola.”
- Trademark: When a company secures the legal protection of a brand, then it becomes a trademark.
- Copyright: Copyright is the legal right of the owner of an intangible asset to copy and use that intangible asset. Only copyright owners can legally copy and use an intangible asset.
- Software: Under most circumstances, computer software is considered an intangible asset.
- Computer-related assets: In addition to software, a company may own computer-related assets, such as software licenses and service contracts.
- Research & development: Also referred to as R&D, research & development expenses to improve products or processes are intangible assets because they lack physical existence and provide a future benefit.
- Intellectual property: Intellectual property is any work or invention that is the result of research, development, or other type of creative process.
- Patent: A patent is a property right for intellectual property issued by an official government agency (e.g., the US Patent and Trademark Office in the United States, and the Institut National de la Propriété Industrielle in France) to an inventor.
- Government grant: A government grant is government-issued financial assistance that a company receives from committing to specific projects, activities, or guidelines.
- License: A license is commonly a legal requirement to start operations in a specific field, such as architecture, engineering, or real estate.
- Permit: A permit is an official document that allows its bearer to carry out a specific activity. Permit requirements vary by industry.
What is goodwill?
Goodwill is an intangible asset that stands for the premium on top of the fair market value of a company’s net assets. When a firm acquires another company, the value paid above fair market value is recorded on the balance sheet as goodwill. Goodwill only appears on a balance sheet if a company has acquired another company.
Goodwill is an unidentifiable intangible asset because it can’t be separated from a company. Unlike identifiable intangible assets (e.g., trademarks, patents, copyrights, brands), goodwill can’t be sold, traded, or bartered.
Goodwill is an intangible asset with perpetual life and can’t be amortized. However, if a company were to identify that its goodwill has decreased or lost value, then the company would record a “goodwill impairment” — a non-cash expense that appears on the income statement, and that reduces the value of the goodwill on the balance sheet.
What are intangible assets on a balance sheet?
A company’s Intangible assets appear on its balance sheet only when they’re externally created through an acquisition. A company may have spent a large amount on research and development (R&D), but that R&D will only appear on the balance sheet as in intangible asset if another firm buys the company and pays more than the fair market value. In the meantime, the company records R&D as an expense. For accounting purposes, internally created intangible assets, such as R&D, don’t appear on the balance sheet.
When a company owns intangible assets, its balance sheet generally presents goodwill and/or net intangible assets. Details on the amortization, acquisition, or sale of intangible assets usually appear as footnotes on the financial statements.
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