Definition of Intangible Assets
Intangible assets are non-physical assets that a company possesses. Unlike tangible assets, which include physical items like machinery or buildings, intangible assets are not tangible but still offer significant economic value to the company. Common types of intangible assets include competencies, goodwill, intellectual properties such as patents, trademarks, and copyrights.
Examples
- Goodwill:
- Represents the premium a buyer pays over the net value of the company’s identifiable assets and liabilities. It includes elements like brand reputation, customer relationships, and other intangible factors which contribute to the future earnings of the company.
- Patents:
- Exclusive rights granted for an invention, which allows the holder to produce, use, and sell the invention for a certain period.
- Trademarks:
- Recognizable signs, symbols, or expressions identifying products or services of a particular source.
- Copyrights:
- Legal rights that grant the creator of original work exclusive rights to its use and distribution.
Frequently Asked Questions
What constitutes an intangible asset?
Intangible assets are identifiable non-physical assets. They can be internally developed or acquired through purchase. Their value often stems from legal rights or competitive advantages they bestow on the owning entity.
How is goodwill different from other intangible assets?
Goodwill is an intangible asset arising from the acquisition of one company by another for a premium value. Unlike patents or trademarks, goodwill is not tied to specific legal rights or products and is considered the most intangible and hardest to quantify.
How are intangible assets accounted for on balance sheets?
According to Financial Reporting Standard (FRS) 10 and International Accounting Standards (IAS) 38, intangible assets may be recognized on the balance sheet if they can be measured reliably and it is probable that the anticipated future benefits will flow to the entity.
Can internally generated brands be recognized as intangible assets?
The Financial Reporting Standard Applicable in the UK and the Republic of Ireland (FRS 102) allows the recognition of internally generated brands only under very specific and limited circumstances.
What is the treatment for intangible asset impairment?
Under IAS 36, intangible assets are tested annually for impairment. If the carrying amount of the asset exceeds its recoverable amount, it is recognized as an impairment loss.
Related Terms
Goodwill: An accounting term that represents intangible value arising from the purchase of one company by another, beyond the identifiable tangible and intangible assets.
Intellectual Property: A category of intangible assets that includes patents, trademarks, copyrights, and other creations of the human mind that the law recognizes as property.
Tangible Assets: Physical assets like equipment, inventory, and buildings that have a clear physical presence and depreciate over time.
Market Value: The current quoted price at which an asset or service can be bought or sold in the market.
Book Value: The value of an asset as it appears on a company’s balance sheet, representing the asset’s original cost minus any depreciation, amortization, or impairment costs.
Online References
- Investopedia - Intangible Assets
- International Accounting Standards Board (IASB) - IAS 38
- Financial Reporting Council - FRS 102
Suggested Books for Further Studies
- “Financial Reporting and Analysis” by Charles H. Gibson
- “Wiley IFRS: Interpretation and Application of International Financial Reporting Standards” by PKF Ltd.
- “Accounting for Managers: Interpreting Accounting Information for Decision Making” by Paul M. Collier
- “Modern Advanced Accounting” by E. John Larsen
