What is an intangible asset?
Intangible assets are items of value owned by a business that lack physical attributes. They include ideas and concepts, which can be more challenging to value than physical assets like real estate, machinery, or inventory. Intangible assets include goodwill and intellectual property such as trademarks and copyrights, patents, business processes, and software.
The concept of an intangible asset is key to determining a company’s value and reputation. Goodwill is an example of an intangible asset that can be difficult to value yet is a very important factor in determining a company’s total worth. Goodwill is entered as a line item on the balance sheet when one company buys another, and it represents the perceived value in dollars of the acquired company’s reputation, brand, customer base, and image. Goodwill represents the likelihood of the future sales success of the company being acquired.
Other items that are considered to be intangible assets include:
- Patents: A patent is the description of a novel concept that could be actualized as a device, product or process.
- Trademarks: Customers prefer to purchase well-known brands they associate with quality products.
- Copyrights: Creators of original works are granted exclusive rights for their use and distribution, usually for a limited period of time.
- Software: Computer software is usually (but not always) considered to be an intangible asset.
It is often difficult to determine the realistic value of intangible assets. For example, Coca-Cola values its brand and logo — key trademarks — at $13 billion, greater than the value of all its physical assets, which it values at $12.6 billion. While the company would be hard pressed to substantiate its brand valuation, most people would acknowledge the brand has a a great deal of value.
Intangible asset example
Balthazar’s Widget Manufacturing Corporation has just been purchased by a competitor. The company’s physical assets — including facilities, equipment, and inventory — were valued at $150 million, but the purchase price was $295 million. The reason was Balthazar’s intangible assets, which included $100 million in goodwill and $45 million in specialized computer systems.
Do you understand the difference between the various types of financial assets? Learn more about them by reading this Bankrate article on assets.