Intangible assets are assets that are not physical in nature. Goodwill, brand recognition, and intellectual property, such as patents, trademarks, and copyrights are all considered intangible assets. These assets exist in opposition to tangible assets, which include land, vehicles, equipment, and inventory.
These assets are regarded as long term assets that are useful for the business over a period of more than one accounting period. In other words, They generate revenue for the business across accounting periods. Intangible assets can be created or can be acquired by the means of purchasing from a third party. Valuation of an intangible asset is difficult and they also provide unpredictable future benefits.
They are usually recorded at the cost of the original purchase and are not adjusted over time. They appear on the balance sheet only if intangible assets are acquired. Intangible assets cannot be destroyed by fire, natural calamities like floods, etc, but they can be destroyed under certain circumstances.
List of Intangible Assets:
- Company reputation
- Intellectual property
- Domain names
- Employment contracts
- Lease agreements
- Client relationships
- Trade secrets
- Computer Software
Calculating Intangible Asset
The formula below can be used for calculating the total (on and off-balance sheet) financial value of a company’s intangible asset:
Market Value of Business – Net Tangible Asset Value = Intangible Asset Value
It should be noted that this formula only gives an approximate value. Market value is the current value of the company in the stock market.
Characteristics of Intangible Asset
The following are the characteristics:
- These assets do not have a physical existence.
- They cannot be used as collateral for obtaining loans for business expansion.
- These assets are amortized (except goodwill) over the useful life of an asset.