Intangible Property
Intangible property refers to non-physical assets that represent value and can be legally claimed or owned. These assets do not have a physical form but still provide essential value and potential income generation for their owners. Common examples of intangible property include financial instruments, intellectual property, and business-related rights.
Examples of Intangible Property
- Stock Certificates: Legal documents that certify ownership of shares in a corporation.
- Bonds: Fixed-income securities representing a loan made by an investor to a borrower.
- Promissory Notes: Written promises to pay a specified amount of money at a future date.
- Franchises: Licenses that allow individuals or groups to operate a business under the franchisor’s brand and business model.
- Patents: Exclusive rights granted for an invention, giving the patent holder the right to exclude others from making, using, or selling the invention for a certain period.
- Trademarks: Symbols, words, or phrases legally registered or established by use as representing a company or product.
- Copyrights: Exclusive rights to reproduce, distribute, perform, display, and license works of authorship, such as literary and musical works.
Frequently Asked Questions
What distinguishes intangible property from tangible property?
Intangible property lacks physical substance and cannot be seen or touched—examples include financial instruments and intellectual property. On the other hand, tangible property has a physical form and can be physically possessed, like machinery, buildings, or vehicles.
How is intangible property valued?
Intangible property is usually valued based on its legal rights, expected future economic benefits, and profitability potential. Methods like income approach, market approach, and cost approach are commonly used for valuation.
Can intangible property be legally protected?
Yes, intangible property can be protected through various forms of legal rights and registrations, such as patents, trademarks, copyrights, and franchise agreements.
How is intangible property reported on financial statements?
In accounting, intangible property is recorded on the balance sheet under non-current assets and is commonly subject to amortization or impairment testing.
Can intangible property be transferred or sold?
Yes, intangible property can be transferred or sold under contractual agreements, licenses, and sales transactions. The ownership and rights can be re-assigned according to legal and regulatory standards.
Related Terms
- Tangible Asset: Physical assets that can be touched and seen, such as real estate, equipment, and inventory.
- Tangible Personal Property: Tangible assets excluding real estate, e.g., machinery, vehicles, furniture.
- Intellectual Property: Creations of the mind, such as inventions, literary works, and designs, under legal protection by patents, trademarks, and copyrights.
- Goodwill: An intangible asset representing the value of a company’s reputation and customer relationships, often arising during business acquisitions.
- Leasehold Interest: An intangible asset providing rights to use and occupy leased property.
- Brand Equity: The value premium that a company generates from a recognizable and respected brand name.
Online References
- Investopedia: Intangible Assets
- Internal Revenue Service (IRS): Section 197 Intangibles
- Financial Accounting Standards Board (FASB): Intangibles—Goodwill and Other
Suggested Books for Further Studies
- “Valuing Intangible Assets” by Robert F. Reilly & Robert P. Schweihs
- “The Intangible Assets Handbook: Maximizing Value from Intangible Assets” by Weston Anson
- “Intellectual Property and the U.S. Economy: Securing Value” by Jimmy King
- “Financial Reporting and Analysis” by Charles H. Gibson
- “Understanding Business Valuation: A Practical Guide to Valuing Small to Medium-Sized Businesses” by Gary R. Trugman
Fundamentals of Intangible Property: Business Law Basics Quiz
### Which of the following is an example of intangible property?
- [ ] Machinery
- [ ] Inventory
- [ ] Office furniture
- [x] Stock certificates
> **Explanation:** Stock certificates represent ownership in a corporation and do not have a physical form, qualifying them as intangible property.
### How can intangible property be legally protected?
- [x] Through patents, trademarks, and copyrights
- [ ] By locking it in a safe
- [ ] By insuring it
- [ ] Through tangible means like fencing
> **Explanation:** Intangible property can be legally protected through intellectual property rights like patents, trademarks, and copyrights.
### What type of asset is a franchise?
- [ ] Tangible personal property
- [x] Intangible property
- [ ] Inventory
- [ ] Leasehold interest
> **Explanation:** Franchises are considered intangible property as they involve rights to operate a business model and brand.
### How is intangible property usually reported on financial statements?
- [ ] Under current liabilities
- [ ] In equity
- [x] As non-current assets
- [ ] Under current assets
> **Explanation:** Intangible property is recorded as non-current assets on the balance sheet, reflecting their long-term value.
### Which valuation method is not typically used for intangible property?
- [ ] Income approach
- [x] Substitution approach
- [ ] Market approach
- [ ] Cost approach
> **Explanation:** The substitution approach is not commonly used in valuing intangible property. Common methods include income, market, and cost approaches.
### What financial statement is intangible property primarily included in?
- [ ] The cash flow statement
- [x] The balance sheet
- [ ] The income statement
- [ ] The statement of changes in equity
> **Explanation:** Intangible property is included in the balance sheet under non-current assets.
### Can intangible property be subject to depreciation for tax purposes?
- [ ] Yes, all intangible properties can depreciate
- [ ] No, it cannot be depreciated at all
- [x] Only certain types, such as amortizable intangibles
- [ ] Only if the intangible property is insured
> **Explanation:** Amortizable intangible assets, such as Section 197 intangibles, can be subject to amortization for tax purposes.
### Which intangible property represents a modular, reproducible business model?
- [ ] Leasehold interests
- [ ] Trademarks
- [ ] Copyrights
- [x] Franchises
> **Explanation:** Franchises represent a modular and reproducible business model, fitting well as an example of intangible property.
### What does brand equity represent as an intangible asset?
- [ ] The physical assets of a company
- [ ] The total liabilities of a company
- [x] The value premium of a brand name’s recognition and reputation
- [ ] The cash reserves of a company
> **Explanation:** Brand equity represents the value premium from a recognizable and respected brand name.
### What is a key basis for valuing intangible property?
- [ ] The weight of the asset
- [ ] The year the asset was created
- [x] Expected future economic benefits
- [ ] The average shelf-life of the asset
> **Explanation:** Expected future economic benefits are a key basis for valuing intangible property, as they indicate potential profitability.
Thank you for exploring the concept of intangible property. Happy learning!
